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Reference Guide

Permachart - Marketing Reference Guide: Marginal Revenue, Profit Maximization, Marginal Cost

4 pages1947 viewsFall 2015

Department
E-Business Marketing
Course Code
ECN 102
Professor
All
Chapter
Permachart

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Microeconomics
Microeconomics
TYPES OF MARKETS
Pure competition is a market situation in which individual
buyers and sellers are too small to influence the price of a
homogeneous item, as the price is free to move, and there are
no limits on who can buy or sell
Perfect competition is pure competition with perfect
knowledge that enables the market to adjust instantaneously to
change
PURE & PERFECT COMPETITION
OLIGOPOLY
• A monopsony is a market in which a single buyer purchases an
item with no substitute available
MONOPSONY
• A monopoly is a market in which a single seller sells a product
for which there are no substitutes; a monopoly exerts control
over price and supply
• It can raise sales without lowering the price by convincing
consumers that they cannot be without the good, thereby
lowering the price elasticity
MONOPOLY
PRODUCTION COSTS
• Anything used to create goods or services (e.g., natural
resources, human resources)
• Includes entrepreneurship, which is an intangible resource
because it is difficult to place a quantitative value on vision
• The market refers to any place in which buyers and sellers
conduct transactions
• All non-human goods used to aid production of goods or
services; excludes raw materials or money used to purchase
capital goods
Money capital refers to the money that is used to purchase real
capital goods
• The value of the resources needed to produce a good if those
resources were used to their best alternative use
• Also applies to the resources that must be given up to produce a
good
• External resources (e.g., labor, materials, overhead)
Explicit costs are ruled by opportunity cost principles
Implicit costs include costs of self-employed resources used in
production (e.g., a sole proprietor paying him/herself profits in
lieu of salary)
PRODUCTIVE RESOURCES
ALTERNATIVE (OPPORTUNITY) COST
REAL CAPITAL GOODS
EXPLICIT & IMPLICIT COSTS
• If increasing quantities of a variable factor are applied to a given
quantity of fixed factors, then the marginal and average
products of the fixed factor eventually decrease (also known as
the law of variable proportions)
• If the input of only one resource is increased, then total output
will initially increase
• Beyond some point, output increases will become smaller (if it is
carried further, then eventually total output will reach a
maximum and may begin to decrease)
• The surplus of total earnings over what must be paid to prevent
a factor from transferring to another use
• The allocation of an economy’s scarce resources of land, labor,
and capital among alternative uses
PRODUCTION
LAW OF DIMINISHING RETURNS
ECONOMIC RENT
PROFIT MAXIMIZATION
• The difference between total cost and total revenue is greatest
at q1, where tangents Mtc and Mtr are parallel
• Total profit is plotted from the difference total cost total
revenue; at q1, marginal cost = marginal revenue
• From q2to q1, the gap between revenues and costs are
increasing (profit is growing); from q1to q3, further production
results in decreased profits
• Losses occur to the left of q2and to the right of q3
• Firms seek to maximize profits by adjusting their price/output
combination to the point where Total Revenue – Total Cost is
maximized
• This is also where Marginal Revenue = Marginal Cost
• An oligopoly is a market in which the number of sellers is small
enough for the activities of one to affect the activities of others
• A differentiated oligopoly occurs where the few sellers sell
products with differences
• A pure oligopoly occurs where the few sellers sell homogeneous
or identical goods (cartels function as oligopolies)
• When MR = MC, profits are maximized; q1is the optimal
output for profit maximization
RESOURCE ALLOCATION
Marginal Cost (MC) Measures the increase in total cost
that results from raising the rate of
production by 1 unit (also known as
incremental cost)
Marginal Revenue (MR) Measures the change in total
revenue due to a change in the
sales rate by 1 unit (also known as
incremental revenue)
MICROECONOMICS • 1-55080-742-2 1
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