Microeconomics - Microeconomics The substitution effect...

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Microeconomics The substitution effect occurs when a product becomes less costly relative to the alternatives. Because labor can be substituted for machinery, a decline in the price of labor will increase the amount of labor demanded and decrease the demand for machinery. Thus, when two resources are substitutes, the price of one and the demand for the other are directly related. An economic profit is the excess of total revenue over the economic costs of the firm. Economic costs are the payments needed to acquire and retain productive resources, such as materials, land, labor, capital, and entrepreneurial services. A normal profit is an economic cost because it is the payment required to acquire and retain entrepreneurial services. An entrepreneur must be paid to organize the enterprise and combine the other resources needed for production. In an oligopoly firm products can be either differentiated or standardized. Prices tend to be rigid (sticky) because of the interdependence among firms . Entry is difficult because of either natural or created barriers. Price leadership is typical in oligopolistic industries. Under price leadership, price changes are announced first by a major firm. Once the industry leader has spoken, other firms in the industry match the price charged by the leader. The mutual interdependence of the firms influences both pricing and output decisions. -
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This note was uploaded on 02/01/2009 for the course ACTG 6610 taught by Professor Ward during the Spring '09 term at Middle Tennessee State University.

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Microeconomics - Microeconomics The substitution effect...

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