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Markets and Firms (Economic concepts (Consumption
Define: act of using…
Markets and Firms
Economic concepts
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Production
Define: transformation of inputs into outputs by firms to earn profits
:check: inputs include: i) labour ii) land and raw materials iii) capital
Problem of scarcity
Define: excess of what humans wants over what can be produced to fulfill those wants
Macroeconomics objectives
:pencil2:high and stable economic growth
:pencil2:low unemployment
:pencil2: low rates of inflation
:pencil2:avoidance of payments of deficit
:pencil2:stable financial system
:pencil2: avoidance of excessive rate of fluctuations
:pencil2:avoidance of excessively financial distressed sectors of economy
Circular Flow of income
(relationship bet firms and owners of factors of production)
Opportunity cost: cost of the activity measured in terms of it best alternative foregone
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Production and Cost
measuring cost of inputs
:pencil2:Factors not owned by company - explicit
:pencil2:Factors owned by firm- implicit costs
:pencil2:historic cost of factor- $$ paid for it
:pencil2: replacement cost of factor- cost to replace
:pencil2: sunk cost - cost cannot be recouped
:pencil2:bygone principle: only variable costs should be considered
Production in SR
:check:short run = period of time where at least 1 input factor is fixed
Long run = all factors are varied
:check: Law of diminishing (marginal) returns
as more variable factors are combined with fixed factors, increase in total output will eventually decrease ( applies in SR as fixed factors become overloaded.
:check: TPP = f( K, L) i.e amount of output produced over time
k = capital , L = labour
:check:APP= TPP/ Q
:check: MPP= dTPP/dQ [ 1 extra cost of unit /extra cost of variable factor]
cost in the SR
- factor productivity= higher productivity means lower production cost
- factor prices= higher prices imply higher production cost
Total cost = TFC +TVC
Marginal cost = dTC / dQ
AFC= TFC/Q
AVC= TVC/Q
AC = (TFC+TVC)/Q= AFC+ AVC
MC< AC , AC must be falling
MC> AC , AC must be rising
MC=AC, AC is at min.
Production in the LR
:check: change all factor inputs by same percentage i.e increasing, decreasing, constant
( Economies of scale - LRAC fall as scale of production increased)
- causes:
:check:specialization & division of labour
:check: indivisibilities -> container principle, greater efficiency of large machines, multistage production
:check: organisational - rationalisation
:check: spreading of overhead costs
:check: financial economies
:check: economies of scope
Diseconomies of scale
:red_cross:poor industrial relations
:red_cross: managerial problems of co-ordination
:red_cross: poor motivation of workforce
:red_cross:problems in area holding up prodn
location of production:
transport costs: distance from market/ raw materials
industrial clusters: interconnected companies in same location
i) improve productivity
ii) encourage innovation
iii) encourage formation of new businesses to meet needs of cluster- VC & skilled labour available to reduce cost and lower risks of new business set up
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ULTIMATE DECISION
VSR= all fixed
SR = at least 1 fixed
LR = all factors are variable but fixed quality
VLR= all factors are variable with adjustable quality, hence productivity changes.
Cost in LR
LRAC
- decrease up til a certain level due to economies of scale
- increase beyond a certain level due to diseconomies of scale
MES( minimum efficient scale) = level of output beyond which there is no further economies of scale
- assumptions:
i) technology and factor quality are given
ii) firms chooses cost minimising combination of factors
iii) discounts are given on bulk purchases
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Demand and Supply
R bet Demand and Price
- law of demand
- income effect
- substitution effect
- quantity demanded
Other Determinants of demand
- consumer tastes
- number and price of substitute goods
- number and price of complementary goods
- consumer incomes
- distribution of income
- expectations of future price changes
RS bet Supply and Price
- Short T: increase price increase supply
but beyond a certain output, cost also increases
- Long T: if price remains high, production set up by firms and total market supply increases
Other determinants of supply
- cost of production/ distribution
- profitability of alt prdts
- profitability of goods in joint supply
- nature, random shocks and other unpredictable events
- aims of producer
- number of suppliers
4 main causes for change in prices:
i) changes in inputs
ii) changes in technology
iii) organisational changes within firm
iv) changes in gov. policies
Price controls
- Maximum price ( price ceiling)
:check: will result in DEM>>>SUP
Food , daily essentials
-Minimum Price
:check:will result in DEM<<< SUP
Wages, agricultural commodities, alcohol etc
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Revenue and Profit
Revenue
Total revenue= Price * Quantity
Average revenue= TR/Q = P
- AR curve = P = firm's demand curve
MR= dTR/dQPrice taker: D =AR=MR P usually is at industry equilibrium
TR for such companies is a straight line curve ( Y=X)
Price maker: can influence the price charged for its good or service
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