Chapter 1 Flashcards
Accounting profits
the total amount of money taken in from sales (total revenue, or price times quantity sold) minus the dollar cost of producing goods or services.
what show up on the firm’s income statement and are typically reported to the manager by the firm’s accounting department.
Economic Profits
The difference between the total revenue and the total opportunity
cost of producing the firm’s goods or services
Opportunity Cost
The explicit cost of a resource plus the implicit cost of giving up its best alternative use.
Five Forces
five categories or “forces” that impact the sustainability of industry profits: (1) entry, (2) power of input suppliers,
(3) power of buyers, (4) industry rivalry, and (5) substitutes and complements
Entry
Globalization strategies, a new company forming, new product lines at existing firms
Heightens competition and reduces margins of existing firms
How fast can you capture market share? Is it fast enough to justify entry into market? There are sizeable sunk costs, economies of scale, and network effects
Power of Input Suppliers
Industry profits are lower when suppliers have power to negotiate favourable terms
Supplier power low when inputs relatively standardized and relationship-specific investments are minimal or alternatives available
Power of Buyers
Industry profits lower when buyers have more power
If they serve a few high-volume customers then buying power is higher
Industry Rivalry
Less intense in industries with relatively few firms
The level of product differentiation and the nature of the game being played—whether firms’ strategies involve prices, quantities, capacity, or quality/service attributes, for example—also impact profitability.
Consumer-Producer Rivalry
Consumers attempt to negotiate or locate low prices, produces attempt to negotiate high prices
Producer-Producer Rivalry
multiple sellers of a product compete- only time this works
Substitutes and Complements
The level and sustainability of industry profits also depend
on the price and value of interrelated products and services.
presence of close substitutes erodes industry profitability
Consumer-Consumer Rivalry
reduces the negotiating power of consumers, economic doctrine of scarcity
Competing for the right to purchase a good, and outbid each other if willing to pay more
Time Value of Money
The fact that $1 today is worth more than $1 received in the future because of interest that could have been earned on that dollar
Marginal Analysis
states that optimal managerial decisions involve comparing the marginal (or incremental) benefits of a decision with the marginal (or incremental) costs.
N(Q) = B(Q) − C(Q)
B benefits, C cost, of Q quantity, N net benefits
Marginal Benefits
The change in total benefits arising from a change in the managerial control variable Q.
MB (Q) = N(Q) - N(Q-1)
Marginal (incremental) Cost (MC)
The change in total costs arising from a change in the managerial control variable Q.
MC(Q) = C(Q) - C (Q-1)
Marginal Net Benefits
Change in net benefits from (Q-1) to Q
MNB(Q) = MB(Q) - MC(Q)
MB = MC at any level of Q that maximizes net benefits
At the level of Q where the marginal benefit curve intersects the marginal cost curve, marginal net benefits are zero. That level of Q maximizes net benefits.
Incremental Revenues
The additional revenues that stem from a yes-or-no decision.
Incremental Costs
The additional costs that stem from a yes-or-no decision.
Econometrics
the statistical analysis of economic data
Least Squares Regression
The line that minimizes the sum of squared deviations between the line and the actual data points.
The parameter estimates â and bˆ
represent the values of a and b that result in the smallest sum
of squared errors between a line and the actual data.
Standard Error
a measure of how much each estimated coefficient would vary in regressions based on the same underlying true relationship, but with different observations.
The smaller the standard error of an estimated coefficient, the smaller the variation in the estimate given data from different outlets (different samples of data).
t-statistic
The ratio of the value of a parameter estimate to the standard error of the parameter estimate.
A useful rule of thumb is that if the absolute value of a t-statistic is greater than or equal to 2, then the corresponding parameter estimate is statistically different from zero.
