Final Exam (Microeconomics) Flashcards
Microeconomics
the study of economics as seen by a single business
Purpose of microeconomics
to maximize profit by finding the most efficient level of production and sales for a product/service
Profit Formula
Profit = Revenue - Costs
For-Profit Companies
seek to maximize shareholder/investor value and may share profits among shareholders
Not-for-Profit Companies
seek to maximize the purpose for which they were created; profit generated by these organizations must be retained for the organization and may not be shared
Income Statement
Records revenues and expenses over time (monthly, quarterly, or yearly)
- Shows the bottom line of net income (key measurement of the company’s performance)
Income Statement Formula
Revenue - Costs = Operating Income
Balance Sheet
Snapshot that records the assets and liabilities of a company
Accounting Equation
Assets = Liabilities + Equity
Law of Supply
- Quantity of goods supplied rises and market price rises & falls as the price falls (willingness of a supplier to supply goods/services to the market)
Law of Demand
- Quantity of goods demanded rises as the price falls & falls as the price rises (willingness of a consumer to buy goods/services at a given price)
Fixed Costs
Costs a business must bear before they produce a single product or service (remains the same no matter how much you produce)
Fixed Costs Examples
Loan Payments (interest and principal)
Rent
Basic Utilities (electricity, water, etc.)
Salaried employees
Taxes and Fees
Variable Costs
Directly related to the volume of goods or services provided; increases or decreases as the amount of product you provide increases or decreases)
Variable Costs Examples
Raw Materials
Cost of Maintaining or Replacing Tools
Labor Costs
Total Cost
The sum of fixed costs and variable costs (same as variable cost curve but displaced due to the addition of fixed cost)
Average Total Cost
Total cost divided by number of units produced
Marginal Cost
Cost to produce one more
- Sum of the actual direct variable costs required to make that additional unit/service
Decrease and Increase of the Cost Curves
- The cost decreases as production increases because the cost is spread over many products.
- The cost increases after a certain amount of time because additional costs are made to support the production of additional products.
Long Run vs Short Run
All costs are variable in the long run.
Price in a Competitve Market Situation
Horizontal Line labeled AR (Average Revenue) or MR (Marginal Revenue) or P (Price)
Maximum Profit Considering Price
MR = MC
Total Profit
(Sales Volume * Price) - (Sales Volume * Average Total Cost)
Price in Monopoly Situation
MR = MC ; Monopolists also have to follow the market price
Profit Graph for Monopoly
MC, ATC, Demand Curve, MR
Economy of Scale
Costs decrease at higher production level.
Cost of better tools are spread over more units.
Larger purchases imply discounts.
Operate at a flat part of the learning curve.
Economy of Scope
Takes advantage of shared costs and capacities among varied products
