question
How is Total Variable Cost (TVC) calculated?
answer
TVC = Sum of all Marginal Costs (MC)
question
How is Marginal Cost (MC) Calculated?
answer
MC = (Change in Total Cost / Change in Quantity)
Can also be calculated as: (Change in TVC / Change in Quantity) since TFC never changes.
Can also be calculated as: (Change in TVC / Change in Quantity) since TFC never changes.
question
How is Average Fixed Cost (AFC) Calculated?
answer
AFC = (Total Fixed Costs / Quantity)
question
How is Average Variable Cost (AVC) Calculated?
answer
AVC = (Total Variable Costs / Quantity)
question
How is Average Total Cost (ATC) Calculated?
answer
ATC = (Total Costs / Quantity)
question
How is Total Cost (TC) Calculated?
answer
TC = (Total Fixed Costs + Total Variable Costs)
question
How is Marginal Product (MP) Calculated?
answer
MP = (Change in Total Output / Change in Input Quantity)
question
How is Total Utility (TU) Calculated?
answer
TU = Sum of all MU values
question
How is Marginal Utility (MU) Calculated?
answer
MU = (Change in Total Utility / Change in Quantity)
question
What is a Diseconomy of Scale?
answer
Means small companies can produce at a LOWER ATC than a large company.
Large companies cannot compete in this model.
Large companies cannot compete in this model.
question
What is an Economy of Scale?
answer
Means a large company can produce at a LOWER ATC than a small company.
Small companies cannot compete in this model.
Small companies cannot compete in this model.
question
How do Economists measure revenue and cost? (When is it "counted")
answer
Revenue is counted when it COMES INTO the firm (NOT at the time of sale).
Cost is calculated when money LEAVES the firm and has opportunity cost accounted for.
Cost is calculated when money LEAVES the firm and has opportunity cost accounted for.
question
Where does an MC curve intersect the AVC and ATC curves?
answer
MC curves intersect the AVC and ATC curves at their lowest point.
question
IF MC is LESS than ATC, then ATC will:
answer
ATC will DECREASE if MC is less than ATC.
question
If MC is MORE than ATC, then ATC will:
answer
ATC will INCREASE when MC is more than ATC.
question
If MC is less than AVC, then AVC will:
(Tall people in the room example)
(Tall people in the room example)
answer
AVC will DECREASE if MC is less than AVC.
question
What happens to AFC as Q increases?
answer
AFC will DECREASE as Q increases.
question
How do you calculate Average Total Cost (ATC)?
answer
ATC = (Total Cost / Quantity)
question
How do you calculate Average Variable Cost (AVC)?
answer
AVC = (Total Variable Cost / Quantity)
question
How do you calculate the Average Fixed Cost AFC?
answer
AFC = (Total Fixed Cost / Quantity)
question
If MP Increases, what happens to MC?
answer
If MP increases, MC will decrease.
question
What is Marginal Cost? How is it calculated?
answer
The EXTRA cost of producing one more unit of output.
MC = (Change in Total Cost / Change in Input Quantity)
MC = (Change in Total Cost / Change in Input Quantity)
question
What are the two categories of a cost?
answer
Fixed: Doesn't vary with production quantity.
Variable: Depends on Production Quantity
Variable: Depends on Production Quantity
question
What is the "Law of Diminishing Marginal Returns?
answer
At SOME POINT, as more and more of one input is added, the MP on that input will decrease.
Example: Adding a bunch of workers to a construction site only increases production for a certain amount, then it's just becomes a bunch of workers sitting around.
Example: Adding a bunch of workers to a construction site only increases production for a certain amount, then it's just becomes a bunch of workers sitting around.
question
What is a Marginal Product? How is it Calculated?
answer
The EXTRA amount of output per 1 additional unit of input.
MP = (Change in Total Output (Product) / Change in Input Quality)
MP = (Change in Total Output (Product) / Change in Input Quality)
question
Give an example of fixed and variable costs.
answer
Labor is a variable cost (easy to hire and fire).
Capital is a fixed cost (hard to quickly change).
Capital is a fixed cost (hard to quickly change).
question
True or False? The productivity of any resource depends on the amount of resources used.
answer
True. A worker with no tools is less productive.
question
What are some determining factors when assessing Input Cost?
answer
The costs that went into an item:
-Labor
-Materials
-Location
The productivity of the input.
-Labor
-Materials
-Location
The productivity of the input.
question
What is the "Agency Problem"?
answer
The separation of ownership and control of corporations, both with different goals that leads to a conflict in "end-goals".
(Maximize Profit for Business Owners vs. Maximize Personal Wealth and Perks for Business Controllers)
(Maximize Profit for Business Owners vs. Maximize Personal Wealth and Perks for Business Controllers)
question
Which gets "paid out" first; bonds or shares?
answer
Bonds are paid first, THEN shares.
question
What is a bond?
answer
A loan to a company that someone can buy. The company then pays the owner of the bond back with interest.
question
How can corporations raise financial capital?
answer
Selling stock and bonds.
question
What are common characteristics of corporations?
answer
-Tend to be large.
-Tend to be publicly traded.
-Many Owners
-Taxed Twice
-Corporate Veil
-Can easily raise financial capital.
-Tend to be publicly traded.
-Many Owners
-Taxed Twice
-Corporate Veil
-Can easily raise financial capital.
question
What are the characteristics of a partnership?
answer
-More than one owner
-Tend to be medium sized
-Tend to be medium sized
question
What is a franchise?
answer
A business that rents another company's name and sells it's product in return for logistics, management, and help running the business.
question
What are the characteristics of a sole proprietorship?
answer
-Single Owner
-Unlimited Liability
-Smaller
-Profits taxed once at owners income rate
-Unlimited Liability
-Smaller
-Profits taxed once at owners income rate
question
What is the equation for solving how much "bang for your buck" a good brings you?
*Hint: has to do with Marginal Utility
*Hint: has to do with Marginal Utility
answer
Marginal Utility / Price
question
True or False?
For Utility Maximization to exist, it requires:
(MUx / Px) = (MUy / Py) = (MUz / Pz)
With x, y, and z being separate goods
For Utility Maximization to exist, it requires:
(MUx / Px) = (MUy / Py) = (MUz / Pz)
With x, y, and z being separate goods
answer
True. Each additional product bought must bring AT LEAST the same amount of MU as the previous item for Utility to be maximized.
question
What is the goal of the consumer?
answer
To maximize happiness, subject to Budget Constraint
question
True or False?
The law of Diminishing MU is responsible for demand curves being downward sloping AND the Law of Demand.
The law of Diminishing MU is responsible for demand curves being downward sloping AND the Law of Demand.
answer
True. The Law of Diminishing Return causes Demand Curves to be downward sloping and the Law of Demand to be true.
question
What demand determinant is mostly related to Utility?
answer
Taste
question
What is Total Utility?
How is Total Utility calculated?
How is Total Utility calculated?
answer
The cumulative total utility received from the entire amount consumed.
Calculated by adding up all the MU values.
Calculated by adding up all the MU values.
question
What is the law of Diminishing MU?
answer
At SOME POINT, as more-and-more of an item is consumed, the MU will decrease.
question
What is Marginal Utility?
answer
The EXTRA happiness received from consuming one more unit of an item.
question
Mix-and-Match:
Cross price elasticity is:
A. Positive
B. Negative
C. Close to 0
1. Unrelated Items
2. Substitutes
3. Compliments
Cross price elasticity is:
A. Positive
B. Negative
C. Close to 0
1. Unrelated Items
2. Substitutes
3. Compliments
answer
Cross Price Elasticity is:
-Positive for Substitutes
-Negative for Compliments
-Close to 0 for Unrelated Items
-Positive for Substitutes
-Negative for Compliments
-Close to 0 for Unrelated Items
question
What is cross-price elasticity? How is it measured?
answer
The relationship between the demand for one item when the price of a different item changes.
Calculated by:
(% change in Quantity of X / % Change in Price of Y)
X = Good #1
Y = Good #2
Calculated by:
(% change in Quantity of X / % Change in Price of Y)
X = Good #1
Y = Good #2
question
Income Elasticity is positive for ____________, but negative for ____________.
(Hint: Types of Goods)
(Hint: Types of Goods)
answer
Normal Goods = Positive Income Elasticity
Inferior Goods = Negative Income Elasticity
Inferior Goods = Negative Income Elasticity
question
What does it mean if a product has 1.5 Income Elasticity?
answer
For every 1% increase or decrease in income, people will buy 1.5% more or less of a product.
question
What is Income Elasticity? How is it measured?
answer
Looks at how much Quantity changes when people's Income changes.
(% changes in Quantity / % changed in Income)
(% changes in Quantity / % changed in Income)
question
What are common Elasticity Determinants?
answer
-Number and similarity of substitutes
-Luxury Items vs. Necessities
-% of buyers income a good costs (Inexpensive items tend to be inelastic)
-Time for buyers to adjust to new prices
-Luxury Items vs. Necessities
-% of buyers income a good costs (Inexpensive items tend to be inelastic)
-Time for buyers to adjust to new prices
question
What does it mean for a product to be unit elastic? What effect does that have on TR?
answer
If price INCREASES, Quantity will DECREASE an equal amount.
Example: Price Increases 6%, Quantity will decrease 6%.
Total Revenue will remain the same.
Example: Price Increases 6%, Quantity will decrease 6%.
Total Revenue will remain the same.
question
What does it mean for a product to be inelastic? What effect does it have on total revenue?
answer
If Price INCREASES, then Quantity will DECREASE A LITTLE. Steep Demand curve.
TR WILL increase
TR WILL increase
question
What does it mean for a product to be elastic? How does that affect total revenue?
answer
If price INCREASES, Quantity will DECREASE A LOT. Relatively flat demand curve.
TR will decrease.
TR will decrease.
question
How do you determine if something is elastic, inelastic, or unit elastic?
answer
P Elasticity = (% changed in Quantity / % changed in Price)
If the ABSOLUTE VALUE of the Elasticity value is:
>1 then the product is elastic
<1 then it's inelastic
=1, then it's unit elastic
If the ABSOLUTE VALUE of the Elasticity value is:
>1 then the product is elastic
<1 then it's inelastic
=1, then it's unit elastic
question
What is Price Elasticity?
answer
The relationship between how much Q changes when P changes; in relation to Total Revenue.
Asks the Question: For every 1% change in price, how will quantity change?
Asks the Question: For every 1% change in price, how will quantity change?
question
What is TR? How is it calculated?
answer
TR = Total Revenue. The total amount of money COMING INTO the firm.
Calculated by multiplying Price by Quantity.
Calculated by multiplying Price by Quantity.
question
How do you measure Price Elasticity?
answer
% Changed in Quantity / % Changed in Price
question
How do you calculate percent changed for price elasticity?
answer
(New Value - Old Value) / Average of Values
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