Economics Primer Flashcards
Definition: Strategy
Alfred Chandler
The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of ressources necessary to carrying out these goals.
Definition: Total Cost Function
The lowest possible cost the firm could incur to produce a level of output given the firm’s technological capabilities and the prices of factors of production such as labour and capital.
Formula: Total Costs
TC = FC + Q*VC
Fixed Costs vs Variable Costs
FC remain constant as input increases whereas VC increase as input increase.
Formula: Average Cost function
AC = TC/Q
> if AC decrease when Q increase => economies of scale
if AC increase when Q increase => diseconomies of scale
if AC remain constant => constant return to capital
What could cause the demand curve to slope upward for some range prices ?
- prestige
- signalling effects
Definition: Minimum efficient scale
MES is the smallest output level at which economies of scale are exhausted.
Definition: Marginal Cost
MC is the incremental cost of producing exactly one more unit of output.
Formula: Marginal Cost
MC = TC’
MC = [TC(a+b) - TC(a)] / b
Sunk vs Avoidable Costs
Sunk costs are costs that has have already been incurred and cannot be recovered whereas avoidable costs are expenses that won’t be incurred if a particular activity is not performed.
Short-run average cost and Long-run average cost
SAC = AFC + AVC
The Long-run cost function is the lower envelope of the short run cost functions represented by a bold line. It shows the lowest attainable average cost for any particular level of output when the firm can adjust its plant size optimally.
Definition: Economic Cost
EC of deploying resources in a particular activity is the value of the best foregone alternative use of those resources.
Accounting profit vs Economic profit
AP = Sales Revenue - Accounting Cost
EP = Sales Revenue - Economic Cost
Definition: price elasticity of demand
Is the % change in quantity brought about 1% change in price
If it is <1 => the demand is inelastic
If it is >1 => the demand is elastic
While demand can be inelastic at the industry level, it can be elastic at a brand level.
Formula: Total Revenue Function.
TR = Q*P
Definition: Marginal Revenue
MR is the rate of change in total revenue that results from the sale of delta Q additional outputs
Formula: MR
MR = TR’
MR = [TR(a+b) - TR(a)] / b
MR = P* [1 - 1/elasticity]
Definition: the Revenue destruction effect
To sell more the firm must decrease its price. While it increases revenue on extra units sold, it loses revenue on all the units it could have sold at a higher price.
The theory of the firm
Assumes that the firm’s ultimate objective is to make as large profit as possible.
MR & MC
MR = MC, output and price are at their optimal level
MR > MC => can increase profit by selling more and decreasing price
MR < MC => can increase profit by selling less and increasing price
How is the demand curve of perfectly competitive firm?
Horizontal
MR = Market Price
Definition: Nash Equilibrium
The optimal outcome of the game is where there is no incentive to deviate from their initial strategy after considering an opponent’s choice.
The prisoners’ dilemma
Is when 2 individuals action on their own self interest do not result in the optimal outcome. Both participants find themselves in a worse situation than if they had cooperated.
What is the opposite of a dominant strategy ?
A dominated strategy
