Midterm Review Tutorial.pdf - MGCR 293 CHAPTER ONE Dr Kamal Salmasi Dr Taweewan Sidthidet Dr Tariq Nizami T.A Mike Brintnell

Midterm Review Tutorial.pdf - MGCR 293 CHAPTER ONE Dr Kamal...

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CHAPTER ONE MGCR 293 Dr. Kamal Salmasi Dr. Taweewan Sidthidet Dr. Tariq Nizami T.A.: Mike Brintnell [email protected] Presentation Credit: Brianna Mooney
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Present Value and Theory of the Firm The basic theory of a firm is to maximize its value (as opposed to maximizing profits) The value of a firm is determined by the present value of expected future profits. Mathematically, the present value is always less than the expected future profits this is due to the time value of money Present Value = σ 𝑡=1 ? (?? 𝑡 −?𝐶 𝑡 ) 1+𝑖 𝑡 Where 𝑇? 𝑡 is Total Revenue in year T, 𝑇𝐶 𝑡 is Total Cost in year t, i is interest rate, and t goes form 1 (next year) to n (last year)
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Economic Profit Accounting Profit would be the recorded revenues minus explicit costs. Accounting profit is the profit shown on an income statement Economic Profit considers the potential (or alternate use) of both capital and labor. If a man invests $10,000 dollars of his own money at the start of a year into a business and spends 100 hours making and selling his product, and then gets a revenue of $10,000, his accounting profit would be zero. However, the economist would see that his $10,000 dollars could’ve been put into a bank with 10% interest yielding $1,000, and he could’ve spent 100 hours working minimum wage at $10/hour, thus he incurred an economic loss of $2,000. Economic profit is always less than OR equal to accounting profit.
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DEMAND THEORY The demand curve shows the amount of a product that consumers are willing to buy, at each price. This amount is called the quantity demanded Each demand curve is based on a set of assumptions. Some assumptions include: income of population, consumer tastes and preferences, price of complement/substitute products/services and expectations of price/availability The demand curve shifts if any of the underlying assumptions change A change in the price of a product does not cause a shift of its demand curve, but rather a movement along it
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SUPPLY THEORY The supply curve shows the amount of a good or service that suppliers are willing to sell at each price point. The amount is called the quantity supplied. Each supply curve is based on assumptions, including: constant technology and constant cost of production inputs (ex: labour, land, capital, materials, etc.)
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MARKET EQUILIBRIUM Market equilibrium occurs where the supply curve intersects the demand curve At the equilibrium point: 1.Quantity demanded equals quantity supplied 2. Price that consumers are willing to pay equals the price at which consumers are willing to sell Therefore, the equilibrium price (AKA market clearing price) and quantity (AKA market clearing quantity) are established at this point
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MARGINAL PROFIT & AVERAGE PROFIT Marginal profit is the change in profit associated with a 1-unit change in total output When total profit is maximized, the slope of the profit function is 0 Average profit rises if it is less than marginal profit
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  • Spring '08
  • Salmasi

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