Creating Value: September 2009

Marginal Revenue-Marginal Cost Approach

First order condition

Marginal revenue means the addition made to the total revenue by producing and selling an additional unit of output and marginal cost means the addition made to the total cost by producing an additional unit of output. Now a firm will go on expanding this level of output so long as an extra unit of output adds more to revenue than to cost, since it will be profitable to do so. The firm will not produce an additional unit of the product which adds more to cost than to revenue because to produce that unit will means losses. In other words, it will pay the firm to go on producing additional unit of output so long as the marginal revenue exceeds marginal cost. The firm will be increasing its total profits by increasing its output to the level at which marginal revenue just equals marginal cost. It will not be profitable for the firm to produce a unit of output of which marginal cost is greater than marginal revenue.

The firm will be making maximum profit by expanding output to the level where marginal revenue is equal to marginal cost. If it goes beyond the point of equality between marginal revenue and marginal cost, it will be incurring losses on the extra units of output and therefore will be reducing its total profit. Thus the firm will be in equilibrium position when it is producing the amount of output at which marginal revenue equals marginal cost.

In the figure, MC and MR, output intersects at E. This shows that the firm is in equilibrium where (MC=MR). When MC>MR, TP will fall. If the firm is producing more than equilibrium level MC>MR in this situation the firm should reduce its output till the equality between MC and MR.

When MC

Second order condition for equilibrium of the firm

The first order condition for the equilibrium output of the firm is that of its marginal revenue should be equal to marginal cost. There is a second order condition which must also be fulfilled if the firm is to be in a stable equilibrium position, thus equality between marginal revenue and marginal cost is a necessary but not a sufficient condition of firm’s equilibrium. The second order condition requires that for a firm to be in equilibrium marginal cost curve must cut marginal revenue curve from below at the point of equilibrium. If at the point of equality between MR and MC, the MC curve is cutting MR curve from above them beyond this equality point MC would be lower than MR and it will be profitable for the firm to expand output beyond this equality point. It is thus clear that the output at which marginal revenue is equal to marginal cost but marginal cost curve is cutting marginal revenue curve from above can’t be the position of stable equilibrium because the firm will have a tendency to increase its output further in spite of the equality between marginal revenue and marginal cost.

In the above fig, MR curve is a horizontal straight line and MC curve is U-shaped and is cutting MR curve at two points, F and E. the firm cant be in equilibrium at point F at which MC is equal to MR. this is because MC curve is cutting MR curve from above at point F corresponding to ON output with the result that beyond ON output MC is lower than MR and it is therefore profitable for the firm to expand output beyond ON. Actually, at ON output the firm is making losses equal to the area between MC curve and MR curve. It is thus clear that in spite of the fact that marginal revenue and marginal cost are equal at output ON, the firm is not in equilibrium since it is profitable for it to expand further.

At OM output (or point E) where marginal cost and marginal revenue are equal and also marginal cost curve is cutting marginal revenue curve from below, the firm will be in equilibrium position. This is so because beyond OM, marginal cost curve lies above marginal revenue curve and therefore it will not be worthwhile to produce more than OM. The firm will not stop short of OM output for it can increase its profits by expanding output up to OM.

Equilibrium of a Firm

The word "equilibrium means a state of balance. When the object under the pressure of forces working in opposite direction has no tendency to move in either direction, the object is in equilibrium. Similarly a firm is said to be in equilibrium when it has no tendency to change its level of output, that is, when it has no tendency either to increase or to contract its level of output. The firm will produce the equilibrium level of output and will charge the price at which the equilibrium output can be sold in the market. Equilibrium of the firm has also to be achieved in respect of output it has to produce. So we can say the firm is in equilibrium, when given certain demand and cost conditions, it has struck upon the level of output at which it will stick on and will have no tendency to change it.

Equilibrium of the firm depends upon the objective it wants to achieve. However, the goal of profit maximization by the firm is still believed to be the most important and the theory of the firm has been extensively developed with maximization of profits as the objective of the firm. Therefore, in our analysis of equilibrium of the form, we will assume that it aims at maximizing its profits .The firm will therefore be in equilibrium when it is producing a level of output at which it is making maximum money profits. Now, profits are the difference between total revenue and total cost. So, in order to be in equilibrium, the firm will attempt to maximize the difference between total revenue and total cost.

It is to be noted that presently here, we are concerned with the analysis of equilibrium of firms in general terms. Here we shall derive general condition of equilibrium which are valid under all types of market. An old method of explaining the equilibrium of the firm is to draw the total revenue and total cost curves of the firm and locate the maximum profit point .But with the development of the approach of marginal analysis, equilibrium of the firm in modern micro-economics theory is explained with the aid of marginal revenue and marginal cost curves. The equilibrium of the firm can be explained in two ways-

Total Revenue-Total Cost Approach

Marginal Revenue-Marginal Cost Approach

Total Revenue and Total Cost Approach

A firm is in equilibrium when it is earning maximum profit. A firm will go on increasing its output if its profit is increasing. It will fix output at the level where it is making maximum money profits. Profit is the difference between Total Revenue and Total Cost i.e. (TR-TC). Thus, the firm will be in equilibrium at the level of output where the difference between TR and TC is greater. It can be shown with the help of the following figure:

Above figure presents what is called breakeven chart by businessmen. In this figure Total Revenue Curve TR and Total Cost Curve TC measured by OY-axis and output at OX-axis. TR starts from the origin, which means that when no output is produced, revenue is zero. TR goes on increasing as more output is produced. However, it will be noted that TC curve starts from a point F which states that even when there is no production, the firm has to ensure some cost i.e. OF. For instance, when the firm stops production in short-run, it has to bear fixed cost. Thus, the figure depicts short-run TR and TC. As a firm starts from zero output and increases its production of the good, in the very initial stage, TC is greater than TR and the firm is not making any profit at all. When it is producing OL level of output, TR is just equal to TC and the firm is therefore making neither profit nor losses i.e. the firm is only breakeven. Thus OL is called the breakeven point.

When the firm increases its output beyond OL, TR becomes larger than TC and profits began to assure to the firm. It will be seen from the figure that profit is increasing as the firm increases production to output OM since the distance between TR and TC is widening. At OM level of output, the distance between TR and TC is the greatest and therefore, the profit will be maximum. Thus, the firm will not produce any output larger than OM since, after, the gap between TR and TC goes on decreasing. At OH level of output, TR and TC curve intersect each other which means that TC=TR. Thus, the point Q corresponding to OH output is again a breakeven point. Beyond OH, TR is less than TC and firm will incur loss again.

Profit can also be shown with the help of profit curve where, profit is maximum at point D and declines thereafter.

An overview of IT and e-commerce

Plan your IT systems for the future

Planning your IT system with room for change can help you bolt on additional functions when you need them. There's little point in investing in a new IT system only to find that, six months later when you want to add more staff or software, it isn't capable of expansion.

Help with planning

In order to plan effectively for both your current and future IT needs, you must specify your requirements correctly and acquire the appropriate technology. See our guide on how to make the right IT choices.

For practical advice on selecting the most appropriate IT partner and how to make the relationship work, see our guide on how to choose and manage your IT supplier.

Going online

Before you put your business online, consider all the options and make sure that it's as simple as possible to make the move when you decide to. For example, you may at some stage want to create and manage a website to promote your business or have a fully transactional online shop. See our guide on planning for e-commerce.

Mobile working

If you have got staff out on the road or working from home, you may want to consider mobile solutions and the ability to connect to your systems remotely. For example, sales people on the road can instantly check stock levels or people who work from home can access internal documents, making communication more effective. To find out about the practical and technical issues you'll need to consider, see our guides on mobile technology andwireless technology.

Essential Elements of a Successful Trader

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you're taking.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We can correct any deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a 'hold on until it comes back' strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.

Forex Beginner

Here we have listed few question's which generally arise in the mind of people regarding the forex trading.

1: What is a forex broker?

Have you ever felt intrigued by the many advertisements on high leverage and great profit potential involved in currency trading? The golden gate of the kingdom of money, we are told, is reached by the road of forex.

2: Easy Income Source that can be happening in One Day

Forex is the best home business to father. Once you are able at it your channel is lined with gold if we embroidered just a petty little.

3: Learn the Simple Forex Market

Forex trading is a market which is both complex and simple. How to make money is the simple part, but the implementation of the process to learn forex market can be a little difficult. Forex education can prove to be a boon for all those who are willing to try their luck in forex trading. Therefore it is very important for them to understand the ways and methods of forex trading before actually getting into it. Even if one is well experienced in trading, there is always a room for improvement even for the experts.

4: Automated Forex Trading System

The Forex MegaDroid is an automated Forex trading robot This was specifically designed to function in all market environments. Which isexactly why its performance during testing was close to the highest we have everwitnessed. The facts are clear and un-debatable on this issue, the market canmake unexpected moves at the drop of a hat and having a weapon in your arsenalable to react instantly to those corrections and profit from them at the sametime, puts you in a very powerful position. Because of this we were forced togive it our highest rating possible, a 10 out of 10. This item is not to beunderestimated and MUST be in your final decision making process when makingyour purchasing decision

5: Forex Signals Providers - Are They Really Worth Your Money?

Making money in forex market became no longer difficult as it was few years ago. with the all new trading techniques and high speed internet connections and the appearance of the so many brokers who give the opportunities to every one to participate in the forex trading market regardless his capital volume.

6: Can You Make Money Online Trading Forex?

When you are ready to trade this market, keep these four simple steps in mind and then do not let anything stand in your way of becoming the trader you want to be.

Creating Value