lecture 8 Flashcards
what does the slope of the indifference curves equal?
the marginal rate of substitution
as it indicates the willingness of substitution of goods
what does a change in price imply?
a change in utility
a change in purchase power
a change in relative prices
what is the principle agent problem?
the idea share ownership is often dispersed and shares are held through many things such as banks etc leaving the ownership very remote and therfore managers may not be able to be controlled effectively and managers may prioritise their own objectives over owner objectives
what do we assume about firms and consumers?
consumers maximise utility and firms maximise profits
what does revenue depend on?
the demand function
do we account for total cost of non current assets in the first month?
no as we only account for the amount we used
what are costs according to economists
-they consider opportunity costs when considering total costs
-accounting costs (including sunk costs)
what is sunk costs?
an expense that ahs already been incurred and cant be recovered eg salaries, marketing, r and d, machinery, money spent on a business project etc
what is opportunity cost?
amount lost by not using a resource in its best alternative use
what are accounting costs?
actual payments (accurual or cash) made by a firm in a given period including sunk costs
why is mr below demand curve?
The marginal revenue is always below the demand curve because sellers have to reduce prices to increase demand and sell the additional unit. Also, demand has to be higher to gain more revenue for the additional units.
what is marginal revenue?
the increase in total revenue from selling an extra unit of output
its reliant on the demand function
where is revenue maximisation?
mr = 0
whats the relationship between quantity and price?
negative
what is the inverse demand function?
it just makes P the function of the equation its used to determine the optimal price for revenue maximisation
what does the production function show?
states the maximum outputs that can be produced are given inputs
what is marginal product?
the increase in output when increasing an input by 1 unit (labour) whilst keeping all other inputs the same (capital etc)
what is marginal value product?
the extra revenue made by selling the output made of one extra worker
marginal product of labour multiplied by output price
it equals wage
what happens when mrp = wage?
profit maximisation
what is diminishing marginal product (returns)?
in the short run it occurs if at least on factor of production is held fixed leading to a fall in returns
eg increasing labour without increasing capital
what is the short run?
where at least one input is fixed
