SMC Microeconomics

Loss Minimization

A rule stating that a firm minimizes economic loss by producing output in the short run that equates marginal revenue and marginal cost if price is less than average total cost but greater than average variable cost.

Law of Diminishing Returns

A concept in economics that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, for example) are held constant, the output per unit of the variable factor will eventually diminish.

Equilibrium of Pure Competition (Short Run)

A firm is in equilibrium at that point where Marginal Revenue (MR) = Marginal Cost (MC) and price.At this stage firm produces the best level of out put and it has no incentive to increase or decrease its out put. In the short run there are four conditions of equilibrium of firm.

Markets

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers.

Monopoly

A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute.

Negative Externalities

A negative externality is a cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organisation, property owner, or resource that is indirectly affected.

Profit Maximization

A process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal. There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total Revenue Method.

Allocative Efficiency

Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

Productive Efficiency

An economic status that occurs when when the highest possible output of one good is produced, given the production level of the other good(s).

Surpluses

An economic surplus is the aggregate of consumer surplus and producer surplus in a market transaction. Conceptual Framework. Consumer surplus is the difference between what consumers will pay for a good or service and what consumers actually pay for it.

Comparative Advantage

Comparative advantage is the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

Fixed Costs

Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

Consumer Surplus

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

Loss of Monopoly "Deadweight Loss"

Deadweight loss are costs to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium.

Positive Externalities

Definition of Positive Externality: This occurs when the consumption or production of a good causes a benefit to a third party. For example: When you consume education you get a private benefit. But there are also benefits to the rest of society.

Demand

Demand is an economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease demand, and vice versa.

Profit Region

Economic profit is the difference between the total revenue received by a business and the total implicit and explicit costs of a firm. It's often the extra profit left over after considering the next best alternative investment, and can be either positive or negative in value.

Land, Labor, Entrepreneurship, Capital

Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship. The first factor of production is land, but this includes any natural resource used to produce goods and service

Elasticity

Elasticity is a measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes.

Marginal Costs

In economics and finance, marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good.

Marginal Product

In economics and in particular neoclassical economics, the marginal product or marginal physical product of an input is the change in output resulting from employing one more unit of a particular input, assuming that the quantities of other inputs are kept constant.

Shut Down Cases

In economics, a firm will choose to implement a shutdown of production when the revenue received from the sale of the goods or services produced cannot even cover the fixed costs of production.

Shortages

In economics, a shortage or excess demand is when the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply (surplus).

Average Costs

In economics, average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).

Equilibrium

In economics, economic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change.

Benefits of International Trade

International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall.

Production

Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (the output). It is the act of creating output, a good or service which has value and contributes to the utility of individuals.

Marginal Revenue

Marginal revenue (MR) is the increase in revenue that results from the sale of one additional unit of output. Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity.

Pure Competition

Perfect competition is a market structure in which the following five criteria are met: 1) All firms sell an identical product; 2) All firms are price takers - they cannot control the market price of their product; 3) All firms have a relatively small market share; 4) Buyers have complete information about the product being sold and the prices charged by each firm; and 5) The industry is characterized by freedom of entry and exit. Perfect competition is sometimes referred to as "pure competition".

Price Discrimination

Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay.

Producer Surplus

Producer surplus is defined as the difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade.

Specialization

Specialization is a method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas.

Supply

Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.

Economizing Problem

The fundamental issue that arises for a society out of the relative scarcity of goods and services compared to the demand for them by consumers. Solving the economizing problem for a business involves making decisions about how best to allocate resources to those demanding them given the company's objectives.

Equilibrium of Pure Competition (Long Run)

The long-run is the period of time where there are no fixed variables of production. As with any other economic equilibrium, it is defined by demand and supply.

Profit Maximization for Monopoly

The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.

Production Possibilities Curve

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

Cost Complications

The sacrifice involved in performing an activity, or following a decision or course of action. It may be expressed as the total of opportunity cost (cost of employing resources in one activity than the other) and accounting costs (the cash outlays).

Consumer Equilibrium

The solution to the consumer's problem, which entails decisions about how much the consumer will consume of a number of goods and services, is referred to as consumer equilibrium. This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent on good 2.

Golden Rule of Profit Maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

Total Costs

Total cost is the overall opportunity cost incurred by a firm in production. For short-run production, total cost consists of variable cost, which depends on the quantity produced, and fixed cost, which does not vary with production.

Total Product

Total product is the overall quantity of output that a firm produces, usually specified in relation to a variable input. Total product is the starting point for the analysis of short-run production. It indicates how much output a firm can produce according to the law of diminishing marginal returns.

Variable Costs

Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output.