Exam Flashcards
TR
total revenue
TC
total costs
P
Price
Q
quantity sold
FC
fixed costs
VC
variable costs
MC
marginal costs
Equations for profit (3)
- TR - TC
- P x Q - (FC+VC)
- P x Q - (FC+MCxQ)
break even formula in terms of Q
(P-MC)Q-FC = 0
(P-MC)Q = FC
Q = FC/(P-MC)
AR
Average revenue
Equation for AR
TR = PxQ
&
AR = TR/Q
AR = (PxQ)/Q = P
Equations for profit per unit
- Profit/Q = AR - AC
- P - (FC/Q + MC)
NPV
net present value
Equation for NPV
Xt + (Xt+1÷1+r) + (Xt+2÷(1+r)^2) + (Xt+2÷(1+r)^3)…
simultaneous equation example
solve FC and MC
FC + 4 X MC = 60,000 (1)
FC + 6 X MC = 80,000 (2)
solution
MC =
(2) - (1) = 2 x MC = 20,000
MC = 20,000/2
MC = 10,000
FC=
6/4 =1.5
(1) x 1.5 1.5 x FC + 6 X MC = 90,000 (3)
(3) - (2) = 0.5 FC = 10,000
FC = 20,000
PED
price elasticity of demand
PED equation
%change in quantity demanded ÷ %change in price
e.g. ((Q1 - Q2)/(Q1+Q2)) ÷ ((P1-P2)/P1+P2))
e
PED
|e|
a positive value of e
If |e|<1…Demand =
inelastic
If |e|>1…Demand =
Elastic
Marginal revenue equation
% change in revenue = %change in price + %change in quantity
what happens if demand is elastic and price increases
lower demand = decrease in revenue
what happens if demand is elastic and price decreases
higher demand = increase in revenue
what happens if demand is inelastic and price increases
higher prices + similar demand = increase in revenue
what happens if demand is inelastic and price decreases
Lower prices + similar demand = decrease in revenue
MR>MC us equal to…
P(1-1/|e|) > MC
P-MC > P/ |e|
(P-MC) ÷ P>1 ÷ |e|
what makes demand more elastic?
- Products with close substitute products
- demand for individual brands are more elastic than industry aggregate demand
- products with many complements (complementary products) have less elastic demand
