Short Run Total Cost
Variable Cost – Cost are directly related to the level of production for the period. Ex. Raw materials, labor cost, overhead.
Average Fixed Cost - goes down consistently as more units are produced.
Average variable cost – Total variable cost divided by the number of units produced.
Marginal cost – added cost of producing one extra unit.
Average total cost – Total cost divided by the number of units produced.
Fixed Cost – Cost that does not vary without output.
Cost of inefficiencies is referred to as “Law of Diminishing Returns. It states that as we try to produce more and more output with a fixed productive capacity, marginal productivity will decline.
Long Run Total Cost
Constant returns to scale – output increases in same proportion.
Increasing returns to scale – output increases by a greater proportion.
Decreasing returns to scale – output increases by a smaller proportion.
Two different types of profit:
1. Normal profit – The amount of profit necessary to compensate the owners for their capital and or managerial skills. 2. Economic profit – The amount of profit in excess of normal profit.
Marginal revenue - additional revenue received from the sale of one additional unit of product.
Marginal product – additional output obtained from employing one additional unit of a resource.
Money and interest rates
Money is any item or commodity that is generally accepted as a means of payment for goods and services or for repayment of debt and serves as an asset to its holder.
Money consists of bills and coins which have been printed or minted by the national government called currency. It also includes the funds stored as electronic entries in one checking account and savings account.
Fiduciary basis – relying on the public’s confidence in the established forms of monetary exchange.
Money serves three main purposes:
1. Medium of exchange – acceptable in exchange for goods and services
2. Store of value – durable for exchange at a later date.
3. Standard of value or unit of account – it is usable for quoting prices. Characteristics of good money
1. General acceptability – ready acceptance by everybody 2. Durability – bear normal wear and tear
3. Portability- easy to carry
4. Divisibility – capable of being subdivided into smaller denominations 5. Stability of money value- purchasing power of money must be maintained 6. Cognizability – easy to recognize
7. Uniformity – same characteristics in terms of weight, fineness and designs. 8. Malleability - capable of being stamped with proper design and durable to maintain its form.
Key measures for the money supply:
1. M1 – narrowest measure of money supply. It includes currency in circulation, demand deposits, checkable deposits, travelers checks. 2. M2 – in addition to M1 it includes money held in savings deposits, money market deposit accounts, noninstitutional money market mutual funds and other short-term money market assets. 3. M3 – in addition to M2 it includes the financial institutions. 4. L – In addition to M3 this includes liquid and near liquid assets. Short term treasury notes, high grade commercial paper and bank acceptances notes.
Demand for money
Sources of the demand for money
1. Transaction demand – Money demanded for day to day payments through balances held by household and firms. 2. Precautionary demand – money demanded as a result of unanticipated payments. 3. Speculative demand – Money demanded because of expectations about interest rates in the future.
Rate of interest is the price paid in the money market for the use of money or loans.
Rate is a percentage of the amount borrowed.
Opportunity cost – the interest that could be earned in an interest bearing account. Quantity theory of money - holds that changes in the money...
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