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19 Cards in this Set

  • Front
  • Back
2 Relationships
-Marginal Analysis
-Optimization (how to optimize a function)
Marginal Analysis
-margin/ marginal change
-managers maximize profit → MR = MC

MR= marginal revenue
MC= marginal costs
Margin/ Marginal Change
a change by the smallest amount possible (usually a 1 unit change)

*think derivative when you hear margin
Optimization
-occurs when maximizing or minimizing
-optimization ≠ best outcome

Ex: a.)maximize revenue
b.) minimize cost
c.) maximize profits → π= TR-TC
Total Revenue
P= price of good/ service
Q= quantity sold
TR= total revenue

TR= PQ
Small Firm; Does Not Differentiate Product
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)
Average Revenue (AR)
amount of revenue brought in per unit

AR= TR / Q

*P = AR
Marginal Revenue (MR)
extra revenue brought in from selling next unit

MR= ΔTR / ΔQ

*P = AR = MR
Large Firm; Differentiate Product
-monopoly
-oligopoly
-monopolistic competition

Characteristics:
-price makers (influence price)
-restricted by law of demand ( P↓, Q↑)
-downward sloping demand curve
Total Cost
2 types of costs
-fixed costs (FC)
-variable costs (VC)

TC = FC + VC
Fixed Costs (FC)
costs that do not change with output

Ex: rent, property taxes
Variables Costs (VC)
costs that change as the firm alters output

Ex: raw materials, electricity, wages
2 Times Periods in Cost Structure
-short run
-long run
Short Run
at least one fixed input

FC > 0
Long Run
all inputs are variable

FC = 0
Average Cost (AC)
cost per unit produced

AC = TC / Q
Marginal Cost (MC)
the addition to TC from producing one more unit

*derivative of TC

MC = ΔTC / ΔQ
Profits
goal for all business managers is to maximize profits
Marginal Profit
thee addition to profit (π) from selling one more unit

-derivative of π

Marginal Profit = MR - MC