Basic Economic Notes..

What are other factors that cause a change in demand and a change in supply?

Price is not the only factor that determines how much of goods people will buy.  Demand is also affected by the following:

Tastes.  The more desirable people find the goods, the more the will demand for it.  Tastes are affected by factor such as advertising, fashion, observation of other consumers, considerations of health and experiences form consuming the good on previous occasions.

The number and price of substitute goods (that is the competitive goods).  The higher the price of substitute goods, the higher will be the demand for this good as people switch from the substitutes.   For example the demand for McDonald’s burger will be depend on the price of the burger from KFC or Burger King.

The number and price of complementary goods.  Complementary goods are those that are consumed together: cars and petrol, shoes and polish, bread and butter.  The higher the price of complementary goods, the fewer of them will be bought and hence the less the demand for this goods.

Income.  As people incomes rise, their demand for most goods will rise.  Such goods are called normal goods.  There are exceptions to this general rule.  As people get richer, they spend less on inferior goods, such as cheap margarine, and switch to better-quality goods.

Distribution of income.  If, for example, national income were redistributed from the poor to the rich, the demand for luxury goods would rise.  At the same time, as the poor got poorer, they might have to turn to buying interiors goods, whose demand will rise too.

Expectations of future price changes.  If people think that prices are going to rise in the future, they are likely to buy more now before the price does go up.

Nature, random shocks and other unpredictable events.  Example in our latest event, the missing of MAS plane MH370, demand of travelling using flight is dropping.  In the hot weather, water demand is higher.

Like demand, supply is not determined simply by the price.  The other factors of supply are as follows:

The costs of production.  The higher cost of production, the less profit will be made at any price.  As cost rising, firm will cut back the production and supply will go down.  The main reason for change of costs are as follow:

• Change in input price.  Price of raw material is higher, making cost of production higher.
• Change in technology.  Technology advancement will make production easier and cost might be reducing.
• Organizational changes.  Various cost savings can be made in many firms by reorganizing production.
• Government policy.  Costs will be lowered by government subsidies and raised by various taxes.                                                             

The profitability of alternative products (substitutes in supply).  If the other product is making more profit, firm will likely switch to the profitable product.  This will make the supply for the first product reduced.

The profitability of goods in joint supply.  Sometimes when one good is produced, another good is also produced at the same time.  For example in producing a petrol, the firm will also produce diesel, paraffin and NGV.  So if more petrol is produce, all other joint supply goods will also produce higher.

                   

Nature, random shocks and other unpredictable events.  Example where weather and diseases is affecting the farm output.  Wars affecting the supply of imported raw materials.  The breakdown of machinery, industrial disputes, earthquakes, floods and fire and others. 

=========================================

Advantages of Sole Proprietor Form of Business:

Easy formation:

The formation of sole proprietorship business is very easy and simple. No legal formalities are involved for setting up the business excepting a license or permission in certain cases. The entrepreneur with initiative and certain amount of capital can set up such form of business.

Direct motivation:

The entrepreneur owns all and risks all. The entire profit goes to his pocket. This motivates the proprietor to put his heart and soul in the business to earn more profit. Thus, the direct relationship between effort and reward motivates the entrepreneur to manage the business more efficiently and effectively.

Better control:

The entrepreneur takes all decisions affecting the business. He chalk out the plan and executes the same. His eyes are on everything and everyone. There is no scope for laxity. This results in better control of the business and ultimately leads to efficiency.

Promptness in decision-making:

When the decision is to be taken by one person, it is sure to be quick. Thus, the entrepreneur as sole proprietor can arrive at quick decisions concerning the business by which he can take the advantage of any better opportunities.

Secrecy:

Each and every aspect of the business is looked after by the proprietor and the business secrets are known to him only. He has no legal obligation to publish his accounts. Thus, the maintenance of adequate secrecy leaves no scope to his competitors to be aware of the business secrets.

Flexibility in operations:

The sole proprietorship business is undertaken on a small scale. If any change is required in business operations, it is easy and quick to bring the changes.

Scope for personal touch:

There is scope for personal relationship with the entrepreneur and customers in sole proprietorship business. Since the scale of operations is small and the employees work under his direct supervision, the proprietor maintains a harmonious relationship with the employees. Similarly, the proprietor can know the tastes, likes and dislikes of the customers because of his personal rapport with the customers.

Inexpensive formation and management:

The cost of formation of a sole proprietorship is the minimum because no cost is involved in its formation excepting the license fee in certain cases. The management of the business is also inexpensive as no specialists are normally appointed in various functional areas of the business which is the added advantages.

Free from Government control:

Sole proprietorship is the least regulated form of business. Regulated laws are almost negligible in its formation, day-to-day operation and dissolution.

Easy dissolution:

Like that of formation, the dissolution of the sole proprietorship is also very easy. Since the proprietor is the supreme authority and no regulations are applicable for closure of the business he can dissolve his business any time he likes.

Socially desirable:

New and small entrepreneurs can take up business on small- scale basis. There will be no scope for concentration of wealth in few hands. Sole proprietorship continues its operation in almost each and every area of business activity and caters to the need of the society. Further, it provides ample opportunities for large-scale self-employment for rural and less skilled personnel. Thus, it is socially desirable.

Below are the disadvantages as a partnership firm:

• Business partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others. You have to decide on how you value each other’s time and skills. What happens if one partner can put in less time due to personal circumstances?
• Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations and situations can change, which can lead to dramatic and traumatic split ups.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
• A partnership usually has limitations that keep it from becoming a large business.
• You have to consult your partner and negotiate more as you cannot make decisions by yourself. You therefore need to be more flexible.
• A major disadvantage of a partnership is unlimited liability. General partners are liable without limit for all debts contracted and errors made by the partnership. For example, if you own only 1 percent of the partnership and the business fails, you will be called upon to pay 1 percent of the bills and the other partners will be assessed their 99 percent. However, if your partners cannot pay, you may be called upon to pay all the debts even if you must sell off all your possessions to do so. This makes partnerships too risky for most situations. The answer would be a different business structure.

Disadvantages of Cooperative Society:

Despite many an advantages, the cooperative society suffer from certain limitations c drawbacks. Some of these limitations, which a cooperative form of business has, are as follows:

1. Limited resources:

Cooperative society’s financial strength depends on the cap contributed by its members and loan raising capacity from state cooperative banks. The membership fee is limited for which they are unable to raise large amount of resources as their members belong to the lower and middle class. Thus, cooperative are not suitable for the large scale business which require huge capital.

2. Inefficient management:

A cooperative society is managed by the members only. They do not possess any managerial and special skills. This is considered as major drawback of this sector. Inefficiency of management may not bring success to the societies.

3. Lack of secrecy:

The cooperative society does not maintain any secrecy in business because the affair of the society is openly discussed in the meetings. But secrecy is very important for the success of a business organization. This paved the way for competitors to compete in better manner.

4. Cash trading:

The cooperative societies sell their products to outsiders only in cash. But, they are usually from the poor sections. These persons require to avail credit facilities which is not possible in the case of cooperatives. Hence, marketing is a shortcoming for the cooperatives.

5. Excessive Government interference:

Government put their nominee in the Board of management of cooperative society. They influence the decision of the Board which may or may not be favorable for the interest of the society. Excessive state regulation, interference with the flexibility of its operation affects adversely the efficiency of the management of the society.

6. Absence of motivation:

The members may not feel enthusiastic because the law governing the cooperatives put some restriction on the rate of return. Absence of relationship between work and reward discourage the members to put their maximum effort in the society.

7. Disputes and differences:

The management of the society constitutes the various types of personnel from different social, economic and academic background. Many a times they strongly differ from each other on many important issues. This becomes detrimental to the interest of the society. The different opinions and disputes may paralyses the effectiveness of the management.

Disadvantages of Public Coorperation:

1. Difficulty of formation:

It is comparatively more difficult to set up a public company. A prospectus had to be issued and filed. Allotment of shares has to be done in accordance with legal guidelines. A certificate of commencement of business is required and business cannot be started immediately after incorporation of the company.

2. Delay in decisions:

There are several directors and managers in a public company. Deci­sions are taken in meetings of the Board of directors with the consultation of concerned officials. The decisions may often get delayed.

3. Lack of secrecy:

A public company has to file several documents with the Registrar of Companies. Its annual accounts are published and its records are open for inspection to public. Therefore, business secrets cannot be guarded effectively.

4. Legal formalities:

A public company is required to observe several legal formalities. There is excessive Government control over public companies. Flexibility of operations is re­duced.

5. Lack of motivation:

There is divorce between ownership and management in a public company. Paid officials do not have the incentive to work hard and increase efficiency of opera­tions.

It may not be possible to maintain personal contacts with customers and employees. There can be a clash of interests among shareholders, debenture holder and managers of the company.

6. Unhealthy speculation:

Shares and debentures of public companies are bought and sold daily on stock exchanges. Clever and dishonest people may indulge in reckless speculation in these securities for private gain. There is lack of protection to minority shareholders.

========================================

1. What are the meanings of the following terms?

Scarcity: is the excess of human wants over what can actually be produced.  Because of scarcity, various choices have to be made between alternatives.   The problem with scarcity is lack of production.

The basic economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources efficiently.

Choice:  We constantly making choice : what to goods and services, how are things going to produced and for whom the things going to be produced.

Opportunity cost:  is what you give up to get it/do it.   In other words, it is cost measured in terms of the best alternative forgone.  Example, the opportunity cost of working overtime is the leisure time with family you have to sacrified.

Explain how those terms are related.

People, business has to make choices.  Society has to choose what goods and services to produce, how to produce them and for whom to produce them.

Relational choices involve the weighing up the marginal benefits of each activity involve in the business to its marginal cost.  If marginal benefits are higher than marginal cost, business should go for it.

2. Distinguish between microeconomic and macroeconomics?

Microeconomic:  This includes all the economic factors that are specific to a particular firm operating in it’s own particular market.

Example :

• one firm may be operating in a highly competitive market, whereas another may not (e.g. astro).
• one firm may be faced by rapidly changing consumer tasted (e.g. a designer clothing manufacturer)
• while another may be faced with a virtually constant consumer demand (e.g. a potato merchant)
• one firm may face rapidly rising costs, whereas another may find that costs are constant or falling.

Macroeconomic:  This is the national and international economic situation in which business as a while operators.

Business in general will fare much better if economic is growing then if it is recession.

In examining the macroeconomic environment we will also be looking at the policies that governments adopt in their attempt to steer the economy, since this policies, by affecting things such as taxations, interest rates, exchange rates, will have a major impact on firms.

3.a. Distinguish between marginal benefits and marginal costs.

Marginal benefits:  the additional benefits of doing extra activity.   Let say DHL wants to buy another plane for the company, business will check the benefits of this plane to the company profit.

Marginal costs:  the additional costs of doing extra activity.  From the above example business team will check the cost of buying this plane.

From above example DHL business team will then check the relational choices if the marginal benefits is more than the marginal costs so they will buy the plane.

If the marginal cost of the plane is more than the marginal benefits, DHL will not buy the extra plane for the time being.  They will wait and weight both marginal benefit and marginal cost again.

3.b. How would a firm use the principle of weighing up marginal costs and marginal benefits when deciding whether:

i)             To take an additional worker:  to take an additional worker, a firm should consider the salary they will offer to this workers.  If the workers are an experience worker, the salary must be higher than a fresh graduate worker.  And if the worker is a foreigner or local term.

The space taken for this extra worker need to be considered too, should the firm open new warehouse, buy a new building or just rent new space for this new workers.

Both will have marginal costs and marginal benefits to be considered.

ii)            To offer overtime to existing worker:  this is the most marginal benefit a firm can consider.   But sometime worker will not feel good to work overtime as they also might have another commitment.

When overtime offered, worker might get injured or not feeling well and sometimes they will resign.  This will make firm more marginal costs.

In the other hand, as in marginal benefits, firm will not need to hire new employee as hiring new employee will take so much time, effort and money.

4. Briefly explain the following macroeconomics policies:

Fiscal policy: is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.  The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors.

These changes can affect the following macroeconomic variables in an economy:

• Aggregate demand and the level of economic activity;
• The distribution of income;
• The pattern of resource allocation within the government sector and relative to the private sector.

Fiscal policy refers to the use of the government budget to influence economic activity.

Monetary policy: is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.

Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.

Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.

How these policies affect business?

This policy will affect business as when fiscal policy from government that giving special incentive or tax exemption for certain new product, this product will need more supply and maybe reduce some price.

Example lately our government has given special incentive of tax exemption for an fuel economic electronic cars.  This makes this kind of cars having lower price and higher in production.

MRF0013: Basic Economics.

1. a)   What is a multinational corporation? State three examples of multinational corporation in Malaysia.

b) Why do these businesses (your examples in question 1a) go multinational ?

c) Assess the advantages and disadvantages facing Malaysia, as a host state, when receiving multinational corporations investment.

(25 marks)

a) Explanation of multinational corporation (2 marks )

A multinational corporation (MNC) or multinational enterprise (MNE) are organizations that own or control production or services facilities in one or more countries other than the home country.

For example, when a corporation that is registered in more than one country or that has operations in more than one country may be attributed as MNC. Usually, it is a large corporation which both produces and sells goods or services in various countries.It can also be referred to as an international corporation.

3 examples ( 3 marks)

1. DHL

2. Royal Dutch Shell

3. Petronas

b) Business go multinational because :  ( 5 factors x 2 marks = 10 marks)

• Cut cost

• Seek new market and new expansion opportunities

• Ownership of superior technology

• R&D capacity

• Product differentiation

• Entrepreneurial and managerial skills

• Availability of raw materials

• Relative cost of inputs

• The quality of inputs

• Avoiding transport and tariff costs

• Government policy towards FDI

• Economic climate in host nations

c) The advantages facing Malaysia, as a host state, when receiving multinational corporations investment : ( 2 factors x 2 marks = 4 marks)

• Employment

• Balance of payment

• Technology transfer

• Taxation

The disadvantages :    ( 2 factors x 2 marks = 4 marks)

• Uncertainty

• Control

• The environment

• Transfer pricing

Organization of points and presentation = 2 marks.

2. a)   Externalities can be in the form of external benefits and external costs. Distinguish between these two types of externalities.

b) Analyze the external benefits and external costs resulting from the operations of manufacturing firms in Malaysia.

c) Discuss the possible government interventions in the market to rectify the problems of externalities ?

(25 marks)

a) Definition of external benefits (1 mark)

Definition - An external benefit occurs when producing or consuming a good causes a benefit to a third party.

The existence of external benefits (positive externalities) means that social benefit will be greater than private benefit.

Definition of external costs  (1 mark)

-  An external costs occurs when producing or consuming a good or service imposes a cost upon a third party.

-  If there are external costs in consuming a good (negative externalities), the social cost will be greater than the private cost.

-  The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs.

b) External benefits : ( 3 x 2  marks = 6 marks)

• industrial training by a firm has positive effects on labor productivity and can reduce the cost of other firms 

• The opportunity of firms to access the R & D results of other firms might reduce the costs of production and can be transferred to the consumers in terms of lower prices 

• Health provision by a firm will reduce absenteeism and creates a better quality of life and higher living standards.

• Job creation by small firms who deals with manufacturing firms

External costs : ( 3 x 2  marks = 6 marks)

• water pollution

• air pollution

• traffic congestion in industrial area

• higher consumer products’ prices

• social problems 

c) Government intervention : ( 4 x 2 ½  marks = 10 marks)

• Taxes

• Subsidies

• Property rights

• Laws prohibiting or regulating undesirable behaviors

• Price controls

• Provision of goods and services  (health care and education)

Organization of points and presentation = 1 mark.

3. a)  Country’s economy is growing and demands for most consumer products are increasing. Discuss the factors that might cause the increase in demand for these products.

b) Assume that in good economic condition government allows taxi drivers to increase taxi fares by 5 %. This situation leads to a fall in demand for taxi services in the city from 10 000 trips to 9 600 trips daily.

i)   Calculate the price elasticity of demand for taxi services.

ii) What might happen to total income of the taxi drivers when they raise their taxi fares? Justify you answer.

iii) Analyze the factors that might influence the degree of elasticity of demand for taxi services.

(25 marks)

a) Factors that might cause the increase in demand for consumer products are :

i. Higher income

ii. Advertisement

iii. Change in tastes and preferences

iv. Government policy of income redistribution 

v. Change in price of related goods   

( 4 factors x 2 marks = 8 marks)

b) i)     E =   % change in quantity demanded / % change in price

=  [ (9600 -10000) / 10 000  x 100% ] divided 5 %

=  4 %   / 5 % = 0.8  (2 m)

ii) Demand for taxi services is inelastic. (1 m)

Thus increase in price will lead to an increase in income  ( 1 m) 

Total income = P x Q  (1 m)

Assume price increase from RM 10.00 to RM 10.50 (5% increament), total income will change from :

Total income before price change  :

=  RM 10 x 10 000 trips

=  RM 100 000

Total income after 5 % increase in fares :

= RM 10.50 x 9600 trips

= RM 100,800   ( 3 m)           

( Total 6 marks) 

iii) Factors that influence the degree of elasticity of demand for taxi services :

• Necessity good

• Time period

• No close substitute available

• Taxi fare constitutes only small portion of total income

( 4 factors x 2 marks = 8 marks)

Organization of points and presentation = 1 mark.

4. Dr. Munif, a medical doctor, resigned from government hospital and started his own clinic. He employs three assistants and one locum doctor.

a) What form of business structure is Dr.Munif’s clinic classified as? What are the advantages and disadvantages of this form of business structure ?

b) If Dr.Munif wants to expand his business in the future, advise him on the suitable internal and external growth strategies. What economies of scale would his business gain from that expansion ? 

(25 marks)

a) Sole proprietorship ( 1 mark)

Because : own by single owner, small business, has few employees (2 marks)

Advantages :  easy to set up, require small initial capital investment, flexible to changing market condition, success depends very much on the commitment of owner  (2 marks)

Disadvantages :  

i)  Limited scope for expansion (financial source & size of firm that the owner can manage effectively)

ii) Unlimited liability  (2 marks)

b) Definition of internal and external growth strategies (2 marks)

Suggestion of internal growth  -   horizontal integration / vertical integration / conglomerate

      Suggestion of external growth   -  merger & acquisition / strategic alliance

(2 x 4 marks = 8 marks)

Economies of scale :

• Economies of bulk buying

• Managerial economies

• Marketing economies

• Specialization & division of labor

• By product

• Spreading overhead

• Financial economies

  ( 3 x 2 marks = 6 marks)

Organization of points and presentation = 2 marks.                

MRF0013: Basic Economics: Chap 9, 10, 11 & 12.

========================
Chapter 9: Cost of Productions.
========================

Opportunity cost: Cost measured in terms of the next best alternative forgone.

Explicit costs:  The payments to outside suppliers of inputs.

Implicit costs:  Costs which do not involve a direct payment of money to a third party, but which nevertheless involve a sacrifice of some alternative.

Historic costs:  The original amount the firm paid for factors it now owns.

Sunk costs:  Cost that cannot be recouped (eg: by transferring assets to other uses)

Replacement costs:  What the firm would have to pay to replace factors it currently owns.

Total physical product:  The total output of a product per period of time that is obtained from a given amount of inputs.

Production function:  The mathematical relationship between the output of a good and the inputs used to produce it.   It shows how output will be affected by changes in the quantity of one or more of the inputs.

Fixed costs:  Total costs that do not vary with the amount of output produced.

Variable costs:  Total costs that do vary with the amount of output produced.

Total Cost (TC):  The sum of total fixed costs (TFC) and total variable costs (TVC)
TC = TFC + TVC

Average total cost (AC):  Total cost (fixed plus variable) per unit of output
AC = TC/Q = AFC + AVC

Average fixed cost (AFC):  Total fixed cost per unit of output.
AFC = TFC/Q

Average variable cost (AVC):  Total variable cost per unit of output
AVC = TVC/Q

Marginal cost (MC):  The cost of producing one or more unit of output.
MC = <>TC / <>Q

Economies of scale:  When increasing the scale of production leads to a lower cost per unit of output.

Specialization and division of labour:  Where production is broken down with a number of simpler, more specialized tasks, this allowing workers to acquire a high degree of efficiency.

Indivisibilities:  The impossibility of dividing a factor of production into smaller units.

Plant economies of scale:  Economies of scale that arise because of the large size of the factory.

Retionalisation:  The reorganising of production (often after a merger) so as to cut waste and duplication and generally to reduce costs.

Overheads:  Costs arising from the general running of an organisation, and only indirectly related to the level of output.

Economies of scope:  When increasing the range of products produced by a firm reduces the cost of producing each one.

Diseconomies  of scale:  Where costs per unit of output increase as the scale of production increases.

External economies of scale:  Where a firm's costs per unit of output decrease as the size of the whole industry grows.

Industry's infrastructure:  The network of supply agents, communications, skills, training facilities, distribution channels, specialised financial services, etc that support a particular industry.

External diseconomies of scale:  Where a firm's costs per unit of output increase as the size of the whole industry increases.

Technical or productive efficiency:  The lease-cost combination of factors for a given output.

Long-run average cost (LRAC) curve:  A curve that shows how average cost varies with output on the assumption that all factors are available.  (It is assumes that the least-cost method of production will be chosen for each output).

Long run equilibrium: LARC = AC = MC = MR = AR

Envelope curve:  A long-run average cost curve drawn as a tangency points of a series of short-run average cost curves.

========================
Chapter 10: Revenue and profit.
========================

Total Revenue: A firm's total earnings from a specified level of sales within a specified period
TR = P X Q

Average revenue:  Total revenue per unit of output.  When all output is sold at the same price, average revenue will be the same as price.
AR = TR/Q = P

Marginal revenue:  The extra revenue gained by selling one or more unit per time period
MR = <>TR / <>Q

Price taker: A firm that is too small to be able to influence the market price.

Price maker (price chooser):  A firm that has the ability to influence the price charged for its good or service.

Profit-maximizing rule:  Profit is maximized where marginal revenue equals marginal cost.

Normal profit:  The opportunity cost of being in business.  It consists of the interest that could be earned on a risk-less asset, plus a return for risk-taking in this particular industry.  It is counted as a cost of production.

Supernormal profit (also known as pure profit, economic profit, abnormal profit or simply profit):  The excess of total profit above normal profit.

Short-run shut-down point:  This is where the AR curve is tangential to the AVC curve.  The firm can only just cover its variable costs.  Any fall in revenue below this level will cause a profit-maximizing firm to shut down immediately.

Long-run shut-down point:  This is where the AR curve is tangential to the LRAC curve.  The firm can just make normal profits.  Any fall in revenue below this level will cause a profit-maximizing firm to shut down once all costs have become variable.

=======================================================
Chapter 11: Profit maximization under perfect competition and monopoly.
=======================================================

Perfect competition:  A market structure in which there are many firms, where the is freedom of entry to the industry; where all firms produce an identical product; and where all firms are price taker.

Monopoly:  A market structure where there is only one firm in the industry.

Monopolistic competition:  A market structure where like perfect competition, there are many firms and freedom of entry into the industry, but where each firm produces a differentiated product and thus has some control over its price.

Oligopoly:  A market structure where there are few enough firms to enable barriers to be erected against the entry of new firms.

Imperfect competition:  The collective name for monopolistic competition and oligopoly.

The short run under perfect competition:  The period which there is too little time for new firms to enter the industry.

The long run under perfect competition:  The period of time which is long enough for new firms to enter the industry.

Natural monopoly:  A situation where long-run average costs would be lower if an industry were under monopoly than if it were shared between two or more competitors.

Competition for corporate control:  The competition for the control of companies through takeovers.

Perfectly contestable market:   A market where there is free and cost-less entry and exit.

Sunk costs:  Costs that cannot be recouped (eg:  by transferring assets to other uses).

==============================================
Chapter 12: Profit maximization under imperfect competition.
==============================================

Independence (of firms in a market):  When the decisions of one firm in a market will not have any significant effect on the demand curves of its rivals.

Product differentiation:  When one firm's product is sufficiently different from its rivals' to allow it to raise the price of the product without customers all switching to the rivals' products.  A situation where a firm faces a downward-sloping demand curve.

Collusive oligopoly:  When oligopolists agree, formally or informally, to limit competition between themselves.  They may set output quotas, fix prices, limit product promotion or development, or agree not to 'poach' each other's market.

Non-collusive oligopoly:  When oligopolists have no agreement between themselves - formal, informal or tacit.

Cartel:  A formal collusive agreement.

Quota (set by a cartel):  The output that is given member of a cartel is allowed to produce (production quota) or sell (sales quota).

Tacit collusion:  A situation where firms have an unspoken agreement to engage in a joint strategy.  For example, oligopolists take care not to engage in price cutting, excessive advertising or other forms of competition.  There may be unwritten 'rules of collusive behaviour such as price leadership.

Dominant firm price leadership:  When firms (the followers) choose the same price as that set by a dominant firm in the industry (the leader).

Barometric firm price leadership:  Where the price leader is the one whose prices are believed to reflect market conditions in the most satisfactory way.

Average cost pricing:  Where a firm set its price by adding a certain percentage for (average) profit on top of average cost.

Price benchmark:  This is a price which is typically used.  Firms, when raising prices, will usually raise them from one benchmark to another.

Cournot model:  A model of duopoly where each firm makes its price and output decisions on the assumption that its rival will produce a particular quantity.

Duopoly:  An oligopoly where there are just two firms in the market.

Nash equilibrium:  The position resulting from everyone making their optional decision base on their assumptions about their rivals' decisions.

Takeover bid:  Where one firm attempts to purchase another by offering to buy the shares of that company from its shareholders.

Kinked demand theory:  The theory that oligopolists face a demand curve that is kinked at the current price:  demand being significantly more elastic above the current price than below.  The effect of this is to create a situation of price stability.

Countervailing power:  When the power of a monopolistic / oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up.

Game theory (or the theory of the games):  The study if alternative strategies that oligopolists may choose to adopt, depending on their assumptions about their rivals' behaviour.

Maximin:  The strategy of choosing the policy whose worst possible outcome is the least bad.

Maximax:  The strategy of choosing the policy which has the best possible outcome.

Dominant strategy game:  Where different assumptions about rivals' behaviour lead to the adoption of the same strategy.

Prisoners' dilemma:  Where two or more firms (or people), by attempting independently to choose the best strategy, based upon what other(s) are likely to do, end up in a worse position than if they had cooperated from the start.

Tit-for-tat:  Where a firm will cut prices, or make some other aggressive move, only if the rival does so first.  If the rival knows this, it will be less likely to make an initial aggressive move.

Credible threat (or promise):  One that is believable to rivals because it is in the threatener's interests to carry it out.

Decision tree (or game tree):  A diagram showing the sequence of possible decisions by competitors firms and the outcome of each combination of decisions.

First-mover advantage:   When a firm gains from being the first one to take action.

MRF0013: Basic Economics: Chap 4, 5 & 6.

======================================
Chapter 4: The working of competitive markets.
======================================

Price taker:  A person for firm with no power to be able to influence the market price.

Perfectly competitive market (preliminary definition):  A market in which all producers and consumers of the product are price takers.  There are other features of a perfectly competitive market.

Free market:  One in which there is an absence of government intervention.  Individual producers and consumers are free to make their own economic decisions.

The price mechanism:  The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply.

Equilibrium price:  The price where the quantity demanded equals the quantity supplied; the price where there is no shortage or surplus.

Equilibrium:  A position of balance.  A position from which there is no inherent tendency to move away from current prices and quantities.

The law of demand:  The quantity of a good demanded per period of time will fall as the price rises and rise as the price falls, other things being equal (ceteris paribus).

Income effect:  The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as result of the price change.

Substitution effect:  The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products.

Quantity demanded:  The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.

Demand schedule for and individual:  A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time.

Market demand schedule:  A table showing the different total quantities of a good that consumers are willing and able to buy at various prices over a given period of time.

Demand curve:  A graph showing the relationship between the price of a good and the quantity of good demanded over a given time period.  Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis.  A demand curve can be for an individual consumer or a group pf consumers, or more usually for the whole market.

Substitute goods:  A pair of goods which are considered by consumer to be alternatives to each other.  As the price of one goes up, the demand for other rises.

Complementary goods:  A pair of goods consumed together.  As a price of one goes up, the demand for both goods will fall.

Normal goods:  Goods whose demand rises as people's incomes rise.

Inferior goods:  Goods whose demand falls as people's incomes rise.

Change in demand:  The term used for a shift in the demand curve.  It occurs when a determinant of demand other than price changes.

Change in the quantity demanded:  The term used for a movement along the demand curve to a new point.  It occurs when there is a change in price.

Supply schedule:  A table showing the different quantities of a goods that producers are willing and able to supply at various prices over a given time period.   A supply schedule can be for an individual producer or group of producers or for all producers (the market supply schedule).

Supply curve:  A graph showing the relationship between the price of a good and quantity of the good supplied over a given period of time.

Substitutes in supply:  These are two goods where an increased production of one means diverting resources away from producing the other.

Goods in joint supply:  These are two goods where the production of more of one leads to the production of more of the other.

Change in the quantity supplied:  The term used for a movement along the supply curve to a new point.  It occurs when there is a change in price.

Change in supply:  The term used for a shift in the supply curve.  It occurs when a determinant other than price changes.

Market clearing:  A market clears when supply matches demand, leaving no shortage or surplus.

===================================
Chapter 5: Business in a market environment.
===================================

Price elasticity of demand:  A measure of the responsiveness of quantity demanded to a change in price.

Elastic:  If demand is (price) elastic, then any change in price will cause the quantity demanded to change proportionately more.  (Ignoring the negative sign) it will have a value greater then 1.

Inelastic:  If demand is (price) inelastic, then any change will cause the quantity demanded to change by a proportionately smaller amount.  (Ignoring the negative sign) it will have a value less than 1.

Unit elasticity:  When the price elasticity of demand is unity, this is where quantity demanded changes by the same proportion as a price.  Price elasticity is equal to 1.

Total (sales) revenue (TR):  The amount a firm earns from its sales of a product at a particular price.
TR = P X Q.  Note that we are referring to gross revenue:  that is, revenue before the deduction of taxes or any other costs.

Income elasticity of demand:  The responsiveness of demand to a change in consumer incomes:  the proportionate change in demand divided by the proportionate change in income.

Cross-price elasticity of demand:  The responsiveness of demand for one good to a change in the price of another:  the proportionate change in demand for one good divided by the proportionate change in price of other.

Price elasticity of supply:  The responsiveness of quantity supplied to a change in price:  the proportionate change in quantity supplied divided by the proportionate change in price.

Speculation:  This is where people make buying or selling decisions based on their anticipations of future prices.

Self-fulfilling speculation:  The actions of speculators tend to cause the very effect that they has anticipated.

Stabilizing speculation:  This is where the actions of speculators tend to reduce price fluctuations.

Destabilizing speculation:  This is where the actions of speculators tend to make price movements larger.

Risk:  This is when an outcome may or may not occur, but where its probability of occurring is known.

Uncertainty:  This is when an outcome may or may not occur and where its probability of occurring is not known.

Futures or forward market:  A market in which contracts are made to buy or sell at some future date at a price agreed today.

Future price:  A price agreed today at which an item (eg commodities) will be exchanged at some set date in the future.

Spot price:  The current market price.

=============================
Chapter 6: Demand and the consumer.
=============================

Total utility:  The total satisfaction a consumer gets from the consumption of all the units of a good consumed within a given period.

Marginal utility:  The extra satisfaction gained from consuming one extra unit of a good within a given time period.

Principle of diminishing marginal utility:  As more units of good are consumed, additional units will provide less additional satisfaction then previous units.

Consumer surplus:  The excess of what a person would have prepared to pay for a good (ie the utility) over what that person actually pays.

Marginal consumer surplus:  The excess of utility from the consumption of one more unit of a good (MU) over the price paid
MCS = MU - P

Total consumer surplus:  The excess of a person's total utility from a consumption of a goos (TU) over the amount that person spends on it (TE).
TCS = TU - TE

Relational consumer behavior:  The attempt to maximize total consumer surplus.

Consumer durable:  A consumer good that lasts a period of time, during which consumer can continue gaining utility from it.

Diminishing marginal utility of income:  Where each additional pound earned yields less additional utility.

Spreading risks (for an insurance company):  The more policies an insurance company issues and the more independent the risks of claims from these policies are, the more predictable will be a number of claims.

Law of large numbers:  The larger the number of events of a particular type, the more predictable will be their average outcome.

Independent risks:  Where two risky events are unconnected.  The occurrence of one will not affect the likelihood of the occurrence of the other.

Diversification:  Where a firm expands into new types of business.

Adverse selection:  Where information is imperfect, high-risk groups will be attracted to profitable market opportunities to the disadvantage of the average buyer (or seller).

Moral hazard:  Following a deal, there is an increased likelihood that one party will engage in problematic (immoral and hazardous) behavior to the detriment of another.

Characteristics (or attributes) theory:  The theory that demonstrates how consumer choice between different varieties of a product depends on the characteristics of these varieties, along with prices of the different varieties, the consumer's budget and consumer's tastes.

Efficiency frontier:  A line showing the maximum attainable combinations of two characteristics for a given budget.  These characteristics can be obtained by consuming one or a mixture of two brands or varieties of a products.

Indifference curve:  A line showing all those combinations of two characteristics of a good between which a consumer is indifferent: ie those combination that give a particular level of utility.

Indifference map:  A diagram showing a whole set of indifference curves.  The further away a particular curve is from the origin, the higher the level of utility it represents.

Diminishing marginal rate of substitution of characteristics:  The more a consumer gets of characteristic A the less of characteristic B, the less and less of B the consumer will be willing to give up an extra unit of A.

Market segment:  A part of a market for a product where the demand is for a particular variety of that product.