BEC 5 - Economic Concepts and Analysis

Question 1

Market assumption that a firm will operate best when

Answer 1

Marginal Revenue = Marginal Cost

MR = change in revenue/change in quantity
MC = change in cost/change in quantity

Question 2

Market clearing

Answer 2

the idea that the market will eventually be cleared of all excess supply and demand (surpluses and shortages) assuming that prices are free to change

Question 3

Price elasticity of demand (supply)

Answer 3

% change in quantity demanded (supplied) / % change in price

Question 4

% change in quantity (or price) NOO

Answer 4

New demand - old demand / old demand

Question 5

Unit Elasticity

Answer 5

Elasticity of demand = 1. Total revenue will not change because the change in price is equal to the change in quantity

Question 6

Cross Elasticity of demand (supply)

Answer 6

% change in number of units of X demanded (supplied) / % change in price of Y

Question 7

Elasticity of demand has a(n) ____ relationship while elasticity of supply has a(n) _____ relationship

Answer 7

Demand = indirect (P up, Q down)
Supply = direct (P up, Q up)

Question 8

Income elasticity of demand (supply)

Answer 8

% change in number of units of X demanded (supplied) / % change in income

Question 9

Real cost of debt

Answer 9

Future value (Principal) / (1 + inflation rate)^n

Question 10

Future price of expenses

Answer 10

Present value x (1 + inflation rate)^n

Question 11

Porter’s 5 Forces

Answer 11

1) Barriers to market entry
2) Market competitiveness
3) Existence of substitute products
4) Bargaining power of the customers
5) Bargaining power of the suppliers

Question 12

Circular Combination

Answer 12

A combination of different business units with relatively remote connection to one another come together to Centralize management and lower Costs

Question 13

Diagonal Combination

Answer 13

When a company integrates with another company that provides ancillary support (ex. Shipping) for their primary activity

Question 14

3 types of Divestitures (partial or full disposal of a component or business unit)

Answer 14

1) Sell-off: No potential, get rid of it entirely. Generates cash to focus on core
2) Spin-off: Some potential, no cash inflow, not public
3) Equity Carve-out: Lots of value, cash inflow and controlling interest in IPO

Question 15

Sourcing requirements

Answer 15

Content or value added limits on the percentage of labor or materials used in imported products

Question 16

First steps of strategic planning

Answer 16

1) Define the firms mission and vision
2) Setting the goals and objectives of the firm
3) Creation of a strategic plan
4) etc

Question 17

Main differences between monopolistic competition and oligopoly

Answer 17

Monopolistic

• Low barriers to entry
• Some product differentiation
• Main strategies include maintaining market share, enhanced product differentiation

Oligopoly

• High barriers to entry
• Various product differentiation (more than monopolistic)
• Strategies include maintaining or enhancing market share, adaptation to price changes and changes in production volume