Economics Primer Flashcards
What equals a firms profit
Revenues minus the cost
What does the total cost function show?
The total cost a firm would incur for a level of output
What is the definition of fixed cost
Costs that remain constant as output increases
What is an example of fixed cost
Administrative expenses and property taxes
What is the definition of semi-fixed cost
Costs that are fixed over certain ranges of output but variable over other ranges
What is an example of semi fixed cost
When you are ramping up production to the point that one truck for deliveries is not enough so you will get an get a second one, within these intervals the cost is fixed, but variable between them.
What is the definition of average cost
Costs that vary per output of the firm
What is the definition of marginal cost
Costs that refers to the rate of change of total cost with respect to output
When average cost is decreasing marginal cost is….
less than the average cost
When average cost is increasing marginal cost is….
greater than average cost
When average cost is neither increases or decreases because it is constant, marginal cost is….
equal to average cost
A short run cost function is
When a firm cannot adjust the size of its production facilities
What is the definition of sunk cost
Costs that must be incurred no matter what the decision is and thus cannot be avoided
What is the definition of avoidable costs
These costs can be avoided if certain choices are made
What are accounting costs
Costs that emphasize historical costs (explicit)
What are the use of Accounting statements (related to accounting costs)
These are designed to serve an audience outside the firm, for example lenders and equity investors
What are economic costs and their purpose
Economic costs or better said opportunity costs look at the potential of taking one decision over the other (Implicit)
How do you calculate accounting profit
Accounting profit = sales revenue - accounting cost
How do you calculate economic profit
Economic profit = sales revenue - economic cost
= Accounting profit - (economic cost - accounting cost)
What does the demand curve show
The demand curve describes the relationship between the quantity of that the firm is able to sell and the variables that influence that quantity
What are the variables of the demand curve
There are 5
Price of the product
The prices of related products
The income and tastes of consumers
The quality of the product
Advertising
What is the law of demand
The lower the price, the higher the demand
The higher the price, the lower the demand
What is price elasticity of demand
The price elasticity of demand, commonly denoted by n, is the percentage change in quantity brought about by a 1 percent change in price
How do you calculate price elasticity of demand
Price Elasticity of Demand = % of change in quantity demanded / % of change in price.
When is demand inelastic
if N is less than 1
When is demand elastic
if N is greater than 1
What is the Total revenue function
TR(Q) = P*Q
What is the average revenue function
AR = TR/Q
What is the Marginal revenue function
Formula
MR= dTR/dQ d= derivative
When demand is elastic, Is MR greater or smaller than 0
Greater than 0
When demand is inelastic, Is MR greater or smaller than 0
Smaller than 0
What is the theory of the firm
The theory of the firm follows that the ultimate objective is to make as large a profit as possible
How to calculate change in total revenue
MR X ▲Q
How to calculate change in total cost
Formula
MC X ▲Q
How to calculate in total profit
Formula
(MR-MC) X ▲Q
How can the firm increase profit when the MR > MC
They should sell more and to do so, it should lower its price
How can the firm increase profit when the MR < MC
They should sell less and to do so, it should raise its price
When does the optimal price and quantity occur
When MR =MC
What is the theory of perfect competition
For example; an industry with many firms producing identical products (so that consumers choose among firms solely on the basis of price) and where firms can enter or exit the industry at will.
What is Game theory
The analysis of optimal decision making when all decision makers are presumed to be rational.
What is a Nash equilibrium
Each player is doing the best he or she can, given the strategies of the other players.
When is the matrix form used in game theory
When each party moves simultaneously
When is the game tree used in game theory
When each party moves sequential
What is a Subgame perfect Nash equilibrium (SPNE)
In an SPNE, each player chooses an optimal action at each stage in the game that it might conceivably reach and believes that all other will behave in the same way.
