1. People face tradeoffs

2. The cost of something is what you give up (opportunity cost)

3. Rational people think at the margin

4. People respond to incentives

5. Markets are usually a good way to organize economic activity

6. Government can sometimes improve market outcomes

       a) Externalities- whatever you do affects other people

                                 and you don't

       b) Market Power

1. Identify goals and constraints

2. understand Opportunity cost

   a) Acct. Profit = Total Revenue - Explicit Costs

   b)Econ. Profit = Total Revenue - Total Opportunity Costs

                                                         (Explicit + Implicit Costs)

3. Understand profits (pi) as signals

4. Understand the forces that influence profits

5. Understand Firms and individuals incentives

6. Understand the time value of money

7. Think at the margin

Total Revenue - Total Costs

derivative of TR/ derivative of Q - derivative of TC/ derivative of Q

                                     = 0

so....

   derivative of TR/derivatieve of Q = derivative of TC/ derivative Q

                                 MR                =                 MC

A lump sum is a single payment of money, as opposed to a series of payments made over time.

Present Value (PV)=

Future Value(FV) / ( 1 + interest rate (i) ) ^ number of periods are

                                                           forgoing something (n)

Present Value (PV) =

Future Value (FV) sub base 1 / (1+interest (i))^1 + FV2/(1+i)^2 ...+...

               Future Value (FV)n / ( 1 + i )^ number of periods (n)

A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever.

Present Value (PV) =

       FV / (1+i) + FV sub 2/ (1+i) ^ 2 ..... = FV / i

assumes the numerator is constant

Present Value (PV) - Cost you pay today

Decision Rule;

        if  NPV < 0 reject project

        if NPV > 0 accept project

Present Value of Firm (PV firm) =

Profit at time 0 + Profit at time 1 / (1+i) ^1 + Pi at time 2 / (1+i)^2..

Profit at time 0 + profit at time 0 (1+g) / (1+i)^1...

          = Profit at time 0 ( ( 1 + g ) / ( i - g ) )

Present Value of Firm = Profit at time 0 ( ( 1+i ) / ( i - g ) )

 use this formula as long as g < i

1) Tastes and Advertising

2) Substitutes: Prices of related goods X,Y

          if increase in price of X leads ot Increase demand for Y

3) Salary ( Income ): normal or inferior goods

4) Population

5) Consumer Expectations

Example:

Q = 10 - 2 P

     2 P = 10 - Q

     P = 5 - 1 / 2 Q

" I got a lot of bang for my buck!"

1 / 2 b * h = Area

      Consumer Surplus ( CS ) = 1 / 2 Q * ( a - p )

a) Cost of Input

b) Weather, Technology, Government Regulations

c) Number of Firms

d) Substitutes in Production

e) Producer Expectations

f) Taxes: Excise or Ad Valorem

Example:

Q= 10 + 2 P

       2 P = Q - 10

       P = 1 / 2 Q - 5

It's the price that balances Supply and Demand

where

         Quantity Supplied of X = Quantity Demanded of X

if P is too low there is a shortage, if P is too high there is a surplus

Measures how responsive a variable G is to a change in variable S

E = % change in G / % change in S = derivative G / derivative S

               * S / G

if S goes up a lot, but G goes up a little it is Inelastic

if S goes up a little, but G goes up a whole lot it is Elastic

E = % change in Quantity demanded of x / % change in Price of x 

        = (d of Q  / d of P) * (Price of X / Quantity Demanded of x)

d is the derivative

E > 1

Increase in Price leads to a decrease in Total Revenue

Marginal Revenue ( MR) > 0

E < 1

Increase in Price leads to a Increase in Total Revenue

Marginal Revenue ( MR ) <0

E = 1

Implies that Total Revenue is Maximized

Marginal Revenue = 0

In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.

Total Revenue - Explicit Costs

Total Revenue - Total Opportunity Costs

                            ( Explicit Costs - Implicit Costs ) 

Total Benefits - Total Costs

Marginal Revenue = Marginal Costs

1) Available Substitutes

2) Luxury vs. Necessities

3) Definition of the market: Narrowly defined markets (icecream)

        tend to have more elastic demand than broadly defined

        markets ( food  in general)

4) Time: Demand tends to be more inelastic in the short term than

          In the long term

5) Expenditure Share: Goods that comprise a small share of a

       consumers' budget tend to be more inelastic

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good.

E = % change in Quantity Demanded of x / % change in Price of y

   = (d of Q demanded of x / d of Price of x) * (Price of y / Q of x)

CPE < 0 means x and y are compliments

CPE > 0 means x and y are substititutes

In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, holding all prices constant under the concept of ceteris paribus.

E = % change in Q demanded of x / % change in Income

     = ( d of Q / d of M ) * ( Income (M) / Quantity demanded of x )

IF E > 0 then x is a normal good

IF E < 0 then x is an inferior good

Q = 10 -2P of x + 3P of y - M

positive coefficients on P of y means x, y are substitutes

negative coefficients on M means x is an inferior good

best fit a line through a bunch of data points

the "best fit" line is the one that minimizes the sum of the squared residuals

Q = F ( K, L )  

K is Capital, L is labor

In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs.

Q = F ( K, L ) = aK + bL

inputs are perfect substitutes

Q = F ( K, L ) = min { aK , bL }

inputs are used in fixed proportions

complements in the production process

Q = F ( K, L ) = K ^ a * L ^ b

Inputs have a degree of substitutability

Maximum amount of output produced with a given amount of input

Q = K ^ a * L ^ b

Measure of output produced per unit of input

Average Product (AP) = Q / L

Average Product (AP) = Q / K

change in total output attributable to the last unit of an input

Marginal Product (MP) = change in Quantity / change in Labor

                                    = d of Q / d of L

Marginal Product (MP) = change in Quantity / change in Labor

                                    = d of Q / d of  K

d is derivative

1. Managers need to guide the Production Function

2. Make sure you're producting on the Production Function

      - align incentives to induce max worker effort

3. Employ the right levels of inputs

       - Goal: max profits

Rothschild Index = Elasticity of T-compnay / Elasticity of Firm

measures the elasticity of industry demand relative to that of an individual firm

if R = 0 it is running in a Perfect Competition

if R = 1 it is running in a Monopoly

1. Economies of Scale

2. Patents, Copy Rights, Court Regulations

3. Capital Requirements

4. Economies of Scope

       - when it is cheaper to produce two products (jointly) together

         than separately

to determine a firm's pricing power: we take the measure of the difference between Price and Marginal Cost of a fraction of the Price

Learner Index = ( Price - Marginal Cost ) / Price

when P = MC          L = 0

the firm has no market power, it is perfectly competitive

when  L = 1

relatively weak price competitor, the firm has market power

Price = ( 1 / ( 1 - Learner Index ) ) Marginal Cost

when L = 0, Market Factor = 1 and Price = Marginal Cost

when L = .2, Market Factor (MF) = 1.25

      the firm charges a Price 1.25 times the Marginal Cost