Exam Prep: Topics 4-7 Flashcards
Define Demand
The amount of a good or service a consumer is willing to purchase at a specific price and quantity within a given time period.
What are examples of types of goods?
- Normal goods
- Inferior goods
- Complementary goods
- Substitute goods
- Giffen Goods
What are Normal Goods?
Normal goods are goods for which demand increases as consumer income rises, and decreases as income falls, assuming all other factors remain constant.
Example: Organic groceries, brand-name clothing.
What are inferior goods?
Inferior goods are goods for which demand decreases as consumer income rises, and increases as income falls.
Generic Goods
What are complementary goods?
Complementary goods are products that are often used together, so an increase in demand for one leads to an increase in demand for the other.
Example: Coffee and coffee filters, printers and ink cartridges.
What are substitute goods?
Substitute goods are products that can be used in place of each other, so an increase in the price of one leads to an increase in demand for the other.
Example: Butter and margarine, tea and coffee.
What are Giffen goods?
Giffen goods are inferior goods for which demand increases as their price rises, contrary to the law of demand, due to the strong income effect outweighing the substitution effect.
Example: Staple foods like bread or rice in certain low-income regions where these goods form a significant portion of the consumer’s diet.
Define Elasticity
The ratio of the percentage change in one variable to the percentage change in another variable.
Formula:
ε=
%ΔP / %ΔQ
Identify the Types of Elasticity
- Price Elasticity of demand
- Income Elasticity of Demand
- Arc Price Elasticity
- Point Price Elasticity
- Arc Cross-Price Elasticity
Price Elasticity of Demand
Measures responsiveness of quantity demanded to price changes.
Income Elasticity of Demand
Measures how demand changes with consumer income.
Arc Price Elasticity
Calculates elasticity over a range of prices.
Point Price Elasticity
Measures elasticity at a specific price and quantity.
Arc Cross-Price Elasticity
Measures how the price of one good affects the demand for another.
How does elasticity affect total revenue (TR)?
- Elastic: TR increases when price decreases (ED >1)
- Inelastic: TR increases when price increases (ED <1)
- Unitary: TR remains unchanged (ED=1)
Formula: TR = P x Q
What are the elasticity ranges?
- Perfectly Elastic (ED = ∞)
- Elastic (1 < ED < ∞)
- Unitary (ED = 1)
- Inelastic (0 < ED < 1)
- Perfectly inelastic (ED=0
What is Regression Analysis?
A method using mathematics, statistics, and econometrics to build models and estimate relationships.
What is forecasting?
Using statistical techniques to predict future outcomes.
Define Trend Analysis
Observing historical data to predict future trends.
Define Sales Force Opinion
Sales force estimates future sales based on customer insights and market factors (macro and micro).
Expert Opinion
Consulting experts to reach a consensus on future sales levels.
To combine diverse insights and reach a more reliable consensus.
What is the Cobb-Douglas production function?
The Cobb-Douglas production function is a mathematical representation of the relationship between inputs (capital K and labor L) and output Q
What are the different types of costs?
- Historical and Current Cost
- Explicit and Implicit Cost
- Sunk Cost and Incremental Cost
- Economic Cost and Accounting Cost
- Short-Run Cost and Long-Run Cost
- Opportunity Cost
Define market power
The ability of a firm to influence or establish the market price.
What is a market structure?
The number and relative sizes of buyers and sellers in a market.
Price Makers VS Price Takers
Price Makers: Firms with market power, able to set prices due to product differentiation or dominance.
Price Takers: Firms in perfect competition that accept the market price determined by supply and demand.
What is the shutdown point?
The point where the firm’s operating losses equal the losses from shutting down.
What is Perfect Competition
A market structure where a large number of small firms sell identical products, and no single firm has any market power to influence the price, which is determined solely by supply and demand.
Agricultural markets (e.g., wheat, corn).
Stock markets (to some extent).
What are the characteristics of Perfect Competition?
- No market power.
- Large number of small buyers and sellers.
- Standardized product.
- Free entry and exit.
- Complete market information.
- Non-price competition is not possible.
What is a monopoly?
A market structure in which a single firm is the sole seller of a product with no close substitutes, often with significant barriers to entry.
Regulated utilities (electricity, water).
Companies with patent protections (e.g., pharmaceutical drugs).
Natural monopolies like railroads or pipelines.
What are the characteristics of a monopoly?
- Absolute market power (subject to government regulation).
- Single firm constitutes the entire industry.
- Unique product with no close substitutes.
- Significant barriers to entry (legal, technological, or economic).
- Non-price competition is generally unnecessary.
What is an Oligopoly?
A market structure where a small number of large firms dominate, with interdependent decision-making and significant barriers to entry.
Automotive industry (Toyota, Ford).
Airline industry (Delta, American Airlines).
Technology (Apple, Google).
OPEC (Organization of the Petroleum Exporting Countries).
What are the Models of Oligopoly?
- Cournot Model
- Stackelberg Model
- Bertrand Model
- Sweezy Model
What is the Cournot model of oligopoly?
A model where firms compete by choosing output quantities simultaneously, assuming competitors’ quantities are fixed.
Example: Firms in the aluminum or cement industry where production capacity decisions are crucial.
What is the Bertrand model of oligopoly?
A model where firms compete by setting prices simultaneously, assuming competitors’ prices are fixed.
Example: Gasoline stations in a small area competing primarily on price.
What is the Stackelberg model of oligopoly?
A model where one firm (the leader) sets its output first, and the other firms (followers) adjust their output in response.
Example: Airlines where a major carrier announces routes and other airlines react.
What is the Sweezy model of oligopoly?
A specific version of the kinked demand curve where firms expect rivals to match price decreases but not price increases.
Automobile manufacturers in markets with stable price ranges.
How is profit maximized in a monopoly?
By producing where marginal revenue (MR) equals marginal cost (MC).
What is Price Discrimination?
Charging different prices for the same product in different markets based on factors unrelated to cost.
Conditions for Price Discrimination
- Markets must be separable.
- No resale between markets.
- Demand curves in segmented markets must have different elasticities.
What are the degrees of price discrimination?
- First Degree: Charging each customer their maximum willingness to pay.
- Second Degree: Charging different prices based on quantity consumed.
- Third Degree: Charging different prices to specific groups (e.g., students, seniors).
What is the fourth and lesser known type of Firm
Co-operative
What does the M-M Theorem state?
Modigliani and Miller Theorem
States that under certain conditions, the value of a firm is unaffected by its capital structure.
It asserts that the total value of a firm is not influenced by how it is financed (whether by debt or equity).
What are the methods of financing a firm?
- Debt Financing: Borrowing from banks or issuing bonds.
- Equity Financing: Selling shares.
- Retained Earnings Financing: Reinvesting profits.
Internal Factors to Consider When Financing Firms
- Consequence of Bankruptcy
- Tax Consequences
- Managerial Incentives
- Market Perception of Value
- Finance and Control
External Factors to Consider When Financing Firms
- Real Gross Domestic Product (rGDP)
- Inflation Rate
- Exchange Rate Parity
- Interest Rates
- Employment/Unemployment
- Education and Skills Levels
- Technology/Infrastructure
- Crime Levels
- Poverty Levels
What is credit rationing?
When individuals or firms are willing to pay the current interest rate but cannot obtain funds.
Forms of Credit Rationing
- Borrowers receive less than desired.
- Certain applicants are denied credit.
- Entire categories of applicants are excluded.
What is equity rationing?
Constraining equity distribution to protect the long-term viability or profitability of the firm.
What is a corporate takeover?
A transaction where one company acquires control of another by purchasing sufficient stock.
What are the types of takeovers?
- Friendly Takeover: Both companies agree.
- Hostile Takeover: Acquired without consent.
What are the criticisms of corporate takeovers?
- Raiders prioritize personal interests over stakeholders.
- Takeovers do not guarantee better management.
- Threats of takeovers waste company resources.
- Defensive actions weaken the company’s focus on operations.
What are arguments supporting corporate takeovers?
- Replace ineffective managers.
- Encourage managerial discipline.
- Threats of takeovers drive efficiency.
- Well-managed firms are less likely to face takeovers.
- Other methods of controlling managers are less effective.
Identify the 5 major Developments in the global business environment since the 1930s
- Globalization and Market Expansion
- Technological Advancements
- Regulatory Changes and
- Access to Capital and FInancial Innovations
- Shift towards Sustainability
