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Fundamentals of Microeconomics - Coggle Diagram
Fundamentals of Microeconomics
Introduction
What is Microeconomics?
Understanding Consumer Choices
The Science Behind Purchases
Beyond Supply and Demand
Beyond Supply and Demand
By exploring microeconomics, you will uncover the reasons behind consumer choices and understand the deeper mechanisms at play in the marketplace, setting a firm ground for your journey through the economics of prices and markets.
Economics and Relevance
Lead to a better understanding of how firms compete, organise themselves and create superior profitability through competitive advantages and
Provide a conceptual foundation for making good strategic decisions
Accounting Profit vs Economic Profit.
Accounting Profit
refers to the total amount of money taken in from sales (total revenue) minus the cost of producing goods or services (explicit).
Economic Profit
efers to the sales revenue minus economic costs (
explicit
and
implicit
costs).
Time Value of Money
Often a gap exists between the time when costs are borne, and when benefits are received
known as the "
time value of money" (TVM)
Due to inflation, risk, interest and investment returns and other factors, money has a different value today than it had in the past and compared to its value in the future
Present Value Analysis
evaluate the current value of a sum of money.
present value (PV)
of a single future value refers to the current worth of a sum of money that is to be received at a future date, discounted at a rate representing the time value of money.
PV
is the Present Value
FV
is the Future Value or the amount of money to be received in the future
i
is the discount rate or interest rate
n
is time period in years.
Present value reflects the difference between the future value and the opportunity cost of waiting:
OWC
is the foregone benefit that could have been obtained by taking an alternative action instead of waiting
Future Streams of Value
present value of a stream of future values involves finding the current worth of a series of future cash flows
This process involves discounting each future cash flow back to its present value and then summing all these present values
The Net Present Value (NPV)
financial metric used in capital budgeting and investment planning to analyse the profitability of an investment or project. It’s the difference between the present value of cash inflows generated by the investment and the present value of the cash outflows, including the initial investment cost.
positive
NPV indicates that the projected earnings exceed the anticipated costs, suggesting the investment would be profitable. Conversely, a
negative
NPV suggests the investment would result in a net loss, and therefore, may be undesirabl
Marginal Analysis
examination of the additional benefits of an activity compared to the additional costs of that activity
Companies use marginal analysis as a decision-making tool to help them maximise their potential profits.
how much extra benefit is gained from an additional unit of input
, such as labour or capital,
versus the additional cost incurred to obtain that extra unit of input
.
Marginal Cost:
This is the increase in the total cost that arises from producing an additional unit of a good or service. It’s calculated as the
change in total cost divided by the change in the quantity of output
.
Marginal Revenue:
It represents the additional revenue that can be earned by selling an extra unit of a good or service. It’s calculated as the
change in total revenue divided by the change in the quantity of output.
Marginal Benefit:
This is the additional satisfaction or value derived by consumers from consuming one more unit of a good or service.
Marginal Utility:
It refers to the additional utility or satisfaction a consumer receives from consuming an additional unit of a good or service.
concept of
diminishing returns
also often comes into play, where beyond a certain level of production or consumption, the additional benefit derived from each extra unit decreases
To maximise net benefits, the managerial control variable should be increased up to the point where
MB = MC
.
A Golden Rule in economics says:
MB > MC
means the last unit of the control variable increased benefits more than it increased costs
MB < MC
means the last unit of the control variable increased costs more than it increased benefits
