Summary of Economics of Strategy Book
Chapter 1, Basic Microeconomic principles
TC function: Represent the relationship between total cost and output, assuming that the firm produces in the most efficient manner possible given its current technological capabilities.
Semifixed: fixed over certain ranges of output but variable over other ranges
AC(Q): average cost function; describes how the firms average cost function or per unit of output costs vary with the amount of output it produces. When average costs decreases as output increases, there are economies of scale
Margincal cost: refers to the rate of change of total cost with respect to output the incremental cost of producing exactly one more unit of output. Margincal cost often depeds on the total volume of output.
Short-run average costs: the period of time in which the firm cannot adjust the size of its production facilities. Include fixed and average costs
Long-run average costs: is the lower envelope of the short-run average cost function. It shows the lowest attainable average costs for any particular level of output when the firm can adjust its plant size optimally
Sunk costs: costs which have to be incurred no matter what the decision is and thus cannot be avoided
Avoidable costs: these costs can be avoided if certain choices are made
Total revenue function TR: indicates how the firm’s sales revenues vary as a function of how much product it sells.
Marginal revenue: it represents the rate of change in total revenue that results from the sale of additional units of output.
Revenue destruction effect: while the firm generates revenue on the extra units of output it sells at the lower price, it loses revenue on all the units it would have sold at the higher price.
PCM: the percentage contribution margin, on additional units sold is the ratio of profit per unit to revenue per unit
A supply curve of a perfectly competitive firm is identical to its marginal cost function. For the market to be in
TC function: Represent the relationship between total cost and output, assuming that the firm produces in the most efficient manner possible given its current technological capabilities.
Semifixed: fixed over certain ranges of output but variable over other ranges
AC(Q): average cost function; describes how the firms average cost function or per unit of output costs vary with the amount of output it produces. When average costs decreases as output increases, there are economies of scale
Margincal cost: refers to the rate of change of total cost with respect to output the incremental cost of producing exactly one more unit of output. Margincal cost often depeds on the total volume of output.
Short-run average costs: the period of time in which the firm cannot adjust the size of its production facilities. Include fixed and average costs
Long-run average costs: is the lower envelope of the short-run average cost function. It shows the lowest attainable average costs for any particular level of output when the firm can adjust its plant size optimally
Sunk costs: costs which have to be incurred no matter what the decision is and thus cannot be avoided
Avoidable costs: these costs can be avoided if certain choices are made
Total revenue function TR: indicates how the firm’s sales revenues vary as a function of how much product it sells.
Marginal revenue: it represents the rate of change in total revenue that results from the sale of additional units of output.
Revenue destruction effect: while the firm generates revenue on the extra units of output it sells at the lower price, it loses revenue on all the units it would have sold at the higher price.
PCM: the percentage contribution margin, on additional units sold is the ratio of profit per unit to revenue per unit
A supply curve of a perfectly competitive firm is identical to its marginal cost function. For the market to be in