Prince Mohammad Bin Fahd University
Introduction to Microeconomics ECON1312
Section 102
Name: Kadhem Al – Wayal
ID: 200900292
Assignment 2
December, 12, 2012
Dr. Mohammad Magableh
Chapter 7
Total costs: Fix Cost and Variable Cost : Fixed cost is a cost that does not change
or get effected by other factors, example for a fixed cost would be salaries for the
company employees. Variable cost is explained in its name, the cost that will change
by other factors, example for variable cost would be the raw materials that the
company need to buy.
Marginal Cost: Marginal cost is the change in the total cost when increasing the
production by 1 or more units or decreasing the production by 1 or more units.
Least-cost rule
𝑀𝑃𝐿
𝑃𝐿
=
𝑀𝑃𝐴
𝑃𝐿
=
𝑀𝑃𝑎𝑛𝑦 𝑓𝑎𝑐𝑡𝑜𝑟
𝑃𝑎𝑛𝑦 𝑓𝑎𝑐𝑡𝑜𝑟
: Least cost role is when a firm tries to
produce its given output with the least-cost resource for example, if a company wants
to produce bottled water and to do that they need to get water either from the sea and
desalt it or they get the water from the river, here the company will choose the leastcost recourse .
TC = FC + VC: If we want to get the total cost of a firm or any other company we
need to add the fixed cost of this firm and the variable cost to get the total cost.
AC = TC / q = AFC + AVC: If we want to get the average cost we either divide the
total cost by the quantity or we add the average fixed cost with the average variable
cost.
Income statement (profit and loss statement): sales, cost, profits : The income
statement is the measurement a company or a firm performance in a certain time and
this measurement measures the cost of the raw materials and other inputs the
company needs also measures the sales of this company and the profits that are
getting in to this company.
Depreciation: Depreciation means two things, the first one is, the decrease in the
value of assets, the other thing is, the allocation of the cost of the assets to periods in
which the assets are used, in other words, it’s an expense (noncash expense) that will
reduce the value of an asset as a result of age which will lead this asset to lose its
value over time, “the depreciate”
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Fundamental balance sheet identity: Fundamental balance sheet identity means in a
simple way, the total assets = total liabilities with the net worth, also it means the
financial condition in a certain date
Assets, liabilities, and net worth: Assets are the economic term of economic
resource which is anything that is capable of being owned or controlled and produces.
Liabilities is an obligation that binds a company or a firm or an individual to a debt or
a settle. Net worth in simple word is the total assets minus the total outside liabilities
of a company or an individual.
Stocks VS flows : Stocks are equity capital raised through sale of shares, another
definition is the proportional part of a company’s equity capital but flows are the
general measurement of change over time, a quantity (such as investment) takes
meaning only when time is taken into account to get the result of it (the investment).
Opportunity cost : Opportunity cost is the price the company or an individual that
will pay if he want to change to another product or to relocate his business to another
place.
Cost concepts in economics and accounting : Cost in Economics is total cost,
variable cost, fixed cost, average total cost, and marginal cost. Cost concept in
accounting is cost = price + the ongoing expense of operating a business.
Chapter 8
P = MC as maximum-profit condition: P = MC means the price is at the lowest
level compared to the cost, also it will have no excess output and excess cost at this
level. And what that mean is it will achieve production efficiency and technical
efficiency, In other words maximizing profits.
Firm’s supply curve and its MC curve: A firm’s supply curve is that portion of its’
marginal cost curve that lies above the minimum of the average variable cost curve.
Zero-Profit condition where P = MC = AC: Zero profit condition is a theoretical
condition in economics, if the price and marginal cost and the average cost are equal
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because of the extremely low (near zero) cost of entry, which encourages people to
get in this kind of market.
Shutdown Point where P = MC = AVC: Shut down point is the place where a
firm’s total revenue equals total cost and where the product price equals marginal
cost, and average variable cost, which means this firm or company is not making any
profits and where it’s better to shut down the business.
Summing individual ss curves to get industry SS: Just like market demand, the
sum of the demands of all buyers, industry supply schedule is just the same, the sum
of the supplies of all sellers.
Short-run and long-run equilibrium: A short run equilibrium is the condition when
markets and products are equal but the resource markets are not, also workers have
misconception about wages and prices which causes a short-run supply curve in the
industry. Long-run equilibrium is almost the opposite, the wages of the workers are
flexible and the prices are represented by the total demand curve.
Long-run zero-profit condition: Long-run zero profits is a condition that happens if
there is a profit in a market and many firms get into the market because of the
assumptions of perfect competition which will increase the supply and consequently
reducing the market price.
Producer surplus + consumer surplus = economic surplus: Economic surplus is a
combination between two things, the first one is the producer ( firms, companies )
surplus. The second one is the consumer surplus
Efficiency = maximizing economic surplus: Economic surplus is very important to
any industry, so to be able to maximize it this industry needs to be more efficient
because with efficiency the cost of production will be considerably less which means
an increase in the economic surplus which is the satisfaction of the consumer.
Allocative efficiency, Pareto efficiency: Allocative efficiency is ate an output level
where price equals marginal cost. Pareto efficiency is the economic state where
resources are distributed in the most efficient way possible.
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Conditions for allocative efficiency: MU = p = MC: The condition for allocative
efficiency where marginal utility equals the price and equals the marginal cost.
Efficiency of competitive markets: Profits is the main objective of any firm and to
get the maximum profit the firm needs to be efficient and if there is competitors in the
market then this firm needs to be more efficient to be able to compete with the other
competitors/
Efficiency VS equity: Efficiency is concerned with the optimal production and
allocation of resources by giving an existing factors of production, equity on the other
hand is concerned with how resources are distributed throughout the public.
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