Week 8_ Unit 7 THE FIRM AND ITS CUSTOMERS

Question 1

Economic Profit?

Answer 1

Economic Profit = Total Revenue – Total Cost = P·Q – AC·Q

P : Price that the firm sets in the market
• Q : Output
• Cost of acquiring inputs

Economic profit is the profit compared to the next best option

ANOTHER FORMULA= Q(P-AC)
Q= output, P= profit, AC= Average cost

Question 2

In order to make decisions, managers need to know?

Answer 2

Production cost: how much it costs to produce different quantities

Product demand: how many consumers are willing to buy their product
and how much they are willing to pay

Question 3

Price elasticity of demand?

Answer 3

Price elasticity of demand = degree of responsiveness (of
consumers) to a price change.

= - (% change in demand) / (% change in price)

0<=|elasticity|<=1 === Not very elastic
|elasticity|>1 === Very elastic

Question 4

Consumer surplus?

Answer 4

Consumer surplus (CS) =  
the total difference between willingness-to pay and purchase price