Economics & Glob Bus Apps Essay Example | Topics and Well Written Essays - 2000 words

Economics & Glob Bus Apps - Essay Example Task 1 Relationship between Marginal Revenue and Marginal Cost Marginal revenue is defined as the revenue generated by the sale of one extra unit of a product. Whereas total revenue means the entire revenue generated by the total quantity sold. (Sloman) Marginal cost is defined as the cost of producing one extra unit of a product. Whereas total cost refers to the sum of all the expenses incurred by a company, to produce all the units of the product. (Sloman) Profit is the excess of revenue over cost. Profit is defined as the return that a person gets on investment. In economics, there are three types of profit: normal profit, abnormal profit and subnormal profit. (Sloman) However, the term profit maximizing means that a firm is operating at a point where the difference between its total revenue and total cost is highest. (Lipsey & Harbury, 1992) The profit maximizing firms produce where their marginal revenue equals their marginal cost. Now common sense will suggest producing where t he revenue brought by an additional unit is the greatest and the corresponding cost is the lowest but at this point the total production and the total profit will be very low. Thus the firm will not be maximizing profit at all. So to fulfill the definition and requirement of profit maximization, a firm has to produce where MR=MC. In addition to that, MC and MR are the gradient functions of both TC and TR curves. So when both gradients get equal, the curves get parallel and the distance between them becomes the greatest. (Lipsey & Harbury, 1992) If a profit maximizing firm is faced with a situation where its MC increases its MR, then it will have to reduce its production. This is due to the simple rule that MR reduces as the production increases and MC increases with it. So to get back to the equilibrium, the firm will have to reduce the production. (Lipsey & Harbury, 1992) On the other hand, if the firm’s MR exceeds its MC, then it will have to increase its production. This i ncrease will cause the MR to fall and the MC to increase and the equilibrium will be attained. (Lipsey & Harbury, 1992) Task 2 Supply and Demand Concepts Elasticity of demand is defined as the measure of ‘responsiveness of the demand’ of any good or service with a change in its price. It can also be defined as a ratio of the ‘percentage change in the demand and the percentage change in the price’. Elasticity of demand is of three types. Elastic demand is the demand that responds greatly to a small price change. Inelastic demand shows a smaller change in quantity following a greater change in price. Unit elastic demand shows the same change in demand and price. Price Elasticity of Demand can be calculated by the following formula: Percentage change in quantity demanded / Percentage change in the price. (Sloman) Cross price elasticity of demand gives us the effect on the demand of one good due to a change in the price of other good. Therefore, cross price ela sticity of demand is a measure of the relationship between percentage changes in the demand of one