What is a price taker firm?
In a perfectly competitive market, firms are price-takers. A price taker firm is the firm which does not has any control over the existing market price and cannot influence it.
What is market Demand?
The market demand for a good at a particular price is the total demand of all consumers taken together.
What is opportunity cost? Explain with the help of a numerical example.
An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. In other words, the cost of enjoying more of one good in terms of sacrificing the benefit of another good is termed as opportunity cost of the additional unit of the good.
Example: We have Rs 15,000 with two choices a) to invest in the shares of a company XYZ or b) to make a fixed deposit which gives interest 9%. If the company XYZ gives a return of 15%, we will benefit when we invest in the shares as the alternative would be less profitable. However if company’s return is only 3% when we could have made a return of 9% from FD, then our opportunity cost is (9% - 3% = 6%).
What is the behaviour of average fixed cost as output increases?
Average Fixed Cost refers to the fixed cost per unit of output produced. It is derived by dividing the Total Fixed Cost by total quantity of output produced. When the output increases, average fixed cost decreases.
Given price of a goods, how does a consumer decide as to how much of the good to buy?
The marginal utility of a good or service is the gain from an increase, or loss from a decrease, in the consumption of that good or service. In order to decide, how much of a good to buy at a given price, a consumer compares Marginal Utility (MU) of the good with its price (P). The consumer will be at equilibrium, when the Marginal Utility of the good will be equal to the price of the good.
i.e. MUx = Px
If MUx > Px, that is, when price is lesser than the Marginal Utility, then the consumer will buy more of that good.
On the other hand, if MUx < Px, that is, when price is more than the Marginal Utility, then the consumer will buy less of good.
What is the behaviour of average revenue in a market in which a firm can sell more only by lowering the price?
AR curve slope downward in a market in which firm can sell more only by lowering price.
Draw Average Variable Cost, Average Total Cost ad Marginal Cost curves in a single diagram.
Give meaning of an Economy.
Economy is the system of trade and industry by which the wealth of a country is made and used. It is a system which provides the people of society to earn a living.
An individual is both the owner and the manager of a shop taken on rent. Identify implicit cost and explicit cost from this information. Explain.
An implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It refers to cost of the factor that a producer neither hires nor purchases. Such costs are not actually paid by the producers yet are included in the cost of production. Also implicit costs do not result in any cash outlay from the business.
In this case the implicit cost consists of imputed value of the services provided by the owner who is also the manager. The implicit cost here is in the form of salary to the manager which need not be paid and the explicit cost consists of the rent paid for the shop.
Explicit costs on the other hand, are those costs that are borne directly by a firm and are paid to the factors of production. Explicit costs are referred to as out-of-pocket expenses, which results in outflow of cash. In this case, the rent for the shop paid by the firm is considered as explicit cost, as it results in outflow of cash.
Explain the implication of large number of buyers in a perfectly competitive market.
The number of buyers and sellers operating under perfect competition is very high. As the number of individual sellers very large, an individual seller cannot fix the price. Similarly no single buyer can fix the price or change it by his action. Even if he increases or reduces demand, it does not make any effect on the total demand in the market. Price of a product is determined by the interaction of total demand and total supply in the market. Hence every seller and buyer under perfect competition is a price taker and not a price maker.