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
