ACC102

Subdecks (1)

Cards (33)

  • Investment Decisions

    Trade-off between current costs and future gains that should be considered to determine if future gains are higher than current costs
  • Discounting
    Tool to determine the present value of possible cash flow that will be generated by an investment in the future
  • Discounting formula
    1. Present value= future value/(1+i)
    2. Future value= present value x (1+i)
  • Compounding formula
    Future value= present value x (1+i) ^t
  • Rule of 72
    If you invest at a rate of 8 percent, divide 72 with 8 percent to get the number of years it takes to double your money which is 9 years (72/8)
  • Determining investment profitability
    1. Discount the future value of an investment and compare them with current cost of the investment
    2. If the net present value of discounted cash flow is larger than zero, then the investment earns more than the cost of capital
  • Breakeven analysis
    1. Breakeven quantity= Annual fixed cost/ (price per unit minus marginal cost (cost per unit): Q=F/(P-MC)
    2. Breakeven quantity is the quantity wherein there is no loss and no gain that means zero profit
  • Buyer and Seller surplus
    • Buyer's value for a certain product is how much he will pay for it (top peso on buyers' part)
    • Seller's value of a goods is the cost of goods (bottom peso on the part of the seller)
    • Buyer buys if the price is below his value, top peso
    • Seller sells if the price is above his/her value, bottom peso
    • Seller surplus is the difference between the price agreed upon and seller's value
    • Buyer surplus is buyer's value less the agreed price
    • Total surplus is the gain in the transaction: buyer surplus plus seller surplus
  • Law of Demand
    A consumer purchases more if price decreases, purchase less if price increases
  • Principle of Diminishing Marginal Utility
    An added satisfaction decreases as consumer acquires or consume additional unit of a certain goods
  • Calculating total value and consumer surplus
    • If the sliced kutsinta is priced at 3.00 then consumer will purchase 5 sliced kutsinta that will give 15.00 total value (3.00x5)
    • Purchasing 3 sliced of kutsinta at 3.00, the consumer gets a higher consumer surplus (total value of 12.00 minus expenses of 9.00 = 3.00)
    • Purchasing 5 sliced of kutsinta at 3.00 there will be a zero surplus (total value of 15.00 minus expenses of 15.00 = 0)
  • Marginal analysis for pricing
    • MR > MC, reduce price, sell more
    • MR < MC, increase price, sell less
    • Consumer uses marginal analysis for maximization of consumer surplus, while producer uses marginal analysis for profit maximization
  • Marginal analysis for pricing example
    • Price reduction from 7.00 to 6.00, revenue increase from 7.00 to 12.00, the increase in revenue of 5.00 is the marginal revenue, marginal cost of 3.00 (1.50x2), profit of 9.00
    • Price reduction to 5, revenue of 15.00, marginal revenue of 3, total marginal cost of 4.50 (1.50x3), profit of 10.50
    • Price reduction to 4.00, revenue of 16.00, marginal revenue of 1, total marginal cost of 6(1.50x4)
    • The fourth unit gives 1.00 marginal revenue which is less than the 1.50 per unit marginal cost so it's no longer advantageous to sell 4 units
    • The 3rd unit will give 3.00 marginal revenue which is higher than 1.50 per unit marginal cost and raise profit to a maximum level of 10.50
    • The price of 5.00 is the optimum price that will maximize profit
  • Price elasticity of demand
    • Responsiveness of consumers to a price change
    • Coefficient ed = percentage change in quantity demanded of product X / Percentage change in price of product X
    • Elastic Demand - coefficient is greater than 1
    • Inelastic Demand - coefficient is less than 1
    • Unitary Demand - coefficient is equal to 1
  • Price elasticity of supply

    • If the quantity supplied by producers is responsive to the price changes supply is elastic, if insensitive to price changes then it is inelastic
    • Elastic supply - coefficient is greater than 1
    • Inelastic supply - coefficient is less than 1
    • Unitary supply - coefficient is equal to 1
    • Degree of price elasticity of supply depends on how fast producers can shift resources between alternative uses
  • Market period
    Period that occurs when time immediately after a change in market price is too short for producer to respond with a change in quantity
  • Short run price elasticity of supply
    Period of time too short to change plant capacity but long enough to use the fixed -sized plant more or less intensively
  • Long run price elasticity of supply
    Period of time long enough for firms to adjust plant sizes and for new firms to enter or exit firms to leave the industry
  • Cross elasticity of Demand
    • Measures how sensitive consumer demand of one product (X) to a change in the price of some other product (Y)
    • If cross elasticity is negative the two goods are complementary, if it is positive the goods are substitutes, if zero the goods are unrelated
  • Income elasticity of demand
    • Responsiveness of consumer purchases relative to a change in income
    • If income elasticity is positive the goods is a normal goods, if it is negative the goods is an inferior goods
  • Pricing and Price elasticity
    • Elastic demand: Price increase leads to revenue decrease, Price decrease leads to revenue increase
    • Inelastic demand: Price increase leads to revenue increase, Price decrease leads to revenue decrease
  • Factors that affect demand elasticity and optimal pricing
    • More close substitutes for the product
    • Brand individual demand is more elastic than industry aggregate demand
    • More complements for the product
    • Longer time horizon
    • Higher price level