Concise Language Flashcards
Opportunity Cost
The cost of not doing something, because we did something else instead. Shifting of resources.
Limitations of Neoclassicial Economics
- Premise that production is fully maximized/utilized, and are therefore scarce
Aggregate
A whole or total, made up of many different parts or separate units
Net Operating Surplus
Net Income from rent, interest, and profits
Nonprofit Legal Entity Type
Corporation
Nonprofit Tax-Exempt Organization Classification
501(c)s
Nonprofit Types (3)
- Private foundations 501(c)3
- Public charities 501(c)3
- 501(c)1s through 501(c)27s
Private Foundations
501(c)3 organization. Individual/family/corporation endowed as a nonprofit to provide support to public charities.
501(c)1-27 organizations
Nonprofits that are tax-exempt, but for which donors do not receive a tax deduction. Includes civic organizations, business leagues, trade associations, labor unions, and social/recreational leagues.
Steps to seeking Nonprofit Status
- File for corporation status in any of the 50 states
- Create articles of incorporation and bylaws. File articles of incorporation with the state (following IRS guidelines)
- Once state has approved corporation status, request tax-exempt status with the IRS
- Receive IRS approval
Board of Trustees
Sets up and runs the committee structure within the board. Hires an executive director (which hires staff). Carries fiduciary responsibility to oversee the nonprofit.
Prudent Investor Rule
Protects trustees from personal liability in the case of investment loss, as long as errors in judgement were made in good faith
Budget Constraint Line
Maps possible combinations of 2 goods that are affordable given a customer’s limited income
Utility
Satisfaction with one’s consumer choices
Law of Diminishing Marginal Utility
Common pattern that each marginal unit of a good provides less utility than the previous unit
Marginal Utility
Additional utility provided by one additional unit of consumption
Normal Goods
Goods for which a rise in income leads to rise of consumption, and decline in income leads to fall of consumption
Inferior Goods
Demand declines as income rises, or demand rises as income falls
Substitution Effect
Price changes and consumers have incentive to consume less of a good with higher price, more of a good with lower price
Income Effect
Higher price means the buying power of income has been reduced, which leads to buying less of the good
Elasticity
Concept measuring responsiveness of one variable to changes in another variable
Elasticity
Measures responsiveness of one variable to changes in another
Price Elasticity
(% change in quantity demanded or supplied)/(% change in price)
Elasticities (3)
- Elastic
- Unitary
- Inelastic
Elastic
Responsive to change in price (% change in quantity > % change in price)
Unitary
Proportional response of supply/demand to change in price (% change in quantity = % change in price)
Inelastic
Unresponsive to change in price (% change in quantity < % change in price)
Midpoint Method for Elasticity
Calculating Elasticity based on average % changes in quantity and price. Obtains same elasticity between 2 price points whether there is price increase or decrease.
Infinate/Perfect Elasticity
Quantity demanded/supplied changes by an infinite amount in response to change in price (exreme)
Zero Elasticity/Perfect Inelasticity
Change in price results in zero change in quantity (extreme)
Constant Unitary Elasticity
Price change of 1% results in quantity change of 1%
Value
Personal biases and subjective beliefs
Use-Value
Human material production should be directed toward creation of things that benefit human beings (be thoughtful, not wasteful)
Utilitarianism
People maximize pleasure, minimize pain
Cardinal Utility
Objective/quantifiable utility a consumer assigns a product
Ordinal Utility
Subjective utility in the mind of the consumer, not measurable
Financial Statements for a For-Profit Organization (2)
- Balance Sheet
2. Profit & Loss
Financial Statements for a Non-Profit Organization (2)
- Statement of Financial Position
2. Statement of Activities (general/management, fundraising, and programs)
Breakdown of Nonprofit Activity Expenses (3)
- Management & General
- Fundraising
- Programs
Purpose of Nonprofit Organization
To fulfill a need or mission, and to serve its community. Requires transparency and accountability.
Purpose of For-Profit Company
To make a profit for its owners/shareholders
Nonprofit Net Asset Types (3)
- Unrestricted
- Temporarily Restricted
- Permanently Restricted
Unrestricted Net Assets (Nonprofit)
Assets & Donations that can be used for any purpose
Permanently Restricted Net Assets (Nonprofit)
Donated funds from which only the earnings can be used, not the principal
Temporarily Restricted Net Assets (Nonprofit)
Assets & Donations that are designated by the donor to be used for a specific purpose
Primary Accounting Difference between Nonprofits & For-Profits
Nonprofits show Net Assets on “equity” section of financial statements
For-Profits show Owners show Owner’s Equity on BS
Economic Entity Assumption (GAAP Assumption)
Assumes business functions/records are kept separate from owner’s personal financial transactions
Going Concern Assumption (GAAP Assumption)
Assumes business is to be in operation for a long time
Monetary Unit Assumption (GAAP Assumption)
Assumes a business will divide financial reporting records into artificial time periods
Cost Principle (GAAP Principle)
Requires that assets & liabilities be recorded at their acquisition price (regardless of FMV)
Revenue Recognition Principle (GAAP Principle)
Requires revenue to be recorded when it is earning and realized
Matching Principle (GAAP Principle)
Expenses must be recorded in the same period as the revenue associated with those expenses
Disclosure Principle (GAAP Principle)
Requires all companies to fully disclose information that may impact decisions (buy/sell/hold stock, for example) of users of financial information
Objectivity Principle (GAAP Principle)
Financial statements should be based on objective evidence
Materiality Principle (GAAP Constraint)
Significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.
Consistency Principle (GAAP Constraint)
Organization must use the same accounting principles and methods from period to period
Conservatism (GAAP Constraint)
When choosing between 2 solutions, the one which has the less favorable outcome is the solution which should be chosen
Cost Constraint (GAAP Constraint)
The benefits of reporting financial information should justify and be greater than the costs imposed on supplying it
Time Period (GAAP Assumption)
Assumption that statements are broken down into artificial time periods (quarter, year)
Cash Accounting
Recognize revenue when cash is received and expenses paid
Accrual Accounting
Recognize revenue when earned and expenses when incurred
Fund Accounting
Allows an organization to track how it’s using a pool of resources within a certain activity/group of activities. Allows donors to donate to a particular activity.
Form 1023
Tax-Exemption request form. Must be approved by the IRS to be a nonprofit organization.
Inflation Rate % Change (calc formula)
(CY - PY)/CY x 100 = % Change
Substitution Bias
Rise in price of fixed basket of goods over time, not taking into account a person may substitute away the goods whose relative prices have risen
CPI (Consumer Price Index)
Most commonly cited measure of inflation in the US. Calculated by Bureau of Labor Statistics on prices in a fixed basket of goods/services that represent purchases of average family of four
Quality/New Goods Bias
Price in fixed basket of goods over time tends to overstate consumer’s cost of living, because it does not take into account how standard of living increases with better quality of old goods or arrival of new goods
Core Inflation Index
Measure of inflation using CPI and excluding volatile economic variables (energy and food prices) that are more likely to have prices that shoot up and down
GDP Deflator
Price index that includes all the components of GDP (C+I+G+Net Exports). GDP Deflator = (Value of Nominal GDP)/(Value of Real GDP x 100
Bonds
Government offers bonds for sale, which will be repaid at a fixed rate of interest or (indexed) at a certain rate above inflation rates.
Demand
Amount of good or service consumers are willing and able to purchase at each price
Price
What a buyer pays for a unit of specific good or service
Law of Demand
Inverse relationship that as price increases, demand decreases
Demand Schedule
Table that shows the quantity demanded at each price
Demand Curve
Shows relationship between price and quantity demanded
Supply
Amount of good or service a producer is willing to supply at each price
Law of Supply
Positive relationship between supply and price. Higher price of a good or service leads to higher supply, and vice versa.
Equilibrium (Supply and Demand)
The price and quantity of a good or service that will be bought/sold in a market, as determined by where supply and demand intersect
Excess Demand or Shortage
Price of good or service is below Equilibrium
Excess Supply or Surplus
Price of good or service is above Equilibrium
Ceteris Paribus (Latin)
“Other things being equal” assumption of a supply and demand curve. All other variables assumed constant.
Normal Good
A product whose demand rises when consumer income rises, and vice versa
Inferior Good
A product whose demand falls when consumer income rises, and vice versa
Factors that Shift Demand Curves
- Consumer Income
- Population changing preferences/tastes
- Changes in composition of the population
- Changes in expectations about price or quality
- Price for substitute changes
- Price for complement changes
Substitute
Good or service that can be used in place of another
Complements
Goods are often used together (ex: cereal and milk)
Factors that Affect Supply
- Natural conditions (weather, etc)
- New technology that lowers production cost
- Government policy (tax or subsidy)
Price Controls
Laws the government enacts to regulate prices, often using a ceiling or a floor
Price Ceiling
Keeps a price from rising above a certain level (price control)
Price Floor
Keeps a price from falling below a certain level (price control)
Efficiency
When it is impossible to improve the situation of one party without imposing a cost on another
Consumer Surplus
(Amount individual is willing to pay) - (Amount individual actually paid)
Producer Surplus
(Amount seller paid for a good) - (Seller’s actual cost)
Social Surplus/Economic Surplus/Total Surplus
(Consumer Surplus) + (Social Surplus)
