Unit 2: Activities 5-8 Flashcards
What it the economic problem?
- We are faced with limited resources
- As a result of limited resources, consumers must make decisions about their economic purchases.
- Producers or business owners use profit to decide what they are going to offer in the market.
Need vs want…
- In Canada, many of us are quite casual about our consumption of water. We often linger in the shower or keep the tap running while brushing our teeth.
- However, there are many people in the world who do not have clean drinking water or even water near their residence.
- Their need for water may be more urgent than ours.
Utility:
- A measure of the relative satisfaction or ‘desiredness’ from consumption of goods
- A theoretical unit of measurement for utility is the ‘util’.
The Law of Diminishing Utility…
applies to multiple purchases of the same item in almost any case except collections (stamp collector).
Desire something less and less the more you get the same thing
How does the Law of Diminishing Utility effect the market?
- The Law of Diminishing Utility explains, to some extent, why prices go up and down.
- consumers will not buy more of a product unless it is on sale
- Certain items are more appealing to purchase at a specific time of year
How to businesses entice consumers in order to make a profit?
- Promotions such as “buy one, get one free” (which has now acquired the trendy acronym BOGO)
- Offer bulk purchase discounts
- Market “memberships” to a business alluding to the discounts and benefits of being part of the club.
Private Enterprise System…
- Refers to all businesses/firms owned by individuals and groups of individuals, rather than by the government
- Owners collect all the profits and are accountable to no one except the government.
- To be competitive, businesses must promote a good price, quality, customer service, warranty, location, convenience, etc.
- Their main goal is to increase profit and decrease costs.
Accounting Profit:
Excess of revenues over costs
Important for decision makers in businesses
Used to maximize profit or at least break even to exist
The Theory of the Firm…
- Assumes that producers are all Profit Maximizers.
- Adam Smith’s “invisible hand” of self-interest leads them to increase their revenues and decrease their costs in order to increase their profits.
What does profit mean for business?
- Profits act as an incentive and a reward for the work
- Profits are the producer’s least expensive source of money for expanding/improving
- Profits are used to evaluate how well their business is doing by comparing theirs with their competitors.
- Profits are closely monitored by producers so they can calculate what products are selling the most and making the most profit.
- Profits also allow privately owned companies to pay dividends to their shareholders.
Total Costs:
The money the firm (Business) spends to purchase the productive resources it needs to produce its good/service (ie. payments to suppliers, employees, bankers, etc.).
These are divided into fixed and variable costs
Fixed Costs:
those that remain the same at all levels of output. Must be paid whether or not the business produces (ie. Rent, taxes, insurance, interest on loans)
Variable Costs:
those that are associated with labour, raw materials, fuel, power
These are relatively flexible as production increases it becomes necessary to employ more resources, thus the costs rise as production rises.
Variable costs are often targets for “emergency” cutbacks, for example, layoffs.
How to maximize production…
- Always produce up to the point at which there is no added benefit from producing any more, the business would actually be wasting resources and reducing its profit.
- Production should continue to the point at which the “marginal cost” of producing one more unit equals the “marginal revenue” received from the unit’s sale.
- Profits are maximized at a production level where Marginal Revenue = Marginal Cost
Marginal Cost:
additional cost
