3.4 Price
Completion requirements
All goods and services have a natural price - a price equal to the cost of production (the production factors of land, labour, and capital), plus the average profit rate.
If a selling price is above the natural price, the market will apply more resources to production, and the price will return to its natural level. Conversely, the market will use fewer resources if a selling price drops below the natural price.
If a selling price is above the natural price, the market will apply more resources to production, and the price will return to its natural level. Conversely, the market will use fewer resources if a selling price drops below the natural price.
Let's assume that the natural price of the lumber
from one tree is $10 (the cost to harvest a tree and turn
it into lumber, plus average profit).
The selling price of the lumber from one tree is $10.
Fires rage throughout the province. People need lumber, but less lumber is available!
The selling price of the lumber from one tree jumps to $20.
The industry harvests more trees and produces more lumber. The fire-damaged buildings are repaired or replaced. Demand returns to normal.
The selling price of the lumber from one tree returns to $10.
The selling price of the lumber from one tree is $10.
Fires rage throughout the province. People need lumber, but less lumber is available!
The selling price of the lumber from one tree jumps to $20.
The industry harvests more trees and produces more lumber. The fire-damaged buildings are repaired or replaced. Demand returns to normal.
The selling price of the lumber from one tree returns to $10.