Chapter 1: Fundamentals Flashcards
Managerial Economics
The study of how to direct/allocate scarce resources in the way that most efficiently achieves a managerial goal.
Manager
A person who directs resources to achieve a stated goal.
Economics
The science of making decisions in the presence of scarce resources.
Resources
Anything used to produce a good or service or, more generally, to achieve a goal.
Accounting Profits (Gross Profits)
Sales – Costs of Goods Sold.
Economic Profits
The difference between total revenue and total opportunity cost.
Opportunity Cost
The explicit cost of a resource plus the implicit cost of giving up its best alternative use.
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.
Time Value of Money
The fact that $1 today is worth more than $1 received in the future.
Present Value Formula
PV = FV / (1 + i)n i = rate of interest
Net Present Value
NPV = PV -C0 C0 = current cost
Profit Maximization
Expand output until the revenue earned on the last unit sold equals the cost of that unit (e.g., where marginal benefit equals marginal cost): MB > MC (profitable), once MB = MC Profit is maximized.
Marginal Benefit
The additional benefits that arise by producing an additional unit.
Marginal Cost
The additional cost incurred by producing an additional unit.
Marginal Principal
So long as marginal benefits exceed marginal costs, an increase in quantity adds more to total benefits than it does to total costs.
Marginal Net Benefits
MNB(Q) = MB(Q) − MC(Q)
Five Forces Framework and Industry Profitability
“Forces” that impact the sustainability of industry profits:
i. entry
ii. power of input suppliers
iii. power of buyers
iv. industry rivalry,
v. substitutes and complements.
Profits
Profits signal where resources are most highly valued by society, and, therefore best allocated.
Markets
There are two sides to every transaction in a market: For every buyer of a good, there is a corresponding seller. The final outcome of the market process, then, depends on the relative power of buyers and sellers in the marketplace.
Consumer-Producer Rivalry
Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices.
Consumer-Consumer Rivalry
When limited quantities of goods are available, consumers will compete with one another for the right to purchase the available goods (bidding).
Producer-Producer
Given that customers are scarce, producers compete with one another for the right to service the customers available.
Incentives
Within a firm, incentives affect how resources are used and how hard people work.
The key is to design a mechanism such that if the manager does what is in Y’s own interest, he will indirectly do what is best for X.
If the firm does well, the CEO receives a large bonus. If the firm does poorly, the CEO receives no bonus and risks being fired by the stockholders.
Bonuses (bonuses are in direct proportion with the firm’s profitability).
