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Eco (Fach) / CMA (Lektion)

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• Given his or her income, a rational individual or consumer’s goal is to maximize his or her utility. This occurs when the extra utility obtained from the last dollar spent on an individual commodity purchased (marginal utility) is the same for every product that can be purchased.
• Indifference curves will be “strictly convex.” the consumer will be willing to give up fewer units of Y to get each additional unit of X.
• The basic criteria that determine any one individual’s demand for a specific product are (1) that person’s preferences, (2) that person’s available income, and (3) prices of other goods
• The supply curve depicts the amounts of a commodity the producers are willing and able to supply to the market, at all possible prices during a specific time period
• The Law of Supply states that in the short run, there is a positive relationship between the price of a good or service and the quantity supplied. As the price of a good increases, producers are willing to supply more to the market, causing an increase in the total quantity supplied
• Movement Along the Supply Curve only when the price of that good is changed
• Determinants of Supply 1) Production prices, or the cost of inputs, 2) Number of firms producing the good, 3) Prices of complementary and substitute goods, 4) Price expectations of producers concerning the future price of the good, 5) Taxes and subsidies, and 6) Changes in technology.
• The following events will cause the supply curve to shift outward • A decrease in the price of a production input or process, • An improvement in technology that allows production to be more efficient, • A decrease in the demand for another Good (B), which causes other firms to switch from the produc-tion of Good B to the production of Good A, • An increase in the number of firms producing the good, • The expectation of a decrease in the price in the future, or • A decrease in the taxation of a good, or an increase in the amount of the subsidy received from the government.
• Elasticity of Supply (ES) measures the responsiveness of a change in the quantity supplied of a good to a change in the price of that good
• Factors Affecting the Elasticity of Supply Cost of Storage The Production Process Time
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• Cost of Storage The more it costs the producer to store the product, the less it will build up in inventory. Therefore, without a high level of inventory, the producer will be unable to release a large number of goods immediately if the price increases. This will cause an inelasticity of supply because the quantity supplied can’t be quickly changed even when the price changes.
• The Production Process The longer the production process of a good, the less elastic the supply curve is because the producers will not be able to react quickly to a change in the price of the good
• Time The longer the time period, the more likely, and able, the producers are to supply the goods. This means that in the long run, supply is always more elastic than it is in the short run
• Market supply is the sum of all the individual selling firms’ supply curves
• Market equilibrium the point where the demand curve intersects with the supply curve the market price (the “equilibrium price”) is such that the quantity demanded by consumers is exactly equal to the quantity supplied by firms
• Price Ceilings when a maximum price is set for a product and it is set below the current market (equilibrium) price.   When a price ceiling is set, the decrease in the market price of the good causes a market shortage.
• Price Floors is a minimum price that must be charged for the item. In these cases an increase in the price of the good will cause a market surplus.  
• Price Supports can function either in the form of a subsidy or be a policy of price control that is aimed to preserve the prices higher than the equilibrium price in a competitive market.   the government pays a certain amount to producers, so that they receive a minimum price in total (from the consumer and the government) for the product that they sell. This will create a surplus in the market, because the producers are essentially selling the item at a higher price than the equilibrium market price, thereby stimulating them to produce more than the demand would require at those higher prices.      
• Fixed Costs Costs that do not vary with a change in output. As production increases, fixed costs remain unchanged. Example: factory rent.
• Variable Costs Costs that do vary with a change in output. As production increases or decreases, total variable costs increase or decreases, e.g. raw materials.
• Total Cost The total of the fixed and variable costs
• Average Fixed Costs Total fixed costs divided by output. As production increases, average fixed costs decrease.
• Average Variable Costs Total variable costs divided by output. As production increases, average variable costs will eventually move in the same direction.
• Average Total Cost The sum of average fixed and average variable costs for a given level of output.
• Marginal Cost The additional total cost resulting from a one-unit increase in production. MC = Δ TC / Δ Q
• Economic Costs The explicit or implicit payments or incomes a firm must provide to a supplier, in order to keep a resource away from an alternative use. Economic costs include a company’s explicit costs and their implicit costs.
• Sunk Costs Costs that have been previously spent, and cannot be recovered. They are not relevant to decision-making.
• Technological Efficiency Given a level of physical inputs, the relationship between the output that is achieved and the maximum output possible.
• opportunity cost It is important to understand that opportunity cost is the cost of the “next best alternative” or the “next highest valued alternative.” Since all resources used by a firm have potential alternative uses, a firm’s true economic cost of production is the total opportunity cost of all resources employed plus all the explicit costs.
• Explicit costs are essentially the actual monetary expenditures made in producing a product, as deter-mined by the firm’s accountants. An example is when a firm purchases raw materials in a competitive market and actually is required to pay for the resource.
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• Implicit costs are the forgone (lost) returns the owners of the firm could have received, had they used their own resources in their best alternative use, rather than using them for their own firm’s production.   An example of an implicit cost would be the lost revenue that would have been received if the company had leased its premises instead of using them for the firm’s own production.
• Accounting profit is the profit that is calculated on the Income Statement. It is calculated as revenues minus explicit costs. These are the costs for which the company actually has to make a payment to another party. Implicit costs are not included in the calculation of accounting profit.
• Economic profit is the amount by which total revenue exceeds the total economic costs of the company. Total economic costs include all of the explicit (cash) costs that are paid by the firm as well as the relevant implicit (opportunity) costs. Another way of looking at economic profit is the excess of profit that a company has in its current business over what it could make in its next best alternative business.
• The purpose of calculating economic profit is to determine if the company should actually continue to operate in the business that it is operating in, or if its owners could make more money by doing something else (such as participating in the next best alternative).    
• The main implicit costs that are included in the calculation of economic profit are • Interest lost on money that has been invested in the business instead of elsewhere. • The level of accounting profit that could be earned by moving the firm’s productive resources to its next best alternative use. • Normal profit that the entrepreneur could earn elsewhere. Normal profit is usually defined as the value of the entrepreneurial skills that an individual has. This includes the wages that the in-dividual gives up by not working at another job. Thus normal profit is a cost, not a profit. It is one of the implicit costs of being in business. • Economic depreciation =  the decrease in the market value of the equipment during the period. It is calculated simply as the market value of the equipment at the beginning of the period minus the market value of the equipment at the end of the period.  
• Economic Rent Economic rent is earned if an input of production (for example, labor) is paid a higher amount than the next best use of that resource would cost.
• normal profit For a large, publicly held business is an amount of profit that is just enough to keep its investors satisfied that they are earning the return they should be earning on their investment normal profit is a normal return to capital  
• Formula: Economic Profit Accounting Profit – Normal Profit = Economic Profit
• Resource planning includes resource pricing, resource allocation, cost minimization, output optimization and profit maximization.
• Resource planning is significant in economics for 1) Resource prices determine the income of households.  2) Resource prices allocate resources among industries and companies 3) Resource prices are a cost to the firm that uses them. 4) To the use of the least-cost combination of resources, profit maximization adds determining the profit-maximizing output level. 5) The resource market incorporates many public policy issues.
• substitution effect if the price of one input rises, the cost per unit of output derived from that input will also rise. This suggests that firms may substitute away from the now more expensive input (use less of it) and into inputs for which the cost per unit of output is now relatively lower (use more of these).
• Consequence of the substitution effect when the cost of a specific input rises, a firm may not be able to completely substitute out of that input. As a result, the firm’s overall marginal cost of production will rise, so the profit maximizing level of output will fall. As the firm produces less, it may reduce the demand for all inputs, even those for which price has not changed.
• Nominal wages are the actual amount of money paid as wages.
• Real wages represent the actual purchasing power that the employee has with the nominal wages. The real wage reveals the quantity of goods and services that a worker can obtain with his or her nominal wages. Nominal wages are valued at current dollar prices while real wages are adjusted to account for inflation.
• The real wage can be calculated as follows:                               Nominal Wage Real wage=-----------------------------------                          1 + Price Level Increase
• formula for productivity the ratio of real output per unit of labor.
• by establishing a minimum wage, the government actually increases the unemployment level of workers in the market. Since firms cannot pay less than the prescribed wage, those workers that could have worked for less become too expensive for the firm to hire because the firm is now obliged to pay at least the minimum wage.
• Marginal Analyses is the process of looking at one more unit, meaning, “what will be the effect of sell-ing/producing one more unit.”
• Marginal Revenue The additional revenue gained by producing an additional unit of output.
• Marginal Cost The addition to total cost by increasing production by one unit.

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