182. Economic profit and normal profit

4.Economic profit and normal profit The four (classic) factors of production are: Land Labour Capital Entrepreneurship. The remuneration for each are

Rent

Wages

Interest

Profit

These also form the costs to a firm.

When income equals cost it INCLUDES the remuneration to the entrepreneur = profit. This profit is called “normal” profit. It would be equivalent to what the entrepreneur would have earned had he spent his/her time and effort on the next best activity.

It is however not the goal of the entrepreneur to just earn normal profit – he wants to maximize profit – and that is where ones understanding of the “supply curve of the firm” is useful. It shows you how a firm can make “economic profit” in the short term under prefect market conditions – and maximum profit is attained not where the profit per unit is the greatest, but where MC (marginal cost) = MR (marginal revenue).

See if you understand the “supply curve of the firm”.

Let me know if you need help here.

181. Views that economists hold.

There are many divergent views that economist hold. Economics is a social science. Economists assist us in explaining and predicting as well as informing economic policy. If one takes a phenomenon such as “Unemployment” one will find economists with differing viewpoints having different views and make different predictions regarding the impact of a policy such as the imposition of a minimum wage. As a science it cannot follow the scientific method in the sense that one cannot conduct controlled experiments. There are however numerous “natural” experiments from which one can make certain deductions. By following a logical reasoning process many deductions can however be made – many of these have become “laws”, such as the law of demand that states that the quantity demanded will reduce as the price of a good increases (ceteris paribus). Mohr and Fourie (2004, p11) state in their textbook “Economics for South African students” why economists tend to disagree on certain important issues. This is what they say: • They might make different value judgements • They may not agree on the facts • They may be biased • The may hold different views on how the economy operates • They may have different time perspectives. I would suggest that you have a look at these and perhaps explore some of the differing viewpoints of say the “Austrian” and “Keynesian” approaches. I hope this helps.

180. Marginal Cost

Marginal cost and revenue

Marginal cost is the additional cost that a firm incurs to produce one more item. Marginal revenue is the additional revenue earned in selling one more item.

Marginal Cost: the cost added by producing one extra item of a product. Marginal Revenue: the additional revenue that will be generated by increasing product sales by one unit. It can also be described as the unit revenue the last item sold has generated for the firm.

Remember cost is made up of a fixed component (that does not change in relation to output) and a variable component (that which varies directly in relation to output).

Fixed costs are expenses such as Rent and Salaries (one has to pay these irrespective of how many units are produced) Variable costs are normally the raw materials that are used in the manufacture of the product ( and one can see that, for example, if you make wooden tables, there will be a direct relationship between the amount of wood used and the number of tables made.

179. The SA Economy - what is the problem?

During the 1960's, South Africa had one of the fastest growing economies in the... world. In the first three years of the decade GDP rose by 9.3%, more than any economy in Europe or North America.(pallister, Stewart and Lepper - SA Inc.) This was during the Sharpeville years and against all odds. I cannot see why we have to be content with a 0,3% growth rate today (2016) - we are in so many ways in a better position to solve the problem.

178. TANSTAAFL - How many dying babies must pay for your fantasy?

In a recent Business Day column, Repeat after me: there are no free lunches, Leon Louw highlights a disturbing trend – the fantasy that policy decisions have no costs. Louw says: “In the fantasy free-lunch world, governments confer cost-free blessings on subjects …” … a trend made visible via the #datamustfall and #feesmustfall campaigns, amongst others. Louw points out that “People who allocate their own resources to themselves worry about cost and quality; people who allocate their own resources to others worry about cost not quality; people who allocate someone else’s resources to themselves worry about quality not cost; and people who allocate someone else’s resources to someone else worry about neither cost nor quality.” Louw proposes: “Next time someone says “they should do so and so”, ask “at what cost?” Do they want more rape, infant mortality or destitution, for instance? From what — at what cost — do they want resources diverted to what they propose? Encourage them to start with what they want to sacrifice. “I want fewer teachers and more rhino poaching so that the rich can fly SAA”, perhaps.

http://www.bdlive.co.za/opinion/columnists/2016/09/28/repeat-after-me-there-are-no-free-lunches

177. Rescue kit

https://sites.google.com/site/economicssa123/rescue-kit

176. MBA Economics - Exam prep

EXAM PREPARATION:

The following should be regarded as key areas for a student in Economics:

The Production Possibility Frontier is a useful tool to explain “opportunity cost”, efficiency (productive and allocative) and can be used to demonstrate economic growth through technological innovation and the benefits of trade.

Then measuring the Economy – Understanding the circular flow (Goods/services and factors)

and  Gross Domestic Product (GDP) as a key component in measuring the flow of income and spending goes without saying.

This too will have a bearing on the Economic policies (Fiscal, Monetary and regulatory policies) that can be used to ensure the achievement of all macro-economic objectives.

Unemployment is regarded as a key Macro-economic objective and should therefore be regarded as important – the micro-economic argument for the cause of unemployment in the case of Government intervention in the market through minimum wages (price floors) is crucial.

As a backdrop to this – the various types of unemployment should be known and policies to reduce unemployment.

It is also useful to be able to relate unemployment to the AS/AD Model.

Specifically with regards to Micro-economics it is important that the student understands how the price mechanism works in the market (supply and demand and the market clearing price – the equilibrium)

This includes price elasticity, the equilibrium position of a firm under perfect market conditions as well as under monopolistic and to a lesser degree the other two conditions (oligopoly and monopolistic competition). The conditions for perfect markets should be known.

Then the issues surrounding Economic growth (in particular those factors that affects shifts in the position of the aggregate demand curve (point b on page 89 of the MBA study guide). The meaning of “sustainable economic growth”  (the “advantages and disadvantages” of economic growth) as well as the economic growth v economic development argument.

Other important areas are International trade, exchange rates and  barriers to trade (p 112) – protectionist pressures and the negative effects thereof. As part of this the concepts of Absolute and Comparative advantage should be understood. The concept of globalisation  should be undertood.

A basic understanding of economic systems (Free Markets, Socialist and economies).

AS/AD and how it relates to Inflation, production, income/expenditure (45-degree graph and the consumption function) and employment as well as a detailed knowledge of the concepts, the effects and how these may be affected by Monetary, Fiscal and Regulatory policies. Also how these relate to the Economic growth of a country.

The learner should also be aware of the effect of policies as they relate Nationalisation and  Privatisation.