Law of demand states that demand for a product increases with a decrease in its price and vice versa. Income effect is the effect of increased income on the quantities demanded. In Giffen goods income effect is negative and greater than Substitution effect.
Law of demand states that demand for a product increases with a decrease in its price and vice versa. Income effect is the effect of increased income on the quantities demanded. In Giffen goods income effect is negative and greater than Substitution effect.
Law of demand states that demand for a product increases with a decrease in its price and vice versa. Income effect is the effect of increased income on the quantities demanded. In Giffen goods income effect is negative and greater than Substitution effect.
Demand: Desire to have, Capability to pay, Willingness to pay and
Quantity, price, place, person(s), period of time 2. Law of Demand: Other things remaining the same (ceteris paribus), demand for a product increases with a decrease in its price and vice versa 3. Price Elasticity of demand: Percentage change in demand for a product caused by one per cent change in its price, ceteris paribus 4. Income Elasticity: Percentage change in demand caused by one percent change in income, ceteris paribus 5. Cross Price Elasticity: Percentage change in demand for product-A caused by one percent change in price of product-B, ceteris paribus 6. Indifference curves represent all bundles of goods that provide same level of satisfaction 7. They are convex to the origin (AX1/AX2+ or declining Marginal Rate of Technical Substitution (MRS)) 8. Substitution effect is because of change in the price of other good. It is always positive 9. Income effect is the effect of increased income on the quantities demanded. It is generally positive. i.e. increase| in price results | in demand for products Exception: Giffen goods. Here increase in income has negative income effect. 10. Total effect on price = Income effect + Substitution Effect 11. In Giffen goods Income effect is negative and greater than Substitution effect 12. So in Giffen goods quantity demanded decreases with increase in income. Giffen goods do not follow Law of demand. 13. Production: Creation of utility by change of form, place, time, etc. Examples: crop production, storage, transport, retailing 14. Production Function: Indicates the maximum possible levels of output that can be produced by using different combination of required inputs 15. Diminishing Marginal Returns: With the amount of other inputs fixed at a given level, the marginal product of a variable input declines with an increase in the level of this variable input. 16. Marginal Revenue Product of X1 = Price of X1 (MR)*(MP1) = P1 17. The Production Isoquant: An Isoquant is the set of all combinations of two or more inputs that yield a given output level 18. The Production Isocost: An Isocost is the set of all combinations of two or more inputs that imply the same total cost 19. Minimization of cost for a given level of output AK / AL = w / r , Also MRPK / r = MRPL / w 20. Maximization of output with a given budget AK / AL = w / r 21. Maximization of profit MRPK = r MRPL = w Also implies : AK / AL = w / r 22. Expansion Path: Indicates the least cost combinations of two or more inputs for producing different levels of output 23. Optimal Employment of More than Two Inputs MRP1/MEI1 = MRP2/MEI2 = = MRPN/MEIN 24. Returns to Scale: Proportionate change in output in relation to proportionate change in all factors of production. 25. Economies of Scope: Per unit cost reductions that occur when a firm produces two or more products instead of just one TC (QA) + TC (QB) TC (QA, QB) S = ------------------------------------------------- = TC(AB) / TC (AB) TC(QA, QB)
26. Total Factor Productivity: Average production per rupee of total expenditure on inputs
Q TFP = ---------------------------- P1 X1 + P2 X2 27. Cobb-Douglas production function Q = A K o L | where o and | are the elasticities of factors of production 28. Fertilizer Problems: (ceteris paribus / Experimental Conditions) Profit Maximization: MRP N = P N & MRP P = P P Solve the two equations simultaneously to get the P and N Expansion Path: MRP N / MRP P = P N / P P
Other constraints(if there) like below should be adjusted - yield discount due to field conditions------ multiply LHS in the above simultaneous equations - share cropper-------- multiply LHS in the above simultaneous equations by factor which farmer gets - risk of crop failure --------- multiply LHS in the above simultaneous equations - return on investment of fertilizers needed -------- multiply RHS in the above simultaneous equations
29. Demand for Nitrogen Can be calculated from MRP N = P N
By separating N from the equation below we can find Demand for Nitrogen if other values are given P Y (12.98 + 0.196 P 0.208 N) = P N . N = 62.404 30.334 PN + 0.942 P 30. Price elasticity of nitrogen = (dN/d P N )
* (PN / N). 31. Opportunity Cost: The value of the next best alternative that must be foregone 32. Explicit cost are those costs that involve an actual payment 33. Implicit costs represent the value of foregone opportunities but do not involve an actual cash payment 34. Marginal cost refers to the change in total cost associated with a unit change in output, e.g., producing an additional quintal of wheat 35. Incremental cost refers to the total additional cost of implementing a managerial decision, e.g., adding a new product line 36. Marginal cost may be considered as a sub-category of incremental cost 37. Sunk Costs: Expenditures that have been made in the past or that must be paid in the future as part of a contractual agreement. Sunk costs are irrelevant in making decisions 38. Economic Cost of Long Lived Assets: The difference between the market value of the asset at the beginning and end of the period 39. Economic profit is defined as revenue minus all costs (explicit & implicit) Economic profit is also known as super normal profit 40. Normal profit means a normal payment to all inputs, including managerial and entrepreneurial skills and capital supplied by the owners of the firm, to keep them from moving to other firms and industries 41. Fixed cost is the cost of fixed inputs. It does not change with the level of output 42. Variable cost is the cost of variable inputs. It changes with the level of output 43. Short Run Cost Functions: Short run is the period in which at least one factor of production remains fixed. Cost function relates cost to the rate of output 44. Long Run Cost Functions: No fixed factors of production. Firms operate in short run but plan in long run 45. Breakeven Level of Production: Minimum size of business required to avoid losses. Two types of break evens: a). Price Break even P BE = (TFC / Q) + AVC b). Quantity (or sales) Break even: Q BE = TFC / (P AVC) P AVC = Profit contribution or just contribution 46. Margin of Safety Ratio (MSR): - MSR = (QA QBE) / QA - QA = Actual level of production - QBE = Breakeven level of production MSR = 0.2 - Even if actual production reduces by 20%, it will breakeven Breakeven at MSR=0 47. Operating Leverage: A firm is said to be highly leveraged if fixed costs are large relative to variable costs 48. Leverage can be analyzed using the concept of profit elasticity(E H ) (E H ) = % change in H / % change in unit sales
Q (P AVC) 49. E H = ---------------------------- Q (P AVC) TFC
TFC + E H |
50. Perfect Competiton: - Market Demand: sum of individual demands - Consumer Surplus Difference between total willingness to pay on the part of consumers and the actual payment made by the consumers for a product CS = } p(Q) dQ (P.Q ) where p(Q) represents the demand function, i.e., P = p(Q) - Producer Surplus Difference between the minimum acceptable payment by the producers and the actual payment received by the producers for a product PS = (P.Q) TVC - Economic Welfare: Total Surplus = CS + PS - Lowest cost of production Minimum AC - Lowest possible market price: MC = MR = AR - Only normal returns to producers: P = AC - Maximum surplus to the economy P = MC 51. Monopoly Market - Objective: Profit Maximisation (MC=MR) - Deadweight loss: neither consumer nor producer benefits from this 52. Oligopoly - The Kinked Demand Model: Explains rigidity of prices in an oligopoly market - Oligopolies are also found to follow price increase - The Cournot Model: A firm decides its profit maximising output based on expectation about the output level of other firms - Perfect Collusion Model - Joint profit maximisation: H = TR TC1 TC2 MR = MC1 & MR = MC2
53. Advertising is one way of achieving product differentiation 54. Supply Cooperatives Objectives: Maximisation of profit Minimisation of price paid by members Business at cost 55. MARKETING COOPERATIVES: Possible objectives: Highest price to members for their produce Maximization of profit to the cooperative Business at cost by the cooperative 56. Transfer Pricing: Pricing of a product being transferred from one division to another within an organization
57. PEAK-LOAD PRICING: Pricing based on both capacity and operating costs during peak-load periods and based on operating costs alone during off-peak or slack periods 58. Economic rent is a payment to a factor of production in excess of the minimum amount necessary to induce that factor into employment 59. Reservation price of an input is the minimum acceptable price to that input 60. When market price of a input is above its reservation price, there is economic rent earned by the input 61. Floor Prices These are the minimum prices declared by the regulatory bodies Example: Support prices declared for wheat, paddy and sugarcane by Agriculture Price Commission 62. Ceiling prices: These are the maximum prices declared by regulatory bodies 63. Capital budgeting is the process of planning capital projects, raising funds, and efficiently allocating resources to those capital projects 64. Capital projects are the projects that are expected to generate return for more than one year 65.Pay back Period: The number of years it takes for the net cash flows (undiscounted) to equal the initial investment cost 66. Internal Rate of Return: The rate of return from the project