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Economics for Management > Week 3- Extent decisions and investment decisions > Flashcards

Week 3- Extent decisions and investment decisions Flashcards

1
Q

What is an extent decision?

A

these are “how much” decisions eg. how much labour should you hire

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2
Q

what is an investment decision?

A

an extent decision but with a particular focus on capital. Involves a decision that is over time

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3
Q

what does marginal analysis tell you?

A

the direction of change but not by how much

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4
Q

what is the definition of marginal cost?

A

the cost to make and sell one additional unit of output

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5
Q

what is the formula for MC

A

MC= TCq+1 - TCq

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6
Q

what is the formula for variable cost?

A

VC= MC*Q

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7
Q

what is the formula for TC

A

TC= FC+VC and TC= FC+MC*Q

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8
Q

What is the definition of average cost?

A

the total cost of production divided by the number of units produced

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9
Q

What is the formula for AC

A

AC=TC/Q

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10
Q

Describe the trend of the marginal cost curve

A

Initially, as output increases, marginal costs fall. Eventually, as output continues to increase marginal costs increase which leads to diminishing marginal returns

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11
Q

What is the relationship between the marginal cost curve and the average cost curve?

A

If marginal cost is above the average cost then it will pull the average cost up. If marginal revenue is below the average cost then it will pull AC down

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12
Q

What is the average cost going to look like if output is low?

A

Average costs will be high if output is low because AC= TC/Q

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13
Q

what is marginal revenue (MR)?

A

the additional revenue from producing and selling one more unit.

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14
Q

If the benefits of selling another unit (MR) are greater than the costs (MC)…….

A

then sell another unit

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15
Q

Do you produce more or less when MR>MC ?

A

Produce more

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16
Q

Do you produce more or less when MR

A

Produce less

17
Q

What is the relationship between MR and MC when profits are being maximised?

A

MR=MC

18
Q

What is the trend of the MR curve?

A

as output increases, MR falls. This is because businesses have to lower their price to lure in customers

19
Q

Why does Average REVENUE fall as output increases?

A

To increase demand you can to lower prices to lure in more customers

20
Q

What does the point on the demand curve where MC meets MR signify?

A

Profits are being maximised

21
Q

How is average cost different to marginal cost?

A

It includes the fixed cost component. Remember AC=TC/Q

22
Q

How should you implement an extent decesion?

A

Make small changes to gather information about the marginal effectiveness of each medium. if they don’t work then scale them back

23
Q

Learn Break even formula

A

Week 3 notes

24
Q

what is a low discount rate?

A

when someone has a willingness to invest in projects with a low rate of return

25
Q

what is the definition of Net Present Value (NPV)?

A

Helps determine whether you would be willing to invest in a project that pays off well in the future

26
Q

what is the definition of Net Present Value (NPV)?

A

Helps determine whether you would be willing to invest in a project that pays offs in the future

27
Q

what is the formula for NPV

A

Example: -500+ 600/1.05 +600/1.05squared= 615.65

28
Q

Does the discount rate increase or decrease if you are less patient?

A

increases

29
Q

If the project is profitable the NPV must be above or below Zero?

A

above

30
Q

projects with a negative NPV may show an accounting profit but never a…

A

Economic profit

31
Q

Explain what hold up is?

A

This is when two businesses are making a deal and one of the business is required to make a sunk investment for the benefit of the two parties. Once they have sunk this cost the other business can renegotiate the terms of the contract and demand a lower price which negatively impacts the other business

32
Q

What are the solutions to post-investment hold up?

A

Vertical integration, signing a formal contract to sue the other business if they break the conditions.

33
Q

what are the disadvantages of a contract to prevent hold up?

A

it is costly to write and enforce

Economics for Management (9 decks)

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