Enc 150 Essay Example

Enc 150 Essay Example Enc 150 Essay Enc 150 Essay Directions: Please answer each of the following questions in a paragraph for each. Explain your thoughts with theory and examples where applicable. 1. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs? Opportunity costs is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. Implicit is a cost that is represented by lost opportunity in the use of a companys own resources, excluding cash. These are intangible costs that are not easily accounted for.For example, the time and effort that an owner puts into the maintenance of the company,company rather than working on expansion. Explicit is a business expense that is easily identified and accounted for. Explicit costs represent clear, obvious outflows from a business that reduce its bottom-line profitability. This contrasts with less-tangible expenses such as goodwill amortization, which are not as clear cut regarding their effects on a businesss bottom-line value. Good examples of explicit costs would be items such as wage expense, rent or lease costs, and the cost of materials that go into the production of goods.With these expenses, it is easy to see the source of the cash outflow and the business activities to which the expense is attributed. 2. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? List and describe the characteristics of a perfectly competitive market. A perfectly competitive market has the following characteristics. The market consists of buyers and sellers who are price takers. Each firm in the market produces undifferentiated and homogenous products.Buyers and sellers have perfect information about the price prevailing in the mark. About the availability of commodities at any given point of time. Firms can enter or exit the market freely. The implications of all these features is that there is single price in the mark no individual buyer can change it. On this price a firm can sell any amount of output. Because of flu demand of a firm is perfectly elastic and hence a horizontal line at the market price. Another implication is that a firm will produce only when it is profitable to produce, otherwise it will stop the products. ( reservearticles. com/201104115243/what-are-the-characteristics-of-a-perfectly-competitive-market. html) 4. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If the price is equal to the current market price because if it set its price higher than the current market price, it would not sell anything; and if it set its price lower than the current price, it would sell all of its product, but it would not make an economic profit. If a firm sets its price below the current market price, what effect would this have on the market?If you set a price lower than the market, you are only cutting your nose to spite your face since you would sell as much as a higher price. (Remember, how much you produce is determined by your MC and the output level you produce at is the minimum MC). Cutting the price to sell more also costs more to produce; you are worse off. (http://wiki. answers. com/Q/Why_would_a_firm_in_a_perfectly_competitive_market_always_choose_to_set_its_price_equal_to_the_current_market_price) 5. Explain how a firm in a competitive market identifies the profit-maximizing level of production.When should the firm raise production, and when should the firm lower production? In a perfectly competitive market, all firms are assumed to be very small compared to the market. Now the price is set at the market level, and as a small firm you take it as given; you couldnt sell at a higher price since nobody would buy from you. Now in the long run, you should be at the minimum point of your cost curve, ensuring you make just normal profits. The price is your MR and at the minimum point of your AC curve your MC cuts it: MC=MR and AC=AR.If the market price is higher than this, new entrants will sniff the opportunity created by super normal profits and the market supply curve shifts right/up, reducing price until there are no more super normal profits to be earned. If market price is lower, then firms are making losses, some exit and supply curve shifts left driving price up. In equilibrium, each firm is producing at the minimum point of the AC, where MC=MR=P. Hence the firm temporarily raises production when Pgt;min AC and makes super normal profits until new entrants drive price back down; or lowers production temporarily when P