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Week 2 Economics - Essay Example

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The change in revenue in response to a change in price is determined by a term called the Price Elasticity of Demand, which is simply a ration between the change in quantity demanded in response to an associated change in price. Thus, whenever there is no change in the price for…
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Week 2 Economics
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Download file to see previous pages In such a situation, an increase in price causes the revenue earned by suppliers to go up and vice versa. In contrast, the price elasticity is termed elastic whenever the change in demand of a quantity is greater in comparison to a change in price. in this situation, an increase in price causes the revenue to fall and vice versa. In a perfectly elastic situation, a change in price will cause demand to fall to zero thereby bringing the corresponding revenue to zero. However, when the situation resembles a perfectly inelastic curve, a change in price has no influence on the quantity demanded and the demand curve is a vertical line, which is in clear violation of the law of demand.
In a perfectly competitive market, a number of producers are producing identical goods with no product differentiation. Therefore, a producer cannot set any price as desired as doing so would put them out of business due to availability of substitutes.
Accounting profit is price minus costs for all processes that help bring a product or service to the market. Economic profit is the money earned by investor as a result of their investments. As such, it does not have anything to do with the way firms use that investment to produce goods and generate accounting profit. Economic profit can be negative even when accounting profit is in the green zone.
Short term decision making is driven by the immediate demand and supply forced in the market to which the firm may not be able to make major investments or changes and may have to use present capacities to produce the maximum quantity. Long term decisions require time to implement and must be planned in advance taking the long term demand and supply into consideration.
The combination of price and the production function gives the cost curve. The total cost curve is the amount spent on all fixed and variable costs while the ...Download file to see next pagesRead More
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