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ECON 102 > Exam -2 Chapter 6- Consumers And Firms > Flashcards

Exam -2 Chapter 6- Consumers And Firms Flashcards

1
Q

Utility

A

Is the happiness gained from a good.

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2
Q

cardinal utility

A

It cannot be directly measured

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3
Q

ordinal utility

A

it can be expressed as rankings of goods

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4
Q

It is not possible to meaningfully compare the utility or happiness of one person to the utility or the happiness of another person

A

True

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5
Q

Pareto optimality

A

The only way to know that a choice has made society ( or any group of people)better off is if no one is made worse off and at least one person is made better off

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6
Q

Total utility

A

The total utility is the sum of the utility obtained by a person’s entire consumption of a good.

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7
Q

Marginal utility

A

The marginal utility is the additional utility obtained by The consumption of one or more good

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8
Q

The law of diminishing marginal utility

A

States that as we can consume more of any one good, eventually the additional utility obtained from consuming more will decline.

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9
Q

What is the way for a consumer to maximize their utility?

A

It is to equate the marginal utility to the price for every good they buy.

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10
Q

When is a decision considered to be rational?

A

If we expect a result of that decision to make us better off

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11
Q

The substitution effect

A

When the price of a good changes The quantity of that good purchased changes because we can substitute towards or away from other goods whose price relative to the good has changed

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12
Q

Purchasing power

A

Is the real income of the consumer

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13
Q

Why does the quantity of all goods changes in the substitution effect

A

Because the new price of the good changes the real income or purchasing power of the consumers income. They will be able to afford more or fewer of all the goods. ( the income effect)

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14
Q

What does the price elasticity of demand measure?

A

It measures the responsiveness of the quantity demand it of a good to changes in its price

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15
Q

When does a good have an elastic demand

A

A good has an elastic demand if the percentage change in quantity demanded is larger than the percentage change in price.

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16
Q

Inelastic demand

A

Inelastic demand means that a larger percentage change in price is required to create a certain percentage change in quantity demanded.

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17
Q

Businesses facing elastic demand will be

A

Price sensitive, and have incentive to keep prices low

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18
Q

Businesses under inelastic demand will prefer and try

A

To maintain higher prices.

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19
Q

When does the elasticity of any good becomes more elastic?

A

The elasticity of any good becomes more elastic as time is considered.

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20
Q

Sole proprietorship

A

Most businesses are sole proprietorships,meaning that they are owned by one person who is entirely liable for their operations.

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21
Q

Partnership

A

A partnership exist when two or more people own a business and are entirely liable for its operations

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22
Q

Corporation

A

A corporation is a legally created entity that operates a business, and in doing so shields the owner of the business [its stockholders] from liability for its operations.

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23
Q

The corporation is subject to a

A

Separation of ownership and control of the company

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24
Q

A multinational corporation

A

Has assets and employees in more than one country. It operates through the ownership of subsidiary companies in other countries that it owns, at least in part.

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25
Q

Profit of a business

A

Profit off of business is equal to its revenue minus it’s opportunity cost.

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26
Q

Opportunity cost

A

Opportunity cost includes the explicit (money )cost and implicit (non-money )costs

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27
Q

Normal profits

A

Normal profit is enough profit to continue operations of the business and should be considered a cost of doing business.

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28
Q

Economic profit

A

Economic profit is the excess profit over normal profit

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29
Q

Utility

A

Utility is the economists word foe happiness or satisfaction

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30
Q

It is assumed that consumers

A

Attempt to maximize their utility and minimize their disutility. ( unhappiness)

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31
Q

Consumers do that which gives them the

A

The most pleasure, and avoid that which causes them pain

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32
Q

What do economists use to measure utility

A

Util is used as the basic measure of utility

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33
Q

Cardinal measurements

A

When we can exactly measure the value of something.

But cardinal measurement is not possible

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34
Q

Ordinal measurement

A

It occurs when we can put a group of things in order ( rank them) from highest to lowest.

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35
Q

Utility measurement is

A

Ordinal because consumers cannot measure their utility, but they can put goods in order of preference.

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36
Q

Not being able to measure utility creates

A

Problems

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37
Q

Interpersonal utility comparisons

A

Difficulty in making utility comparisons between people

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38
Q

It is impossible to make Interpersonal utility comparisons

A

True

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39
Q

Pareto optimality rule was created by whom

A

Vilfredo Pareto

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40
Q

Pareto optimality rule

A

Says that that the only way to guarantee society is better off because of an economic change is if at least one person is made better off, and no one is worse off.

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41
Q

What do we know about utility?

A
  1. We cannot measure it , except in ranking
  2. We cannot compare one persons happiness to another persons except in the most general of terms.
  3. If we want to make a group better off, we can only guarantee that will happen if we make no one in the group worse off, while making at least one person better off.
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42
Q

Total utility

A

Is the sum of all the utility a consumer has received from the consumption of a good.

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43
Q

What is not useful in making decisions about how to maximize our utility?

A

Total utility

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44
Q

Marginal utility

A

Is the additional utility obtained by consuming one more of a good

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45
Q

What does marginal utility do

A
  1. Controls behavior
  2. Define what has value
  3. State what the consumer will consume next
  4. State when the consumer will cease to consume more of a particular good.
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46
Q

——————— is everything when consumer decision making is considered

A

Marginal utility

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47
Q

What is the fundamental concept of economics

A

Scarcity

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48
Q

Since we want more than what we have, we are

A

Willing to pay for it.

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49
Q

If the marginal utility of a good is zero ( more air has no value) then the price of a good and its market value will be

A

Zero

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50
Q

If the marginal utility of a good is positive ( we want more music) then

A

It may have a price and a market value above zero.

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51
Q

Law of diminishing marginal utility

A

States that as I consume more of any good, the additional utility that I get from consuming more of it will eventually decline.

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52
Q

Law of diminishing marginal utility describes

A

People’s behavior

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53
Q

The concept of diminishing marginal utility is also related to the idea of

A

Downward sloping demand curves.

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54
Q

So the demand curve can be thought of as a representation of

A

Marginal utility or marginal benefits.

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55
Q

In part the law do demand is a reflection of the

A

Law of diminishing marginal utility

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56
Q

When does the problem of scarcity show up

A

It shows up in the limited income of consumers and the need for goods to have prices.

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57
Q

Consumers maximize their utility subject to

A

The constraints of their limited income

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58
Q

What determines the Best Buy of a product

A

Best buy can be determined by looking at the utility per dollar.

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59
Q

Optimal solution =

A

Optimal solution =marginal utility divided by price (MU/ price)

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60
Q

What do we expect from consumers

A

That they will always be changing their behaviors to buy more of goods with large marginal utility per dollar value, and less of goods that have smaller marginal utility per dollar. The result is that they are always moving towards the optimal, though they will never reach it.

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61
Q

Rationality

A

Decisions are economically rational if the person chooses that thing which they believe will bring them the greatest happiness.

62
Q

Economists argue that

A

People maximize their expected utility, not their actual.

63
Q

Price changes and consumers behavior

A

When the price of a good rises, it does not affect just the purchases of that good by consumers. Instead, all other goods are affected directly or indirectly

64
Q

When the price of a good rises

A

The consumer substitute away from the newly higher price good to a lower price good

65
Q

Substitution effect

A

When the price of a good rises The quantity of that good demanded will fall, and the demand for other, less expensive, goods will increase. This is the substitution effect.

66
Q

When the price of a good rises

A

It is no different than if the income of the consumer falls . The consumer will tend to buy fewer goods in total

67
Q

Income effect

A

When the price of a good rises, consumers buy fewer of all goods.

68
Q

What does price elasticity of demand measure?

A

It measures the responsiveness of quantity demanded to changes in the price of the good

69
Q

Elastic demand

A

A change in price causes a larger percentage change in quantity demanded

70
Q

Inelastic demand

A

A change in price causes a smaller percentage change in quantity demanded

71
Q

In elastic demand, the quantity demanded is

A

Sensitive to price changes

72
Q

In inelastic demand, the quantity demanded is

A

Insensitive to pricing changes

73
Q

Examples of elastic goods

A

Buyers are sensitive to the price

Furniture, automobiles, airline tickets

74
Q

Examples of inelastic goods

A

Buyers are not sensitive to the price

Basic food products such as salt, wheat, corn, gasoline, housing

75
Q

Revenue and elastic demand

A

As the price decreases, business revenue increases. Consumers response strongly to the price decrease, and by a lot more of the product.

76
Q

Revenue and inelastic demand

A

As the price increases, business revenue increases. Consumers buy regardless of price, so the price increase does not cause them to buy much less of a good.

77
Q

Business behavior with elastic demand

A

Consumers are price sensitive. businesses will push low prices [frequent sales] and try to emphasize value in their marketing

78
Q

Business behavior with inelastic demand

A

Consumers are not price sensitive. Firms rarely have sales. Where possible, the firm will raise the price to increase their revenue

79
Q

Elasticity and time

A

The increase in price will eventually cause a substitution effect

80
Q

What happens to elasticity with time

A

The consumer is insensitive in the short-term, but given enough time, become sensitive to price and changes the quantity demanded

81
Q

Elasticity

A

Sensitivity to prices

82
Q

Elasticity increases as we

A

Consider a longer period of time

83
Q

Understanding elasticity helps the economists explain

A

Some important behaviors and to accurately predict that effect of price changes in certain circumstances.

84
Q

Economists believe that consumers are rational because

A

They would never enter knowingly into a transaction that made them worse off than they were before.

85
Q

Consumer surplus

A

Is the difference between the highest amount that a consumer would have paid for something and the amount that they actually paid.
For example consumer is willing to pay five dollars for sandwich. Cost of sandwich is $4.50. Consumer surplus equals five dollars -$4.50 equals $.50

86
Q

Business firms up classified in the following ways

A

Sole proprietorship, partnership, And corporation

87
Q

proprietorship

A

It is the one person business

88
Q

Most Countries require businesses to

A

Obtain a license from the state, county, and or city

89
Q

proprietorship ends when

A

The owner ceases us to do business ( often by bankruptcy, retirement, or death)

90
Q

Most proprietorship last

A

Five years or less

91
Q

Why does proprietorship rarely grow to be a large business without changing its business form?

A

The reason is liability. The owner of the business and the business are inseparable.

92
Q

Why does the proprietorship have difficulty raising large sums of money to expand or enhance their business?

A

Because banks are typically the only source of business loans and they are often reluctant to loan to small businesses, given the risk associated with them

93
Q

Examples of proprietorship

A

Small construction firms, restaurants that don’t belong to chains, small grocery stores/many markets, hair salons, gardeners, insurance agents, family farms, secretary who sells quilts at the swap meet

94
Q

Partnership

A

Is a business owned by two or more individuals, which suffers from the same liability issues as proprietorships, except that the partners are jointly liable that is you are responsible for what your partner does that same way as if you had done it.

95
Q

Corporation

A

A corporation is a legally created entity that has many of the same rights and privileges of human beings. A corporation has the right of free speech, a fourth amendment right to protection from illegal searches, a right to due process and so on

96
Q

The corporation is essentially a legally created person

A

That represents the business

97
Q

You can identify corporations by the letters

A

Stuck after their names: Inc, Ltd, PlC, LLC etc

98
Q

To start a Corporation

A

One or more people must apply to the government in which the corporation will be housed, so even though a corporation may sell in 200 different countries, it always has a hole in one.

99
Q

What are the advantages of corporations

A

The owners of the corporations are the owners of the shares of stock issued by the company.
They have a right to elect the Board of Directors who actually run the company.
They have a legal shield of liability that encourages people to invest in corporations

100
Q

Suppose a corporation is sued by a customer

A

The customer sues the corporation as an entity, not the owners [stockholders]
If the company is worth $2 million, but loses a 2 billion Dollar lawsuit, the corporation maybe bankrupted, but the owners cannot lose more than the amount they paid for the stock. This is because the consumer cannot sue the stockholder or the people in the corporation, just the corporation itself

101
Q

Stock

A

A share of stock confers on the owner partial ownership of the assets of the company issuing the share.

102
Q

Each share of stock also carries with it

A

One vote in the election of board of directors of the company, who are responsible for the operation of the company.

103
Q

The profits of the company belong to the

A

Stockholders

104
Q

Since the stockholders do not usually run the company

A

They are rarely paid the entire amount of the profits.

105
Q

Typically, the company keeps some of the profits, called

A

Retained earnings, and pays the rest to the stockholders

106
Q

The payments to stockholders are called what

A

Dividends

107
Q

Since stockholders are paid from profits, companies that do not earn a profit

A

Normally will not pay a dividend.

note there are forms of stock that relinquish their voting rights in exchange for a guaranteed dividend

108
Q

What are the stockholders interested in

A

In dividends ( which requires profits) or increase in the value of the stock [which requires profits and/ or growth in revenue of the Firm]

109
Q

Proxy fight

A

An attempt by a person or a group to gain control of a firm by getting its stockholders to grant that person or group the authority to vote its shares to replace the current management. An attempt to overthrow management and take over the business.

110
Q

Why are corporate dividends are among the most heavily taxed income.

A

The dividends of the corporation are Taxed twice in the United States, when the corporation earns a profit , it must pay a tax on that profit to the IRS. The dividends are then paid out of the after-tax profits. When a person receives their dividend check, the dividend counts as a personal income. Thus corporate dividends are among the most heavily taxed income.

111
Q

What are the advantages of financing the corporations through stock

A
  1. There is no requirement of paying dividends. The corporation can raise money without having to pay a cent to the buyers of the stock. If they do pay dividends, The amount is adjustable based on the operations of the company.
  2. There are large number of entities that buy stock, from individual people, mutual funds, to institutional investors such as pension funds. Many of these investors are in for the long-term, meaning that growth is more important to them than dividends, allowing the company to minimize the dividends it bees.
112
Q

What are the disadvantages of financing the corporation through stock?

A
  1. The issuance of new stock dilutes the ownership of the existing stockholders. Existing stockholders will not be happy that their shares have been devalued.
  2. Once the original owner holds less than 50% of the stock, they can be voted out of control of the company by the stockholders.
113
Q

Bonds

A

A bond is essentially a loan made by a person to the company.
It is a promise to repay money given to the firm at a future date with an additional sum of money called interest.
The interest is sometimes paid quarterly or annually , or it can be held and paid as a lump sum when the bond becomes due ( matures)

114
Q

What are the advantages of the corporation selling bonds?

A
  1. That they are attractive to investors who want a set, regular, return on their investment
  2. They do not confer ownership in the company. Once a bond is repaid, The bond holder and the firm are no longer attached. A stock holder and the company or together forever.
  3. If something happens and the company declares bankruptcy, the bond holder is a creditor and is entitled to a payment.
115
Q

When a stock holder owns a bankrupt company

A

They will receive payments out of assets only after all the creditors are paid. Since the company declared bankruptcy, it was unable to pay its creditors, which means that the stockholders expect, and usually get nothing from a bankrupt company

116
Q

Nonprofit corporations

A

They are a special class of corporation that is founded for a public purpose, rather then to earn profits.

117
Q

Examples of non-profit companies

A

Charities and churches, some hospitals, credit unions, private schools, and homeowners association’s

118
Q

What is a nonprofit corporation supposed to do

A

It is supposed to do good deeds, and not earn a profit doing that. It is generally tax exempt, except where its operations are out side of its public purpose

119
Q

All corporations are owned by their

A

Stockholders

120
Q

When the stock of the company is sold to the public

A

The corporation is publicly held. For example in the New York Stock Exchange or on NASDAQ

121
Q

Some corporations are owned

A

By one person, a few people, or by a family. For example Facebook and Microsoft when they started had a small number of private owners.
The stock of these companies is not traded.
These are called closely held or private corporations.

122
Q

Private corporation

A

In a private corporation, the family or small group that owns the stock trades the value of the total control of the company for giving up their ability to raise money through the sale of stock.

123
Q

The activities of a public corporation are regulated by

A

The SEC securities exchange commission

124
Q

A closely held corporation

A

Is not subject to these requirements and often keeps its data secret from the general public

125
Q

There is a limit as to how many investors a company can have and remain private.

A

True

126
Q

Insider trading

A

The officers and top management of a corporation are limited in their ability To buy and sell the Corporations stock and must report the transactions that they make.

127
Q

Making a trade on insider information is

A

Is illegal, and if you get caught, you can go to jail, and pay a fine
Equal to three times the profit you made.

128
Q

Why have public corporations declined in number

A

Because many have transitioned into private concerns.

Also because of the dramatic increase in the use of state owned enterprises (SOE) around the world.

129
Q

State owned enterprises

A

Is exactly what it’s name implies meaning a business that is owned by the government. It may be hundred percent owned or partially owned.

130
Q

What are the advantages of a SOE’s State owned enterprises

A
  • Having full support of the government ensures that government rules and regulations will support business,
  • that foreign competition will have significant barriers to overcome, and
  • that significant financial resources are available to help the business grow
131
Q

What are the disadvantages of state owned enterprises

A

Consumers can find themselves with fewer choices
Corruption in the government can undermine the effectiveness of the business
Government leaders can enrich themselves by profiting from the business

132
Q

Multinational corporation’s (MNC)

A

A multinational corporation is a distinctive type of business that has assets and employees in more than one country

133
Q

Multinational corporation

A

Has factories in many countries.
Employees person’s across the globe
Sells goods everywhere that could be produced anywhere

134
Q

Technically we identify a multinational corporation because

A

It has subsidiary corporations in countries other than its home nation.

135
Q

Subsidiary corporation

A

Usually called just a subsidiary , is a corporation owned by another corporation

136
Q

Multinational corporation’s are sometimes abbreviated as

A

MNC, MNE ( multinational enterprises), TNC ( trans national corporation)

137
Q

What are the benefits of being a multinational corporation

A

Ability to adapt to culture can be an advantage to the multinational corporation

138
Q

What are the disadvantages of being a multinational corporation

A

A multinational can fail because it uses a subsidiary it creates to avoid adapting to foreign culture.
Another issue is the conversion of currencies and the problems that it can create for a business

139
Q

Revenue of a business

A

Is the amount of money it obtains from selling its goods and services

140
Q

Profit

A

Profit is the difference between revenue and cost. Profit equals revenue minus cost

141
Q

Definition of cost according to accountant

A

Cost is the money paid out by the business in exchange for the natural resources, labor and capital it employs

142
Q

The accountant is really saying

A

Profit= revenue- explicit cost

143
Q

The economists says

A

Profit= Revenue - opportunity cost
Or
Profit= Revenue- ( explicit + implicit cost)

144
Q

Many business owners

A

Pay themselves as if they were employee in order to clear up the question of how much profit they really earned.

145
Q

Economists Believe that

A

Some of what accountants call profit is really a cost

146
Q

Normal profit

A

Is the economists term for sufficient profit to allow the entrepreneur to continue to operate the business

147
Q

Economic profits

A

Profits over and above normal profits are called economic profits, and are more truly the profits of the business.

148
Q

An economist would say that normal profits are a cost, so that the true fundamental question of accounting should be

A

Economic profit= revenue - cost ( including normal profit)

149
Q

Short time horizon

A

Some businesses have a short time horizon. That is, they need to make money now, and are not too concerned with the future.

150
Q

Long time horizon

A

Other businesses plan for a long time horizon, and may make decisions that lessens profits this year, in hopes of making more profits in the future

151
Q

Profit stream

A

Essentially, the business wants to maximize the entirety of its profits over time [called its profits stream)

152
Q

Future profits

A

Are not known or even uncertain. The less certain the future the more pressing the needs of the present, the more concerned the business will be with current profits.

ECON 102 (18 decks)

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