IMC Unit 2: Micro Economics

What is the Production Possibility Frontier

Describes the maximum quantities of goods produced using all available resources in an economy

What are the inputs in the Production Possibility Frontier

Labour

Land

Capital

What are factors effecting demand

• Complementary goods

• Substitute goods

• Consumer income

• Tastes

• Advertising

What is Price elasticity of Demand

Elastic demand: greater than one

Inelastic demand: less than one

Shift ALONG the curve

What is Cross elasticity of Demand

Positive result implies substitute goods

Negative result implies complimentary goods

Shift IN the curve

What is Income elasticity of Demand

Positive result implies normal goods

• Greater than 1 implies luxury goods

• Negative result implies inferior goods (necessities)

• Giffen goods

• Shift IN the curve

What is Supernormal profit (Economic Profit)

Profit in excess of

• Measured (accounting) costs

• Opportunity (economic) costs

• Costs associated with the next best use of the unborrowed

capital tied up in the business and the use of the owner’s tim

How do companies profit maximise

Firms will produce output until the level is reached where marginal

cost and marginal revenue are equal

What is Economies of Scale

An lncrease inputs leads to a more than proportionate

increase in output

What is the bottom of the Long Run average cost curve

The minimum efficient scale

How are Firm’s output determined in Short and Long Run

A is where MR = MC, Q1 is optimal output

Q2 is where diseconomies of scale start to kick in

What is perfect competition

A market structure in which neither buyers nor sellers believe that they can influence the market price by any actions of their own

Horizontal demand line (AR)

How do Buyers and Sellers view themselves in Perfect Competition

as Pricetakers

What are the characteristics of Perfect Competition

Homogeneous product

Large number of independent firms, each small relative to

industry size

No barriers to entry or exit

Perfect information

How is the supply curve of a perfectly competitive firm

In the short run, we equate MR with SRMC, and check to see if this

intersection is above the SRAVC curve

If not, then the firm will not produce

Variable costs must be covered in the short run

How are the cost curves of Identical Firms in Perfect Competition

In the short run the decision to shut down was taken based on the SRAVC, whereas in the long run we use the LRATC

What are features of a Pure Monopoly

A single supplier

Patents/Licenses

• Supernormal (or monopolistic) profits are sustainable in the long

run

Price discrimination

Comparing Pure Monopoly and Perfect Competition

SMC is short run supply

LRS is long run supply

Shows a monopolist may produce less at a higher price

What are the features of Monopolisitc Competition and Oligopolies

Relative few firms

Significant barriers to entry

Homogeneous products

Why is the demand curve kinked

Because if one firm changes their price others are assumed to follow suit

How do business cycles and Industry performance trend over time

What are Porter’s Five Competitive Forces

Bargaining power of the suppliers

Bargaining power of the buyers/customers

Threat of new entrants

Threat of substitutes

Rivalry between current competitors

What are the 5 phases of the product life cycle

Introduction

Growth

Mature

Decline

Obsolescence

What happens in the Introduction Phase

Product sales growing slowly, heavy promotion cost

leading to low or negative profits

What happens in the Growth Phase

Involves a rapid increase in sales as the product becomes

more known; profits rise, competitors attracted

What happens in the Mature Phase

Product is established and well known, promotional

spending falls and economies of scale are present, while competitors have entered the market and hence product innovation is required

What happens in the Decline Phase

Sees a loss of market share and profitability, and a

decision as to whether to continue marketing expenditure to sustain

sales. During this phase a product re-launch may be considered

What happens in the Obsolescence Phase

The product has reached the end of its natural life. Profits

disappear. The timescale will vary between products

What is Swot Analysis

Strengths and weaknesses are internal (firm)

Opportunities and threats are external (market space)

What are the 4Ps of Product Research/ Marketing

Product

• Is it as described

Placement

• Is it available where target market shops

Promotion

• Is it appropriate to target customers

Price

• Does it represents good value

• Image