economics chapter 4

• Firm


  An organisation that produces goods and services for sale in order to make a profit
• Firms play a very important role in the economy because society is affected by firms' active usage of scarce resources, the employment of people, the payment of taxes to all spheres of government and the production of goods and services for consumption
• Firms have a vital role of helping to achieve the socio-economic objectives of society
• Evidence that firms contribute significantly to the welfare of the nation is to be found in i) the remuneration that it creates for the suppliers of capital, labour and other resources, ii) the creation of increasing consumer benefits (more and better quality of goods and services available for consumption) and iii) the payment of taxation to all spheres of government
• Profit and long-run expected value maximisation

  The primary goals for firms in order to contribute to the socio-economic well-being of the nation
• The achievement of these goals (profit and long-run expected value maximisation) are subject to constraints imposed by resource scarcity (labour, materials, energy), technology, laws & regulations and any other internal and external constraints
• This chapter focuses on a microeconomic analysis (and not a managerial focus) of firm behaviour in a mixed economy
• Factors that would impact on the real sales of firms

  • Own-price policy
  • Disposable income of consumers
  • Price policies of firms producing related products
  • Consumer sensitivities towards changes in real disposable income and changes in pricing points
  • Industry-specific factors
  • Advertising expenses
  • Consumer tastes and preferences
  • Any other factor that might impact on consumer demand
• Supply constraints


  • Input costs
  • Technology
  • Production capacity
  • Productivity levels
  • Logistical aspects
• The relationship between productivity and cost structures is highlighted
• The profitability of firms under different market conditions is a pivotal aspect of firm behaviour and the firm-dynamics for each kind of a market structure is discussed
• The chapter ends with a discussion of some pricing practices
• Market demand conditions


  The variables that would impact on real sales (sales revenue deflated by the inflation rate)
• Variables that impact on real sales

  • Income levels of customers
  • Own-pricing points
  • Pricing points of related products
  • Industry-related variables
• The sensitivity of consumers towards different pricing points are determined and included when impact-scenarios on real sales are performed
• Linear demand function


  A straight-line demand curve where the ratio at which the own-price increase and the corresponding quantity demanded decrease remains the same for successive own-price and corresponding quantity demanded levels
• Own-price intercept


  The own-price level where the quantity demanded is equal to zero
• Slope of linear demand curve


  The change in own-price (vertical distance), divided by the change in quantity demanded (horizontal distance)
• Quantity intercept


  The output level where own-price is equal to zero
• Total sales revenue function (TR-function)


  Enables the firm to determine the total sales revenue for every level of output
• Marginal sales revenue (MR)


  The additional sales revenue that can be generated if one more unit of output is produced and sold
• Marginal sales revenue will be equal to zero when total sales revenue is at a maximum
• A change in the own-price, ceteris paribus, will impact on the quantity that is demanded of a particular product/service
• An increase in own-price (ceteris paribus)


  Quantity demanded decreases
• An increase in demand


  Demand curve shifts right
• A decrease in demand


  Demand curve shifts left
• Normal product


  A product where the demand increases as the income of consumers increases
• An increase in the income of consumers (normal product)


  Demand curve shifts right
• Inferior good


  A product where the total demand at every price level decreases as the income of consumers increases
• An increase in the income of consumers (inferior product)


  Demand curve shifts left
• Substitute products


  Closely related products where a change in the price of one product will have an impact on the sales of the other product
• An increase in the price of a substitute product


  Demand for the other substitute product increases
• Complementary products


  Products that are used jointly to satisfy a particular consumer need
• An increase in the price of a complementary product


  Demand for the other complementary product decreases
• An increase in consumer preferences and tastes

  Demand curve shifts right
• An increase in the total population

  Market demand increases (demand curve shifts right)
• Expectations of future price increases

  Demand increases (demand curve shifts right)
• Expectations of future price decreases

  Demand decreases (demand curve shifts left)
• Consumer surplus


  The difference between what a consumer is willing to pay and what the consumer is actually paying for the product
• There are a limited number of products and services where the relationship between higher pricing points and real sales is positive (e.g. scarce oil paintings)