Microeconomics

Least Cost Output

- output is maximized or cost is minimized when the marginal product per dollar of compensation of one input is equal to the marginal product per dollar of compensation of another input - graphically, the optimal point occurs at the point of tangency between the isoquant and the isocost curves.

Types of mergers

-Horizontal- firms selling or producing the same product in the same market -Vertical- suppliers and customers merging -Conglomerate- firms in different markets merge

price fixing

-agreement to raise prices -hold prices firm -eliminate or reduce discounts -adopt a standard formular for computing prices -adhere to a minimum fee or price schedule -fix credit terms -no advertising of prices

Q demand

-an increase in Q demanded is a move along the curve due to price

Q supplied

-an increase in Q supplied is due to increase in price change along the same supply curve

Fixed costs

-example: rent -cost that does not vary with the level of output and that can be eliminated only by shutting down

Motives for merger

-market power and improved visibility -technical economies of scale-synergy -staff reductions -division of labor -reduces transaction costs

Elasticity

-measures how responsive an economic variable is to a change in another

price elasticity of demand

-measures responsiveness of quantity demanded to changes in the price of the commodity dD/dP

determinants of the price demanded

-price -price of substitute goods -price of complementary goods -income -advertising -advertising by competitors -size of population -expected future prices -adjustment time period -taxes or subsidies

Determinants of Supply

-price of the product -input prices (labor and cost of capital) -cost of regulatory compliance -technological improvements -taxes or subsidies -time adjustment period

cross price elasticities

-responsiveness of quantity demanded to changes in prices of related good Ex = dQa/dPb x Pb/Qa

Merger

-two firms merge together to create a new firm -shares of both withdrawn and new shares created

Equilibrium price

-use demand and supply function equations Qd = a + bP Qs = -a + bP Equilibrium= Qd=Qs

inelastic

0<Ep <1

Elastic

1<Ep<infinity

Utility function

= Pxy

Law of diminishing marginal utility

A law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that a person derives from consuming each additional unit of that product

Isocost

Alternative combinations of labor and capital that can purchased with the same amount of money.

Isoquant

Alternative combinations of labor and capital that produce the same level of output.

Law of Diminishing Marginal Product

As more and more units of the variable input are applied to the fixed input, the marginal product of the variable input may initially increase, but will eventually decrease.

market price

determined by the point of intersection between supply and demand curve - satisfies the customer and the producer

Infinitely inelastic

Ep = 0

unit elastic

Ep = 1

Infinitely elastic

Ep = infinity

Classification of good

Ey > 0 - Normal Ey > or equal to 1 luxeries o< Ey <0 necessities Ey < 0 Inferior

Antitrust laws

FTC established to enforce antitrust laws -must notify FTC and DOJ of mergers

highly concentrated merger

HHI above 2500 -change of HHI between 100 and 200 warrants scrutiny

unconcentrated merger

HHI below 1500

moderately concentrated merger

HHI between 1500 and 2500 -change of HHI by more than 100 warrants scrutiny

effect of price elasticity on revenue

Infinitely inelastic- revenue falls inelastic- revenue falls unit elastic - no change elastic- increases infinitely elastic- no need to cut price

Factors of Production

Land Labor Entrepreneurship Capital

Profit Maximization

P=MR=MC

Quantity imported

Qe = Qd-Qs

Revenue of Tariff

Qe x Tariff= revenue from Tariff

Classification of goods

Substitutes if cross elasticity > 0 Complements if cross elasticity < 0

Economies of Scale

The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. Economies of scale can be classified into two main types: Internal - arising from within the company; and External - arising from extraneous factors such as industry size.

Marginal Revenue

The increase in revenue as a result from the sale of 1 additional unit MR = TR/dQ

Total Cost

Total economic cost of production, consisting of fixed and variable costs TC= FC + VC

Equation for Real Wages

Wages r = Wages n/CPI x 100

Increasing Returns to Scale aka Economies of Scale

When the sum of exponents of labor and capital >1 -when labor and capital increase by 1%, output increase by more than 1%

nominal price

absolute price of a good, unadjusted for inflation

Accounting Cost

actual expenses plus depreciation charges for capital equipment

positive analysis

based on objective analysis- what is and what has been occurring in the economy

CPI

consumer price index- tool used to adjust for inflatin

Opportunity cost

cost associated with opportunities that are forgone when a firm's resources are not put to their best alternative use

Variable Costs

cost that varies as output varies

Economic costs

costs associated with opportunities that are forgone when a firm's resources are put to their best alternative use EC= Accounting Cost + Opportunity Costs

Sunk costs

costs that cannot be recovered ex. R and D for pharmaceutical company

price point elasticity

dQ/dP x P/Q

arc elasticity

dQ/dP x avg P/avg Q

income point elasticity

degree of responsiveness of quantity demanded to changes in income dQ/dY x Yo/Qo

normative analysis

expresses value about judgments - what "ought" to be

Diseconomies of Scale

finite upper limit to how large an organization can grow to achieve economies of scale. After reaching a certain size, it becomes increasingly expensive to manage a gigantic organization for a number of reasons, including its complexity, bureaucratic nature and operating inefficiencies.

market demand

horizontal sum of the individual demand curves

Acquisition

one firm purchased by another -target swallowed and its shares withdrawn -shares of buyer continue to be traded

Break Even Analysis

output level at which total revenue equals total cost or profit equals zero Qbe = FC/(1 - V/P)

real price

price of a good relative to an aggregate measure of prices- price would be adjusted for inflation

demand curve

relationship between the quantity of a good demanded by the customers and the demands on the price

supply curve

relationship between the quantity of a good that producers are willing to sell and the price of the good -change in the quantity supplied is caused by the change in price (either of the market price or the product price)

Decreasing Returns to Scale aka Diseconomies of scale

when the sum of the exponents of labor and capital <1 -when both labor and capital increase by 1%, output increases by less than 1%

Constant Returns to Scale

when the sum of the exponents of labor and capital = 1 -when labor and capital increase by 1%, output increases by 1%