Chapter 5 Flashcards
1
Q
Economics
A
- a science that studies human behavior as the relationships between ends and scarce means that have alternative uses
- about individuals, corporations or governments and they choices they make
2
Q
Business Cycle
A
- refers to the rise and fall of economic activity relative to long-term growth trends
- vary in duration and severity
- analysis of business cycle is part of macroeconomics
- macroeconomics examines the determinants of national income, unemployment, inflation and how monetary and fiscal policies affect economic activity
- healthcare services are typically not affected by
3
Q
Gross Domestic Product (GDP)
A
- total market value of all final goods and services produced within the borders of a nation
- excludes goods that have been resold
- all final goods and services produced by recourses within a country regardless of who owns that resource
4
Q
Business Cycle Phases
A
- Expansionary Phase:
- rising economic activity (GDP) and growth
- economic activity rises above long term growth trend
- increased profits, workforce, and prices
- Peak:
- high point of economic activity
- end of expansionary
- profits at the highest level
- firms face capacity constraints and input shortages
- leads to higher costs and higher overall price
- economy will be at the natural rate of unemployment
- Contractionary Phase
- falling economic activity
- profits are falling
- Through:
- low point of economic activity
- significant excess production capacity
- workforce reduction and cost cutting
- Recovery Phase
- economic activity begins to increase and return to long term growth trends
- profits begin to stabilize as demnd begins to rise
variations between business cycles are attrubtable to duration and intensity
5
Q
Recession
A
occurs when the economy experiences negative economic growth
two consecutive quarters of falling national output
profits fall and firms incur losses
firms have excess capacity
resources under utilized and unemployment is high
expereiences a drop in customer purchases and a rise in business inventories of durable good
wages grow slowly
business investment in plant and equiptment sharply drop and profits fall
both interest rates and stock prices fall
potential output will exceed actual output
6
Q
Depression
A
a severe recession
characterized by a relatively long period of stagnation in business activity
high employment rates
significant excess capacity
firms going out of business
7
Q
Leading Indicators
A
- tend to predict economic activity
- they change before economy starts to follow certain trend
- include
- average new unemployment claims
- building permits of residents
- average length of workweek
- money supply
- standards & poos 500 stock index
- orders for goods
- price chances of materials
- index of consumer expectations
- interest rate spread
- index of supply deliveries
8
Q
Lagging Indicators
A
- tend to follow economic activity
- signal after the after
- confirm or dispute previous forecasts and the effectiveness of policy directives
- include:
- prime rate charged by banks
- average duration of unemployment
- commercial and industrial loans outstanding
- consumer price index for services
- consumer debt-to-income ratio
- changes in labor cost per unit of manufacturing output
- inventories-to-sales ratio
9
Q
Coincident Indicators
A
- change at the same time as the whole economy
- provide information current state of economy
- used to identify, after the fact, peaks and troughs in a business cycle
- include:
- industrial production
- manufacturing and trade sales
- industrial production (GDP)
- personal income less transfer payments
10
Q
Perfect (Pure) Competition
A
- no individual firm can influence the market price of its product nor shift the market supply sufficiently to make a good scarcer or more abundant
- strategies:
- maintaining market share and responsiveness of the sales price to market conditions
- assumptions:
- large # of suppliers and customers act independently
- firms are small relative to industry
- no barriers to entry
- very little product differentiation (homogeneous products)
- firms are prices takers
- price is set by market
- firms control only the quantity produced
- demand is perfectly elastic
- entry and exit of new firms ensures that economic profits are zero in long run
11
Q
Monopolistic Competition
A
- exists when many sellers compete to sell a differentiated product in a market into which the entry of new sellers is possible
- assumptions
- numerous firms with differentiated products
- firms are small relative to industry
- few barriers to entry
- firms exert some influence over price and market through differentiation
- firms have more control over quantity produced than over price
- differentiation results in a highly elastic but downward-sloping demand curve
- because of few barriers to entry, in the long run
- strategies
- maintain market share
- enhanced product differentiation
- extensive allocation of resources to advertising, marketing, product research
12
Q
Oligopoly
A
- very few sellers dominate the sales of a product and entry of new sellers is difficult or impossible
- assumptions
- relatively firm firms with differentiated products
- firms large relative to industry
- significant barriers to entry (high capital costs)
- firms have control over both quantity produced and price charged
- have kinked demand curve because firms match price cuts of competitors but ignore price increases
- because of high barriers to entry, profits are positive in long term
- strategies
- strategic plans focus on market share and call for the proper amount of advertising and ways to properly adapt to price changes or required changes in production volume
- when an oligopolist lowers its price, other firms in the oligopoly will match the price reduction, but if the poligopolist raises its price, the other firms will irgnore the price change
- profitability from production levels that maximize profits
- Game Theory Model
13
Q
Monopoly
A
- represents concentration of supply in the hands of a single firm (utility companies)
- assumptions
- single firm with unique product
- insurmountable barriers to market entry
- set both output and price
- no substitute products
- demand is inelastic
- profits are positive in long term
- strategies
- likely to ignore market share and focus on profitability from production levels that maximize profits
14
Q
Monopoly
A
- represents concentration of supply in the hands of a single firm (utility companies)
- assumptions
- single firm with unique product
- insurmountable barriers to market entry
- set both output and price
- no substitute products
- demand is inelastic
- profits are positive in long term
- strategies
- likely to ignore market share and focus on profitability from production levels that maximize profits
- Marginal Revenue equals Marginal Cost
- Natural Monopoly exists when economic and technical conditions permit only one efficient supplier
15
Q
Market Assumptions and Conditions
A
firm will operate best when marginal revenue equals marginal cost
microeconomic theory holds that firms make decisions based on marginal cost and marginal revenue (ignoring fixed or sunk costs)
16
Q
Fiscal Policy
A
- government’s use of governments spending and taxation to influence the economy
- spending includes subsidies, public works projects, welfare programs and salaries paid to government employees
- taxation fund government and includes taxes on income, property, gains from investments and sales
- can be expansionary or contractionary
- more money devoted to national programs and activities leads to increased production, lower unemployment and higher consumer spending
- decreased taxes result in higher net income and profits allowing entities to potentially increase employee compensation, pay higher dividends, and have more discretionary income to invest in profitable project
17
Q
Monetary Policy
A
- used by nation’s central bank (Federal Reserve) to affect money supply, interest rates, and credit available in the economy
- designed to promote stable prices, maximum employments, moderate interest rates and long-term economic growth
- tools
- open market operations
- government buying and selling government securities
- buying increases money supply and expands economy
- selling decreases money supply and contract the economy
- changes in the discount rate
- interest rate of federal reserve
- increase also increases interest rates, discourages borrowing, and reduces the money supply which slows economy
- decreases has opposite effect
- changes in required reserve ratio
- dictates how much money a bank is required to hold in its vault or on deposit with the federal reserve
- higher the ratio decreases the money supply and contracts the economy
- lower has opposite effect
- open market operations
18
Q
Regulations
A
- rules established by a government that guide how an industry and its entities can operate
- generally used to provide protection to individuals and employees, to hold entities accountable for their actions, and to safeguard the environment
- can make it difficult for small or mid size firms to complete
18
Q
Regulations
A
- rules established by a government that guide how an industry and its entities can operate
- generally used to provide protection to individuals and employees, to hold entities accountable for their actions, and to safeguard the environment
- can make it difficult for small or mid size firms to complete
19
Q
Trade Controls
A
- restrict transactions and transfers of goods, services, software, and technology
- protect domestic industries by reducing foreign competition
- examples:
- tariffs
- taxes on imports with increase the prices of foreign goods and make them less competitive
- source of revenue
- quotas
- limits on quantity of a good that can be imported over time
- help protect specific industries
- embargoes
- prohibit the importing or exporting of certain goods from a specific country
- tariffs
20
Q
Demand Curve
A
- illustrates the maximum quantity of a good that consumers are willing and able to purchase at each and every price with all else being equal
- microeconomic
- the impact tha price has on the amount of a product purchased
21
Q
Quantity Demanded
A
- defined as the quantity of a good or service individuals are willing and able to purchase at each and every given price all else being equal
22
Q
Change in Quantity Demanded (Movement Along the Demand Curve)
A
- change in the amount of a good demanded resulting solely from a change in price
- shown as movements along the demand curve
- when assumptions regarding price or quantity change, the demand point will change along this demand cure
23
Q
Change in Demand (Movement of the Demand Curve)
A
- change in the amount of a good demanded resulting from a change in something other than the price of the good
- causes a shift in the demand curve
24
Q
Fundamental Law of Demand
A
- states that the price of a product or service and the quantity demanded of that product or service are inversely related
- reasons:
- Substitution Effect
- fact that consumers tend to purchase more (less) of a good when its price falls (rises) in relation to the price of other goods
- Income Effect
- means that as prices are lowered with income remaining constant, people will purchase more or all of the lower-priced product
- Substitution Effect
25
Q
Factors that Shift Demand Curve (other than price)
A
- Changes in Wealth
- Changes in the Price of Related Goods (Substitutes or Compliments)
- Changes in Consumer Income
- Changes in Consumer Tastes or Preferences for Product
- Changes in Consumer Expectations
- Changes in the Number of Buyers Served by the Market
26
Q
Supply Curve
A
- illustrates the maximum quantity of a good that sellers are willing and able to produce at each and every price, all else being equal
- microeconomics
27
Q
Quantity Supplied
A
- amount of a good that producers are willing and able to produce at each and every given price, all else being equal
28
Q
Changes in Quantity Supplied (Movement Along the Supply Curve)
A
- change in the amount producers are willing and able to produce resulting solely from a change in price
- represented as movement along the supply curve
29
Q
Change in Supply (Movement of the Supply Curve)
A
- change in the amount of a good supplied resulting from a change in something other than the price of the good
- causes shift in the supply curve
30
Q
Factors that Shift Supply Curves
A
- Changes in price Expectation of the Supplying Firms
- Changes in Production Costs (Price of Inputs)
- Changes in the Price or Demand for Other Goods
- Changes in Subsidies or Taxes
- Change in Production Technologies
31
Q
Market Equilibrium
A
- when there are no forces acting to change the current price/quantity combination
- point at which supply and demand curve intersect = equilibrium price
32
Q
Changes in Equilibrium
A
- effects of a change in demand on equilibrium
- increase in demand will result in an increase in price
- effects of a change in supply on equilibrium
- increase in supply will result in decrease in price
- increase in supply and demand results in an increase in equilibrium quantity but effect on price is indeterminate
- if increase in demand is larger than increase in supply, equilibrium price will rise
33
Q
Price Ceilings
A
- maximum price that is established below the equilibrium price which causes shortages to develop
- artificially low prices generating a demand
34
Q
Price Floors
A
- minimum price set above equilibrium price which causes a surpluses to develop
- minimum wages and agricultural prices
35
Q
Elasticity
A
measure of how sensitive the demand for, or supply or, a product is to a change in price
36
Q
Price Elasticity of Demand
A
Ep = Price of Elasticity of Demand = % change in quantity demanded
% change in price
- on a normal demand curve, price elasticity of demand is usually negative
- the absolute value of the elastic coefficient (positive value) is considered when elasticity problems are posed on the examination
- Product demand is more elastics when more substitutes are available
- product with high price elsaticity of demand had many substitutes
- basic determinant is number of substitutes available for the product
- if demand is price inelastic, an increase in price will result in an increase in total revenue (positive relationship)
37
Q
Price Inelasticity (Absolute Price Elasticity of Demand < 1.0)
A
- the smaller the number the more inelastic the demand for the good
- if zero, indicates that no matter how the price changes, the demand will remain constant
38
Q
Price Elasticity (Absolute Price Elasticity of Demand > 1.0)
A
- the greater the number, the more elastic the demand
39
Q
Unit Elasticity (Absolute Price Elasticity of Demand = 1.0)
A
- if percentage change in quantity demanded caused by a price change equals the percentage change in price
40
Q
Factors Affecting Price Elasticity of Demand
A
- product demand is more elastic with more substitutes available
- the longer the time period, the more product demand becomes elastic because more choices are available
41
Q
Price Elasticity Effects on Total Revenue
A
42
Q
Price Elasticity of Supply
A
Ep = Price Elasticity of Supply = % of change in quantity supplied
% change in price
*
43
Q
Price Inelasticity (Supply < 1.0)
A
44
Q
Price Elasticity (Supply > 1.0)
A
if absolute price is greater than 1
45
Q
Unit Elasticity (Supply = 1.0)
A
perfectly inelastic if equals 0 and reflects that quantity supplied is insensitive to price changes
46
Q
Factors Affecting Price Elasticity of Supply
A
- feasibility of producers storing the product will affect the price elasticity of supply
- time required to produce and supply the good will affect
47
Q
Cross Elasticity
A
- of supply or demand
- percentage change in the quantity demanded or supplied of one good caused by the price change of another
Ce = Cross Elasticity of Demand (or Supply) = % change in number of units of X demanded (supplied)
% change in price of Y
48
Q
Substitute Goods (Positive Coefficient)
A
- price of Product Y goes up, causing the demand for Product X to go up
49
Q
Complementary Goods (Negative Coefficient)
A
- increase in the price of Product A results in the decrease in the quantity demanded for Product B
50
Q
Unrelated Goods
A
- if the coefficient is zero, goods are unrelated
51
Q
Income Elasticity of Demand
A
Ie = Income elasticity of demand (supply) = $ change in number of units of X demanded (supplied)
% change in income
- if income elasticity of demand is positive, demand increases as income increases (NORMAL GOOD)
- if income elasticity of demand is negative, demand creases as income increases (INFERIOR GOOD)
52
Q
Effect of Inflation on Prices
A
- inflation is defined as a sustained increase in the general prices of goods and services and occurs when prices on average are increasing over time
- inflation has inverse relationship with purchasing power
- as prices rise, the value of money declines
53
Q
Effect of Inflation on Investments
A
- Debt Investments
- with floating rates have coupon payments tied to interest rates
- principal payment, which is fixed, will lose value due to inflation
- Equity Investments
- may provide dividends
- inflation will erode the value of dividends
- inflation causes production cost to rise, which drives up sales prices
- Alternative Instruments
- used to hedge against inflation
- real-estate tends to out grow inflation over time
- commodities are used
- in periods of high inflaction, those with fixed debt would be most likely to gain
54
Q
Effect of Inflation on Debt
A
- interest rate adjustments often lag price-level changes
55
Q
Internal Factors that Influence Strategy
A
- Strengths and Weakness
- Include
- innovation of product lines
- competence of management
- core competencies
- influences of high-level management
- capital improvements
- leadership in research and development
- cohesiveness of the values of organization
- marketing effectiveness
- effectiveness of communication
- clarity of strategic mission
56
Q
External Factors that Influence Strategy
A
- Opportunities and Threats
- Overall Industry and Competitive Environment of Industry
- economy
- regulations and laws
- demographics of the population
- technological advances and existing technologies
- social values
- political issues
- Factors that Affect Competitive Environment of the Firms
- Barriers to market entry
- market competitiveness
- existence of substitute products
- bargaining power of the customers
- bargaining power of suppliers
- Overall Industry and Competitive Environment of Industry
57
Q
SWOT Analysis
A
- (S) Strengths
- (W) Weaknesses
- (O) Opportunities
- (T) Threats
58
Q
Porter’s Five Forces
A
- Barriers to Entry
- Market Competitiveness
- Existence of Substitute Products
- Bargaining Power of the Customers
- Bargaining Power of the Suppliers
59
Q
Barriers to Entry
A
- Types:
- government regulations
- Supplier access
- high-up front capital requirements
- preexisting customer preferences and loyalties
- economies of scale
- learning-curve issues
- patents, trade barriers
60
Q
Market Competitiveness
A
- Most significant of the 5 forces
- Include:
- Ability of Rival Firms to Respond to Change
- Advertising of Rival Firms
- Research and Development of Rival Firms
- Alliances of Rival Firms and Suppliers
- Market is not growing fast
- No strong brand preference
61
Q
Existence of Substitute Products
A
- effects firm’s ability to sustain profits
- especially true when readily available, have equal performance, and are pried at or below firm’s product
- especially true when cost to switch is low
62
Q
Bargaining Power of Customers
A
- Large Volume of Firm’s Business
- High Buyer Concentration
- Availability of Information allows for compare and contrast of the product
- Buyer’s Low Cost of Switching Products
- High Number of Alternative Suppliers
63
Q
Bargaining Power of Suppliers
A
- Firm is unable to change suppliers
- reputation of supplier and demand for goods
64
Q
Competitive Advantage
A
- determined by the value the firm offers to its customers minus the cost of creating that value
- Forms:
- Cost Leadership Advantage
- Differentiation Advantage
65
Q
Cost Leadership Advantage
A
- stems from fact that buyers of product are better off because firm can sell product at a lower cost than rivals
- methods:
- Build the Market Share
- Match the Price of Rivals
- fails when buyers become less price sensitive and start to have brand loyalty
66
Q
Differentiation Advantage
A
- offering advantage
- stems from the fact that buyers are better off because the customer perceives the firm’s product to be superior in some way to those of its rivals
- willing to pay a higher price
- ex.
- higher quality, timeliness of delivery, superior service, wide range of goods, fewer risks, performance measures
- types:
- Build Market Share
- Increase Price
67
Q
Five Basic Types of Competitive Strategies
A
- Cost leadership focused on broad range of buyers
- cost leadership focused on narrow range (niche) of buyers
- Differentiation focused on a broad range of buyers
- Differentiation focused on a narrow (niche) of buyers
- Best Cost Provider
68
Q
Cost Leadership Strategies
A
- works well in markets in which buyers have large amounts of bargaining powers and are able to switch between competitive products without incurring significant costs
- fails when firms focus too much on cutting costs of the current process, they may overlook technological advances that could help lower costs or overlook the fact that consumers may want improvements to the product or care so much about price
69
Q
Differentiation Strategies
A
- works well when customers are able to see value in product, when the product appeals to different people for different reasons, and when the firms that are competing in the market choose different features to differentiate their products
- fails when firms differentiate in an area without properly assessing the requirements of the consumer for desired features and preferences, or without creating value for the customer
70
Q
Best Cost Strategies
A
- combination of cost leadership and differentiation strategy to give customer high value for their purchase price
- works well when generic products are not acceptable to the varied needs and preferences of the buyers, but the buyers are still sensitive to value that they are receiving and overall price
- fails when playing the middle because it faces losing customers to other firms that are using cost leadership strategies or those specially focused on differentiation
71
Q
Focus/ Niche Strategies
A
- focused on a small, select group of customers
- specialized needs and preferences
- works well when niche is larger enough to create a profit for the firm and when few firms are focusing in an area where others cannot compete in price
- fails when competitors enter market and take sales away from firm
72
Q
Motivations for International Business Operations
A
- entities are encourages to look beyond political borders to maximize shareholder values
73
Q
Comparative Advantage
A
- specialization in the production and trade of specific products
- companies and countries use to maximize the value of their efforts and resources
74
Q
Imperfect Markets
A
- ability to trade between markets is often limited by the physical immobility of resources or regulatory barriers
75
Q
Product Cycle Theory
A
Predicts that domestic success will results in domestic competition, encouraging the export of products or services to meet foreign demand and to maintain efficient use of capacity
76
Q
Methods for Conducting International Business Operations
A
- International Trade
- by exporting and importing products and service
- Licensing
- entities that provide the right to use processes or technologies in exchange for a fee
- Franchising
- entities whose marketing service or delivery strategy provides training and related service delivery resources in exchange for a fee
- Joint Ventures
- takes advantage of comparative advantage of one or both of the participants in marketing or delivering products
- Direct Foreign Investment
- DFI
- entity may establish international operations by purchasing a foreign company as a subsidiary or by starting a subsidiary operation with the borders of a foreign country
- Global Sourcing
- the synchronization of all levels of product manufacturing, including R&D, production, and marketing on an international basis
77
Q
Relevant Factors of International Business Operations
A
- Political and Legal Influences
- Potential for Asset Expropriation
- Taxes and Tariffs (handled through transfer pricing)
- Limitation on Asset Ownership or Joint Venture Participation (government may limit)
- Content or Value Added Limits (sourcing requirements)
- Foreign Trade Zones (government established NAFTA)
- Economic Systems
- Centrally Planned Economics (China)
- Market Economies (US & Japan)
- Conglomerates (Korean chaebol)
- Culture
- Individualism vs. Collectivism (US v Japan)
- Uncertainty Avoidance
- Short-term vs. Long-term (US v Asian)
- Acceptance of Leadership Hierarchy
- Technology and Infrastructure
- communication systems
- trasnportation systems
- power and water sources
- training of staff
- differences in accounting practices
78
Q
Inherent Risks of International Business Operations
A
- Exchange Rate Fluctuations
- transaction risk
- economic risk
- translation risk
- Foreign Economies
- Political Risks
- represent noneconomic events or environmental conditions that are potentially disruptive to financial operations
- can disrupt cash flows
- examples:
- bureaucracies and related inefficiencies or barriers to trade
- corruption
- host government’s attitude toward foreign firms
- attitude of consumers toward foreign firms
- inconvertibility of foreign currency
- war
79
Q
Foreign Economies
A
- Foreign Demand
- directly affected by the health of economy of country
- weakening demand may cause the foreign government to implement tariffs or other regulatory measures that reduce foreign penetration
- Interest Rates
- higher interest rates in foreign country are indicators of slower economic growth and reduced demand
- Inflation
- higher lower economy inflation reduces purchasing power making imported goods more expensive
- Exchange Rates
- weak local currency reduces demand for imported goods
80
Q
Business Combinations
A
- Horizontal
- Vertical
- Circular
- Diagonal
transactions include mergers, acquisitions, consolidations, tender offers, purchases of assets, and management acquisition
81
Q
Horizontal Combination
A
- occurs when companies in the same industry that produces the same goods or provide the same services join together under single management/ leadership
- reduced competition
- economies of sale to reduce costs
- expertise at various levels of production
- minimized overproduction
- maximized profits
- ex. merger between Heinz and Kraft Foods
82
Q
Vertical Combination
A
- involves the combination of companies at different stages of the production process
- same or different industries
- can assure supply of raw materials (backward integration)
- provide a stable market for products sold (forward integration)
- ex. Time Warner merged with Turner Broadcasting
83
Q
Circular Combination
A
- occurs when different business unit with relatively remote connections come together under single management
- can come from using similar distribution or advertising channels
- can come from requiring similar production processes
- reduces overall administrative and other operational costs
- ex. Pharma Inc acquired Letson Watson- a company specializing in building residential real estate for adult communities 55 and older
84
Q
Diagonal Combination
A
- Occurs when a company that engages in an activities integrates with another company that provides ancillary support for that primary activity
- purpose is to ensure the ancillary support is delivered in a timely and effective manner
- ex. organic meat producers purchases the company that delivers their product to stores
85
Q
Merger
A
- two or more entities combine to form a single new corporation
86
Q
Acquistion
A
- the acquisition of one company by another involves no new company
- only acquirer remains afterward
87
Q
Tender Offer
A
company makes an offer directly to shareholders to buy the outstanding shares of another company at a specified price
offer may be in the form of cash or securities of the acquiring corporation
shareholders can accept or reject
88
Q
Purchase of Assets
A
- occurs when a portion (or all) of the selling company’s assets are purchased by the acquiring company which may result in the dissolution of the selling company
- shareholder approval required
89
Q
Divestiture
A
- involves the partial or full disposal of a component or business unit of a company
- include
- sell-offs
- outright sale of a subsidiary
- can be because of lack of synergy or anticompetitive or antitrust practices
- spin-offs
- creates a new, independent company by separating a subsidiary business from a parent company
- can be completed by distributing stock in the new entity
- typically occur when a unit is less profitable and/ or unrelated to the core parent business
- equity carve-outs
- occurs when a subsidiary is made public through an initial public offering (IPO)
- sale of shares generates cash for parent company and give controlling interest
- sell-offs
90
Q
Dumping
A
According to International Law, dumping occurs when the price charged to forgeign customers on exported goods is less than either the price charged in domestic market or less than the production cost
91
Q
Microeconomic
A
in the long run on the supply side all inputs are variable
92
Q
Real Cost
A
= Future Value
(1 + Inflation Rate) ^n
93
Q
Tender Offer
A
a public bid for stockholders to sell their stock. Usually at a higher price than market so that purchasers (usually a company) can gain conrolling interest in the company
94
Q
Price Discrimination
A
Most sucessful in markets with fairly distinct segments of customers
