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Managerial Economics key terms

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Managerial Economics key terms

  1. 1. Chapter 1:CCore competency: the main thing a firm doesFFree ride occurs when someone receives benefits without paying for those benefitsMMarket share percentage of total sales made by one firmTTotal quality management devoting resources to ensuring that quality is high--oftenimplied that marginal revenue from quality is less than marginal cost of obtaining qualityChapter 2;AArchitecture organization or structure of the firmarbitrage: a process of simultaneously buying in low-priced market and selling theidentical item in high-priced marketC
  2. 2. Comparative advantage when an activity by one person can be carried out with loweropportunity costs than could be done by anotherConstraint a restraint or limit; the budget constraint indicates a limited amount that canbe spentDDerivative in calculus, the change in a dependent variable that comes with a very smallchange in the independent variablesEEfficiency lowest costExternalities costs or benefits created by a transaction not paid foror received by the parties carrying out the transactionFFunction a rule that describes the relationship between variablesGGains from trade the additional amount that an individual, firm, or nation can obtain bytrading as compared to not trading
  3. 3. Hhold-up the situation in which one party to a transaction is able to force another toperform as the first desireshorizontal integration occurs when a firm merges with or acquires a rival firm; thecombining of firms at the same level of businessLLaw of one price identical items sell for the same price in different marketsMmarket failure a situation in which a free market does not allocate resources efficientlymarginal relationship a relationship between two variables that looks at the differenceor change between themOObjective function the item being optimized; profit under profit maximization; costunder cost minimization; happiness under utility maximizationPPareto efficient an outcome or equilibrium in which no one can be made better offwithout harming anotherproduction possibilities curve (PPC) a graph illustrating the limitations of resourcespublic good a product that can be consumed by anyone and where ones consumption
  4. 4. does not reduce the amount others can consumepartial derivative in calculus, measures a change in the dependent variable with respectto a very small change in one independent variable, everything else held constantTTransaction costs costs involved in carrying out a transactionVVertical integration occurs when a firm that is a supplier to another firm is merged withthe second firmChapter 3;AAccounting profit revenue that exceeds costs, not including cost of capitaladded value value of output that exceeds cost of resourcesCCost of capital the opportunity cost to creditors and investors--the amount a firm mustpay investors so that they will not take their funds to another activityEEconomic profit total revenue less total costs, including opportunity cost of capital
  5. 5. NNegative economic profit revenues are less than costs when costs include all costs (thatis, the cost of land, labor, and capital)normal profit zero economic profitSShareholder value the value of a firm to an investorChapter 4:Ccomplements products that are used togethercountercyclical goods when income goes up, quantity demanded of these goods goesdown--income elasticity of demand is negativecross-price elasticity of demand a measure of the sensitivity of sales to change in theprice of a related item; percentage change in quantity demanded of item A divided bypercentage change in price of item Bcyclical goods when income goes up, quantity demanded of these goods goes up--incomeelasticity of demand is positiveEElastic measure of sensitivity of sales to changes in a determinant of sales
  6. 6. Iincome elasticity of demand a measure of the sensitivity of sales to a change in incomeinelastic percentage change in quantity demanded is less than percentage change in priceindifference analysis measuring consumer choice by examining the baskets of goods andservices among which the individual is indifferentindifference curve a graph showing different combinations of goods among which theconsumer is indifferentLLong run a period of time just long enough that everything is variableMMarginal rate of substitution (MRS) the slope of the indifference curveNNoncyclical goods: products whose sales do not depend on incomePPrice elasticity of demand the sensitivity of sales to price changes; the percentagechange in quantity demanded divided by the percentage change in price
  7. 7. SSubstitutes items that can be used in place of each otherUUnit-elastic percentage change in quantity demanded is equal to percentage change inpriceChapter 5:AAverage fixes costs (AFC) total costs divided by quantityaverage total costs (ATC) total costs divided by quantity; per unit costsaverage variable costs (AVC) total variable costs divided by quantityCConstant returns to scale a doubling of all resources results in a doubling outputDDiseconomies of scale a doubling of resources leads to less than a doubling of outputDownsizing reducing the size of the firm; cutting costsE
  8. 8. Economics of scale a doubling of resources leads to a more than doubling of outputJJoint venture two or more firms joining together to produceLlaw of diminishing marginal returns adding increasing amounts of a variable resourceto a fixed amount of other resources initially increases output but eventually causesoutput to increase at a decreasing rate and finally to decreaselong-run average total cost (LRATC) total costs divided by quantity when there are notfixed costsMMarginal cost (MC) the change in cost divided by the change in quantityOOutsourcing divesting activities so they are purchased in the market rather than createdin-houseSshort run a period of time just short enough that at least one resource is fixedshort-run average total cost (SRATC) per unit costs; total costs divided by quantity
  9. 9. when some costs are fixedSupply chain management the management of the value chain; the process of creatingand selling a good or service from raw materials through finished product to theconsumerTTotal fixed costs (TFC) total costs of the fixed resourcesTotal variable costs (TVC) total costs of variable resourcesChapter 6:Ccommodity market a market in which many sellers offer an identical item for saleconsumer surplus the bonus provided consumers by a market; the differences betweenwhat buyers would be willing and able to pay and the market priceDDifferentiated products : products that are different in customers mindsMMarket structures the selling environments in which firms operatemonopolistic competition a selling environment in which there are many firms withdifferentiated products, where entry and exit can be carried out easilymonopoly a selling environment in which only one firm sells a good or service
  10. 10. OOligopoly: a selling environment in which just a few firms dominate the marketPperfect competition a selling environment in which there are many firms sellingidentical products and in which entry and exit are easyprice taker a perfect competitor or commodity seller; the price one must sell at isdetermined by the marketproducer surplus the difference between what a producer is willing and able to sell agood or service at and the market priceSStandardized products: products that are identicalstrategic behavior carrying out actions by considering the actions and reactions of othersChapter 7:EExperience goods: goods whose attributes are discovered through trial
  11. 11. RRent seeking devoting resources to transferring income from one group to anotherSSearch goods products consumers must know about and understand characteristics ofbefore they will purchase themservices items consumed immediatelystrategic asset an asset that enables a firm to create barriers to entrysunk cost expenditures that once made have no liquidation valueChapter 8:CCannibalization occurs when sales of one product by a firm reduce sales of anotherproduct by the same firmcost-plus pricing setting price according to a markup on average costscustomizing setting price according to an individuals willingness and ability to purchasean itemFFull-cost pricing: pricing based on total costs
  12. 12. LLimit price the price above which new firms will enterMmeet-the-competition clause a low-price guarantee--matching any other firms pricemixed bundling occurs when a firms sells two or more products individually and alsosells the products as one productmost-favored-customer clause a firm guarantees that its customers will obtain thelowest price offered by the firmPpeak-load pricing prices differ depending on amount of demand--higher when demandis higherperfect price discrimination each consumer pays exactly what each is willing and ableto pay for a good or servicepersonalized pricing: pricing determined according to each individuals willingness andability to paypredatory price: a price low enough to drive competitors out of businessproduct-line extension adding an attribute or component to an existing productpure bundling offering two products for sale only in combinationSSecond-degree price discrimination when the firm is able to group multiple units of thegood and charge different prices for the different groups
  13. 13. TThird-degree price discrimination groups of customers pay a different price for thesame producttying selling on product by offering it for sale in combination with another productVValue pricing standard economic pricing where MR = MC but the name value isattached to make it seem as if the customer is gaining something additionalChapter 9:AApplied research: research focused on bringing a final product to fruitionBBasic research: research devoted to solving a problem irrespective of final outputDDevelopment readying the results of research for sale as a final product
  14. 14. LLocked-in having to utilize a specific technology even though it is not the most efficienttechnologyNNew Economy term referring to the technological changes occurring in informationprocessing and managementnetwork a situation in which activities carried out by groups of people or firms using aspecific technology have lower costs than if each person or firm uses differenttechnologiesPpath dependence a situation in which certain actions or certain technologies are adoptedsimply because previous actions or technologies were adoptedpositive feedback externalities created by one person carrying out an activity spill overto or benefit all others also participating in those activitiespositive network externalities see positive feedbackTTipping point the point at which a disease becomes an epidemic
  15. 15. UUsing the market purchasing an activity from the market rather than carrying out theactivity in-houseWWinner-takes-all one firm or one technology completely dominates the market--becomes a monopolyChapter 10:BBuyback a means of securing a contract--one party agrees to buy back a portion of thetransaction between two partiesCcontracts agreements to carry out certain transactionscorporate culture a set of collectively held values, beliefs, and norms of behavior amongmembers of a firm that influence individual behaviorsDDownstream an activity that uses a firms output as inputs into its own productionHHostages a means of ensuring that one party to a transaction carries out the transaction
  16. 16. Mmake-or-buy decision the decision whether to carry out an activity in-house or topurchase the activity in the marketmatrix an organizational structure designed to ensure efficient communication amongdisparate unitsM-form, multidivisional form an organizational structure designed to enablespecializationNNetwork a situation in which activities carried out by groups of people or firms using aspecific technology have lower costs than if each person or firm uses differenttechnologiesSSelf-managed team a workplace organization designed to enlist the benefits ofteamworkTTeam a popular means of organizing the workplace--having output produced by groupsor individualstransaction costs: costs involved in carrying out a transaction
  17. 17. UU-form, unitary form, functional form organizational form or structure of a firm thatenables just one activityupstream the firm that is a supplier to another firmVVertical integration occurs when a firm that is a supplier to another firm is merged withthe second firmChapter 11:BBack loaded compensation a compensation structure in which an individual receivesless than his productivity is worth during the first years he is with the firmEEfficiency wage: wage that is higher than the equilibrium of market wage in order toinduce increased productivityFFree ride occurs when someone receives benefits without paying for those benefits
  18. 18. GGolden parachutes compensation provided executives of a firm who are dismissed orotherwise lose a position with the firmgreenmail payments provided to employees/executives of a target firm in the event of ahostile takeoverMMarginal revenue product the value of an additional resource to a firm; the marginalrevenue multiplied by the marginal productPPiece-work rates compensation based on outputpoison pill a situation in which a firm acquired by another firm imposes large costs forthe acquiring firmVValue of the marginal product the value of a resource to a firm that sells its output in acommodity marketWWage compression occurs when wages of newly hired workers are near or above thewages or employees who have been with the firm for a long period of time
  19. 19. Chapter 12:BBlack-Scholes option pricing formula a means of determining a value for the right butnot the obligation to undertake an actionCCall option the right but not the obligation to purchase an itemNNet present value (NPV) present value of earnings less present value of costsOOptions the right but not the obligation to carry out some activityRReal option the right but not the obligation to purchase an asset or carry out an activity
  20. 20. Chapter 13:CCommitment expending resources on a particular action in order to demonstrate that theaction will be carried outDdominant strategy an activity that will be carried out no matter what rivals dodominated strategy an activity that will not be carried out because there are better, moreprofitable activities no matter what rivals doEExpected value value weighed by probability of occurrenceGGame theory mathematical representation of strategic behaviorNNash equilibrium situation in which no one has an incentive to change current actionsP
  21. 21. Prisoners dilemma a situation in which a rivals actions lead to a less than best solutionRRepeated trials carrying out activities more than oncerisk aversion avoidance of risk; when someone prefers a result with certainty over thepossibility of receiving either a higher or lower resultRisk premium the price that people will pay to avoid riskSscorched-earth policy a strategy for penalizing those who cheat on agreements--destroying all assets so that others cannot use themsequential game: game in which decisions are made in steps, with each step taking placeat a different point in timesimultaneous game: game in which decisions are made at the same timeTTit-for-tat a strategy for penalizing those who cheat on agreements--doing unto otherswhat they do unto you
  22. 22. Chapter 14:AArbitrage: process of simultaneously buying in low-priced market and selling theidentical item in high-priced marketBBalance sheet exposure the items on a balance sheet whose value may be affected byexchange-rate changesCCurrency futures contracts for delivery of a certain amount of foreign currency at somefuture date and at a known price; similar in this way to foreign-exchange forwardsEExchange rate the rate at which two currencies are exchangedFforeign exchange currency not that of the domestic nationforeign-exchange options the right but not the obligation to buy or sell foreign exchangeat some point in the future for a price determined nowforward marke:t market in which transactions to occur in the future are bought and soldtoday
  23. 23. forward rate the price determined today for a transaction to take place in the futureforwards contracts for delivery of a certain item at some future date and at a known priceHHedging: undertaking an action to offset some possible losses related to a separatetransactionIInterest rate parity (IRP) occurs when interest rates in different nations are the sameonce adjusted for exchange-rate changesLLaw of one price identical items sell for the same price in different marketsMMarket-based exposure sales and/or costs of multinational companies may be affectedby exchange-rate changesOOffsets a means of ensuring that an agreement is carried out
  24. 24. PPurchasing power parity (PPP) the prices of goods and services are the same indifferent nations once adjusted for exchange-rate changesQQuota a fixed amount that a supplier is allowed to offer for sale in a particular marketSSpot rate current priceTTariff a tax imposed on imported goods and servicesChapter 15:HHerfindahl-Hirshman index (HHI) a measure of the degree of dominance of a firm orfirms in a market; the sum of squares of sales--HI = (size)2 + (size) 2 = … + (size) 2,where (size) 2 is the size of a firm squaredN
  25. 25. Natural monopoly situation that exists when economies of scale persist throughout theentire marketPPer se rule a fixed rule of antitrust that an action is illegal no matter the circumstancesRRule of reason the idea that antitrust prosecution depends on the reasonableness of theaction, that is, the circumstances surrounding the actionrent seeking devoting resources to transferring income from one group to another(The End): Remember me in your prayers :( Wasi )

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