séance 3

Question 1

what is the definition of a firm and its goal?

Answer 1

a firm is an organization which transforms inputs into output. its goal is to maximize profit (revenue-cost)

Question 2

what are the factors of production (or inputs)

Answer 2

• materials (M): materials or resources transformed during the production process
• capital (K): durable material resources used in the production process but not transformes
• labor (L): employee resources involved in the production process

Question 3

what is the tradeoff that firms face when wanting to maximize profit?

Answer 3

producers face a tradeoff between selling at a high price and selling more: is it better to sell few units at a high price, or to sell many units at a low price

Question 4

what helps firms to make decisions while facing the tradeoff?

Answer 4

they want to know how revenue varies as a result of a price change and when it is profitable to raise prices: they need to look at the elasticity of revenue

Question 5

what is elasticity of revenue?

Answer 5

it is the percentage change in revenue in response to a 1% change in price

Question 6

how to compute elasticity of revenue?

Answer 6

Er = 1 - Ep