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19 Cards in this Set
- Front
- Back
2 Relationships
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-Marginal Analysis
-Optimization (how to optimize a function) |
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Marginal Analysis
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-margin/ marginal change
-managers maximize profit → MR = MC MR= marginal revenue MC= marginal costs |
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Margin/ Marginal Change
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a change by the smallest amount possible (usually a 1 unit change)
*think derivative when you hear margin |
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Optimization
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-occurs when maximizing or minimizing
-optimization ≠ best outcome Ex: a.)maximize revenue b.) minimize cost c.) maximize profits → π= TR-TC |
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Total Revenue
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P= price of good/ service
Q= quantity sold TR= total revenue TR= PQ |
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Small Firm; Does Not Differentiate Product
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perfect competition
Characteristics: -small firms -homogeneous goods -no barriers to entry -low start up costs -large number of consumers -low levels of innovation -price takers (no ability to influence prices) |
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Average Revenue (AR)
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amount of revenue brought in per unit
AR= TR / Q *P = AR |
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Marginal Revenue (MR)
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extra revenue brought in from selling next unit
MR= ΔTR / ΔQ *P = AR = MR |
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Large Firm; Differentiate Product
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-monopoly
-oligopoly -monopolistic competition Characteristics: -price makers (influence price) -restricted by law of demand ( P↓, Q↑) -downward sloping demand curve |
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Total Cost
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2 types of costs
-fixed costs (FC) -variable costs (VC) TC = FC + VC |
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Fixed Costs (FC)
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costs that do not change with output
Ex: rent, property taxes |
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Variables Costs (VC)
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costs that change as the firm alters output
Ex: raw materials, electricity, wages |
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2 Times Periods in Cost Structure
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-short run
-long run |
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Short Run
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at least one fixed input
FC > 0 |
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Long Run
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all inputs are variable
FC = 0 |
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Average Cost (AC)
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cost per unit produced
AC = TC / Q |
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Marginal Cost (MC)
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the addition to TC from producing one more unit
*derivative of TC MC = ΔTC / ΔQ |
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Profits
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goal for all business managers is to maximize profits
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Marginal Profit
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thee addition to profit (π) from selling one more unit
-derivative of π Marginal Profit = MR - MC |