Econ

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Managerial Economics
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Terms in this set (63)
Managerial Economics
is the application of microeconomic principles and tools to business problems faced by decision makers.
Profit
Total Revenue - Total Cost
Total revenue
Price × Quantity
Accounting costs
The costs accountants use to keep a firm's financial records.Generally explicit costs
Generally explicit costs
The return from the best alternative use of a resource.•A measure of what the firm gives up when they use a resource. Includes value of explicit and implicit costs
marginal analysis.
Comparing MC and MB
Competitive return
The opportunity cost of the owners' funds invested in a company.
optimal point (maximal suprlus)
Managers want to be at the point where MB=MC
perfectly competitive market
•(1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
market demand
demand by all the consumers of a given good or service.
The Law of DemandInverse relationship between the price of a product and the amount of the product that consumers are willing and able to purchase, holding other things constant.Quantity demandedThe amount of a good or service that a consumer is willing and able to purchase at a given price.Demand scheduleA table that shows the relationship between the price of a product and the quantity of the product demanded.Demand curveA curve that shows the relationship between the price of a product and the quantity of the product demanded.When the price of a good falls, two effects take place:1.Consumers substitute toward the good whose price has fallen. 2.Consumers have more purchasing power, which is like an increase in income.Substitution effectThe change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.Income effectThe change in the quantity demanded of a good that results from the effect of a change in the good's price on a consumers' purchasing power.Shifting the Demand Curve (Change in Demand)A change in something other than price that affects demand causes the entire demand curve to shift. A shift to the right (D1 to D2) is an increase in demand. A shift to the left (D1 to D3) is a decrease in demand.Income•Increase in income increases demand if product is normal, decreases demand if product is inferior.Prices of related goods•Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements.Normal goodsGoods for which the demand increases as income rises and decreases as income falls. Examples: Clothing Restaurant meals VacationsInferior GoodsGoods for which the demand increases as income falls and decreases as income rises. Examples: Second-hand clothing Ramen noodlesIncrease in incomeIncrease in normal goods like clothing. Shift to the rightIncrease in incomeDecrease in inferior goods like second hand clothingSubstitutesGoods and services that can be used for the same purpose. Examples: Big Mac and Whopper Ford F-150 and Dodge Ram Jeans and KhakisComplementsGoods and services that are used together. Examples: Big Mac and McDonald's fries Hot dogs and hot dog buns Left shoes and right shoesIncrease in Price of Big MacIncrease demand for whoppers, decrease demand for french friesTastesIf consumers' tastes change, they may buy more or less of the product. Example: If consumers become more concerned about eating healthily, they might decrease their demand for fast food.DemographicsThe characteristics of a population with respect to age, race, and gender. Increases in the number of people buying something will increase the amount demanded. Example: An increase in the elderly population increases the demand for medical care.Future Prcies•Future products are substitutes for current products. •An expected increase in the price tomorrow increases demand today. •An expected decrease in the price tomorrow decreases demand today.change in quantity demandedA change in the price of the product being examined causes a movement along the demand curve.change in demandAny other change affecting demand causes the entire demand curve to shift.Supply scheduleA table that shows the relationship between the price of a product and the quantity of the product supplied.Supply curveA curve that shows the relationship between the price of a product and the quantity of the product supplied.Quantity suppliedThe amount of a good or service that a firm is willing and able to supply at a given price.The law of supplyThe rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.Shifting the Supply Curve (Change in Supply)As the supply curve shifts, the quantity supplied will change, even if the price doesn't change. The quantity supplied changes at every possible price.What Factors Influence Market Supply?oPrices of inputs oTechnological change oPrices of substitutes in production oNumber of firms in the market oExpected future pricesInputsare things used in the production of a good or service.increase in the price of an inputdecreases the profitability of selling the good, causing a decrease in supply.decrease in the price of an inputincreases the profitability of selling the good, causing an increase in supply.technological changeA firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs.An Illinois farmer can plant corn or soybeans. If the price of soybeans rises,he will plant (supply) less corn.Number of Firms: More firms in the market will result in more product available at a given price (greater supply).More firms → supply increases.Expected Future PriceIf a firm anticipates thatMore firms → supply increases. the price of its product will be higher in the future, it might decrease its supply today in order to increase it in the future.change in quantity suppliedA change in the price of the product being examined causes a movement along the supply curve.change in supplyAny other change affecting supply causes the entire supply curve to shift.Market equilibriuma situation in which quantity demanded equals quantity supplied.Equilibrium PriceQd = QsEquilibrium QuantityQuantity bought and sold at the equilibrium priceTotal SurplusThe sum of the amount by which total benefit exceeds total costEfficient quantityThe quantity of output that yields the largest total surplus of marginal benefit over marginal cost for society.If the Marginal Benefit (MB) of a pair of jeans is $100 and the Marginal Cost (MC) of the pair of jeans is $20 what is the total surplus$80Deadweight lossThe loss in total surplus from producing less or more than the efficient quantity.Consumer surplusThe difference between the maximum price consumers are willing to pay for each unit of a product and the price actually paid, summed over the quantity of units purchased.Producer surplus•The difference between the actual price producers receive for each unit and the minimum price they are willing to accept to produce that unit, summed over the quantity of units produced. • Producers what to maximize their producer surplus.The power of the demand and supply model•is in its ability to predict directional changes in price and quantity traded.Suppose incomes increase. What happens to the equilibrium in the smartwatch market?Smartwatches are a normal good, so as income rises, demand shifts to the right (D1 to D2). •Equilibrium price rises (P1 to P2). •Equilibrium quantity rises (Q1 to Q2).S↑( P↓ and Q↑ )D↑( P↑ and Q↑ )Demand Curve Unchanged, Supply Curve Shifts to the RightQ increases P decreasesprice floorA legally set minimum price place on market price (must set above the equilibrium price to be binding) • Protect Producers (Government thinks Eq. Price is too low) • Too much market activity • Example: Minimum WagePrice CeilingA legally set maximum price for the market (must set below the equilibrium price to be binding) • Protect Consumers (Government thinks Eq. Price is too high) • Too much market activity • Example: Rent Control