CHAPTER ONE
MGCR 293
Dr. Kamal Salmasi
Dr. Taweewan Sidthidet
Dr. Tariq Nizami
T.A.: Mike Brintnell
[email protected]
Presentation Credit: Brianna Mooney

CHAPTER 1

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)

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.

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

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.)

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

CHAPTER 18

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