Between 1850 and 1880, economists began to become more and more aware that, in order to construct an adequate alternative to the theory of labor value, they had to solve the proposition that it is not the total utility of a good that determines their exchange value, but rather the utility of the last unit consumed. For example, water is very useful, it is essential for life. But, since there is relatively a lot of water, the consumption of one more glass has a relatively small value for people. Paradox of use value. During the 1870s several economists
The Marshall synthesis of supply and demand
The clearest definition Total and Marginal Utility as per these marginal principles was presented by the English economist Alfred Marshall (1842-1924) in his Principles of Economics, Published in 1890. Marshall demonstrated that supply and demand acted simultaneously to determine the price. As Marshall pointed out, just as it is not possible to specify which of the two edges of a short scissor, neither can it be said that supply, or demand, determines the price alone. This analysis is illustrated in the famous Marshall cross shown in Figure 1.1. In the graph, the quantity of a good acquired in a period is shown on the horizontal axis and the price appears on the vertical axis. Represents the quantity demanded of the good in each period, at every possible price. The DD curve
The curve slopes downward to reflect the marginality principle that, as increases the amount, people will want to pay less and less for the last purchased unit. It is the value of this last unit that sets the price of all units purchased. The SS curve Shows how (marginal) production costs increase as more production occurs. This reflects the increasing cost of producing one more unit as increases total production. In other words, the positive slope of the SS curve reflects increasing marginal costs, as does the negative slope of the. It is a point of balance: Both buyers and sellers are happy with the quantity exchanged and the price at which it is exchanged. If one of the curves moves, the equilibrium point will shift to another point. Thus, price and quantity are determined simultaneously by the relationship between supplies and demand DD curve reflects a decreasing marginal value. The two curves are cut in P *, Q *
The financing costs should not be included in calculations of cash flows relevant in a capital budget. This statement may seem wrong or, in the best cases, strange. If an investment is to be made, are not additional financial resources required to do so? Definitely yes. So, do not these resources have a cost? Are they free? Of course, financial (or any other) resources have a cost. Regardless of whether you use equity, debt or a combination of both to finance the disbursements that need to be made to carry out the project, this money has a cost. The company has to pay investors – shareholders or creditors – for the use of its resources through dividends and interest.
However, the cost of financial resources is not part of the relevant cash flows. Rather, it is used within the valuation methods that will be studied in a later note to compare the cash flows expected to generate the project against the disbursements required to carry it out. The mix of debt or equity is a variable that belongs to the company’s financing policy which determines how cash flows will be distributed between creditors and owners. This distribution policy does not have to affect the cash flows of the project itself. For more info about business education, please visit Business Study Notes. Business Study Notes provides free notes for all the students of Mba, Bba, and Dba.