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Economics Review Sheet

Economics Review Sheet - Economics Review Sheet Assumptions...

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Economics Review Sheet: Assumptions: Owner manager who owns a business with the primary and only objective to maximize profit in a perfectly competitive market Theory of supply: Measures the quantity that sellers are willing to sell at a given price Sellers maximize profit is a theory of businesses Business is an organization producing goods also called a firm Market is a collection of buyers and sellers organized for the purpose of exchanging goods and services for money Competitive market: There are many buyers and sellers Each item traded in the market is identical to all others Firms can freely enter and exit the market No single buyer or seller can cause the price to move up or down Profit maximization: Profit = Total revenue – Total cost Determined by the level and nature of competition in the market Total Cost: costs are determined by factor market prices and the firm’s technology or production function Production functions: The production function shows the input requirements for each level of production There are substitution possibilities for some firms with more complex production functions Economical summary of the input requirements for each level of production Fixed factors: one that does not vary as the quantity produced increases or decreases (some are fixed in the short run- managerial time, some are fixed in the medium run, cultivated acreage, and nothing is fixed in the long run) Variable Factors: one that must be increased in order to increase output (labor) usually exhibit diminishing marginal productivity- the amount of extra product generated by each additional unit of the input holding other inputs constant declines Average/Marginal Relation: If the marginal product is below the average product then the average product is falling If the marginal product is above the average product the average product is rising When marginal product equals average product when the average product is at a maximum or minimum Cost curves: Total Cost Curve: amount spent on all fixed and variable costs to produce the indicated output Average cost : the ratio of total costs to the units produced Marginal cost: measures the amount by which cost increases as output increases
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by one unit Profit maximization: Profit= total revenue (TR) – total cost(tc) Depends on firms output level (Q) Profit (Q)=TR(Q) – TC(Q) Marginal Revenue (MR) = Change in TR/Change in Q Marginal Cost (MC)= change in TC/change in Q Rules for profit maximization: 1. If Q* maximizes Profit then 2. Maximizing equation= MR(Q*) = MC(Q*) 3. For a firm in a competitive market P=MR at all levels of Q 4. P=MC at Q* 5. Profit (Q*) is a maximum not a minimum 6. At Q* it is worth operating: profit (Q*) is greater than Zero Supply curves: An individual firm’s supply curve IS it’s marginal cost curve Choosing the output at which market price equals marginal cost maximizes profit
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