Micro and Macro Economics (marginal revenue; marginal cost; Essay

Micro and Macro Economics (marginal revenue; marginal cost; elasticity) - Essay Example Define marginal revenue and explain its relationship with total revenue. â€Å"Marginal revenue (MR) is the rate of change in total revenue with respect to quantity sold†. In other words marginal revenue is the additional revenue from a product earned by a producer through the production and sales of an extra unit of the product. Algebraically, marginal revenue is the difference between total revenue earned by producing and selling ‘n’ units of a product instead of ‘n-1’ units. Formula for calculating marginal revenue is MR = ∆TR/∆Q Marginal revenue is the addition to total revenue associated with a unit increase in output or sales. There is a direct relation between marginal revenue and total revenue. When marginal revenue is positive, total revenue increases and it falls when marginal revenue is negative. B. Define marginal cost and explain its relationship with total cost. â€Å"Marginal cost is the change in total cost associated with a unit change in quantity†. Marginal cost is thus the additional cost incurred by the producer in producing an additional unit of product. Marginal cost is thus a cost incured in addition to previous cost ie. cost of producing ‘n’ units of output inplace of ‘n-1’ units. Formula for calculating marginal cost is MC = ∆TC/∆Q Marginal cost is related to the average total cost in the short-run since a change in total cost is reflected in the total average cost. The total variable cost is got by summing up marginal cost. C. Define profit and explain the concept of profit maximization. â€Å"An economist measures a firm’s economic profit as the firm’s total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold† (Mankiw, 2011, p. 262). Profit is the reward received by an entrepreneur for the risk taken during the process of production or for alloting scarce resources for production. Profit maximization is a method used for determinig the quantity of output to be produced and price to be incurred by an entrepreneur so as to receive maximum profit. D. Explain how a profit-maximizing firm determines its optimal level of output, using marginal revenue and marginal cost as criteria. A profit-maximizing firm will determine its optimal level o f output at the point where marginal revenue of the firm equals its marginal cost. At this point the firm receives maximum profit. E. Explain what action a profit-maximizing firm takes if marginal revenue is greater than marginal cost. If marginal revenue is greater than marginal cost, then a profit maximizing firm will increase production which will be followed by a movement from earlier point of marginal revenue to a new intersection point where marginal revenue equals marginal cost. This step is adopted by the firm as there is room for further revenue at the earlier stage. F. Explain what action a profit-maximizing firm takes if marginal revenue is less than marginal cost. In a situation where marginal cost of a profit-maximizing firm exceeds its marginal revenue, the firm will cut short its production up to a level where it will equalize its marginal cost to marginal revenue. At the earlier level the firm was incurring loss. Task 2: A. Define the following three terms 1. Elastic ity of Demand: Elasticity of demand has various definitions. â€Å"The price elasticity of demand is a measure of the sensitivity of the quantity demanded of a good to the price of a good. ‘Price elasticity of demand’ is sometimes shortened to ‘elasticity of demand’† (Taylor & Weerapana, 2009, p. 93). 2. Cross-Price Elasticity (includes substitutes and complements): Cross-price elasticity is the degree of responsiveness to change in the price of a related commodity on the demand for a good. â€Å"

Multiyear Plans and Analysis Essay Example | Topics and Well Written Essays - 750 words

Multiyear Plans and Analysis - Essay Example We analyze data as revealed by the City of Charlottesville 2009, 2010 Financial Ratios and also carry out ratio analysis that helps us discover more information about the business (Gibson, 2012). We compare the City of Charlottesville’s 2009 and 2010 performance using relevant ratios. Liquidity measures, or short-term solvency measures -measure the ability of the city to meet its short-term debt obligations. These ratios majorly focus on current assets and current liabilities (Denise, 2013). The current ratio shows how many times the current liabilities are included with the current assets. Higher ratios are recommended. The city retained its current rate for the two years under study. The ratios are above one which is a good indication of the city’s ability to pay its short-term obligation. The working capital is the difference between a company’s current assets and its current liabilities. A higher amount is required as it shows the excess of assets after accounting for all liabilities. The city’s performance in 2010 is hence more preferred as compared to that of 2009. Long term solvency measures the city’s ability to meet its long-term debt obligations. Debt ratio indicates the ratio of total liabilities to total assets. A lower percentage is more preferred (Denise, 2013). In 2009, 39% of every dollar of the city’s asset was debt while the ratio was 38% in 2010. 2010 is hence more preferable to 2009. The profit margin indicates that the city is not generating income. Its expenditure is higher than its income. From a dollar in revenue the city is making 11 cents loss. The city’s management is hence not useful in converting the available assets into sales. They should hence come up with new policies of raising revenue that will help the adequately meet their expenses. Days payable ratio are the number of days it takes a city to pay their creditors. The longer the period, the better