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EC 260 > Lesson 1.1 (Chp 1 - 2) > Flashcards

Lesson 1.1 (Chp 1 - 2) Flashcards

1
Q

formula for Expected net present value of profits

A

sum of (total revenue in time t - total cost at time t / (1 + i)^t)

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2
Q

economists definition of profit

A

profit over and above what the owner’s labour and capital in the business could be used elsewhere (opportunity cost)

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3
Q

what is principal agent problem?

A

where managers (agents) pursue their own interests at the cost of the owners (principals)

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4
Q

draw demand-supply curve

A

y axis is price, x axis is quantity demanded, Demand curve is downward sloping, supply curve is upward sloping

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5
Q

what does the demand curve show?

A

total demand for a product at various prices, not for a specific firm; pertains to a specific time period

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6
Q

5 factors that affect demand curve

A

income; prices of substitutes and complements, advertising expenses, product quality, government fiat

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7
Q

how do we interpret elasticity of demand

A

how a 1% change in price affects QD

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8
Q

elasticity of demand formula

A

n = (dQ/dP) * (P/Q) = % change in quantity / % change in price = (-1/b) * (a - bQ / Q)

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9
Q

why are elasticities of demand negative?

A

since demand curve is downward sloping

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10
Q

classify elastics of demand

A

n > -1 -> inelastic, 1% change in price –> less than 1% change in Q
n = -1 -> unitary elastic, 1% change in price –> 1% change in Q
n < -1 -> elastic, 1% change in price -> more than 1% change in Q

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11
Q

where on demand curve is price inelastic?

A

to the bottom

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12
Q

price elasticity of 0

A

demand curve vertical, QD unaffected by price

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13
Q

price elasticity of - infinity

A

demand curve horizontal, unlimited amount sold at a price, nothing sold at other prices

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14
Q

price equation

A

P = a - bQ

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15
Q

demand equation

A

Q = a/b - 1/bP

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16
Q

total revenue equation

A

TR = P x Q = aQ - bQ^2

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17
Q

marginal revenue formula

A

MR = derivative of TR fn with respect to Q = a - 2bQ = P(1 + 1/n)

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18
Q

MR curve vs Demand curve

A

MR curve has the same y intercept as demand curve, but slope is 2x demand curve

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19
Q

for what quantities/MR will demand be price elastic

A

MR is positive, Q < a / 2b

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20
Q

for what quantities/MR will demand be unitary elastic

A

MR = 0, Q = a / 2b

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21
Q

for what quantities/MR will demand be price inelastic

A

MR negative, Q > a / 2b

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22
Q

explain normal goods vs inferior goods

A

normal - income rises, demand rises (income elasticity of demand is +ve); inferior - income rises, demand lowers (income elasticity of demand is -ve)

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23
Q

explain substitute goods vs complementary goods vs independent goods

A

substitute - cross price elasticity of demand +ve, complementary - cross price elasticity of demand -ve; independent - cross price elasticity of demand 0

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24
Q

what happens to price elasticities when demand curve is linear?

A

vary along the demand curve

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25
Q

explain constant elasticity demand function

A

elasticities are constant regardless of values of the variables (using exponents)

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26
Q

explain the exponents in the constant elasticity demand function

A

own price elasticity of demand is negative, cross price elasticity either positive or negative, income elasticity is mostly positive, advertising elasticity is positive

27
Q

when is TR maximized?

A

MR = 0

28
Q

when is advertising not a waste of money?

A

if n > 1 (MR is positive)

29
Q

how does managerial economics differ from microeconomics

A

microeconomics focuses on description, managerial economics is prescriptive

30
Q

2 things managerial economics does

A

is an integrative course - brings various functional areas of business together in a single analytical framework; and exhibits economies of scope - integrates material from other disciplines and reinforces and enhances understanding of those subjects

31
Q

what is the managerial objective

A

make choices that increase value of firm

32
Q

3 managerial choices

A
  • influence TR by managing demand
  • influence TC by managing production
  • influence relevant interest rate by managing finances and risk
33
Q

3 managerial constraints

A

available tech, resources scarcity, legal or contractual limitations

34
Q

what are 2 measures of profit

A

economic profit, accounting profit

35
Q

3 traits of accounting profit

A

historical cost, legal compliance, reporting requirements

36
Q

3 traits of economic profit

A

market value, opportunity or implicit cost, more useful measure for managerial decision making

37
Q

profit and its affect on managers

A

1) measures quality of managers decision making skills

2) encourages good management decisions by linkage with incentives

38
Q

3 sources of profit

A

innovation, risk taking, exploiting market inefficients

39
Q

source of profit: innovation

A

producing products that are better than existing products in terms of functionality, tech and style

40
Q

source of profit: risk taking

A

future outcomes and their likelihoods are unknown as are the reactions of rivals

41
Q

source of profit: exploiting market inefficiencies

A

building barriers to entry, employing sophisticated pricing strategies, diversifying, making good strategic production decisions

42
Q

how can you address the principal-agent problem

A

give managers a financial stake in the business

43
Q

explain moral hazard

A

moral hazard exists when people behave differently when they are not subject to the risks associated with their behaviour

44
Q

how does moral hazard relate to managers

A

managers who do not maximize the value of a firm may do so because they do not suffer as a result of their behaviour

45
Q

define market

A

a group of firms and individuals that interact with each other to buy or sell a good

46
Q

define demand function

A

QD relative to Price, holding other possible influences constant

47
Q

what does the market rely on

A

binding, enforceable contracts

48
Q

define supply function

A

quantity supplied relative to price, holding other possible influences constant; for period of time

49
Q

influences held constant for the supply function

A

tech and cost of production inputs (land, labour, capital)

50
Q

define equilibrium

A

when the market is in balance because everyone who wants to purchase the good can and every seller who wants to sell the good can

51
Q

define invisible hand

A

when no gov agency is needed to induce producers to drop or increase prices

52
Q

define market demand schedule

A

table showing the total quantity of the good purchased at each price

53
Q

determinants of market demand curve

A

consumer taste, consumer income, population size, time period

54
Q

is primary objective of a firm’s owner to maximize firm’s profit or firm’s value?

A

value

55
Q

Information on the quantities that would be purchased at different prices, holding all other factors constant, in a given time period from a group of firms is shown in a:

A

market demand curve

56
Q

The demand for costume jewelry has been estimated to be Q = 100P^(–2)E^2, where E is the price of real gem jewelry. Costume jewelry and real gem jewelry are:

A

cross price elasticity of demand = 2 -> substitute

57
Q

define elasticity

A

Measures the percentage change in one factor given a small (marginal) percentage change in another factor

58
Q

define demand elasticity

A

Measures the percentage change in quantity demanded given a small (marginal) percentage change in another factor that is related to demand

59
Q

cross price elaticity of demand formula

A

(dQx)/d(Qy) (Py/Px)

60
Q

what is cross price elasticity of demand when the goods are substitutes?

A

n > 0

61
Q

cross price elasticity of demand when the goods are independent

A

n = 0

62
Q

What is the relationship between economic and accounting profit?

A

economic profit may be less than or equal to accounting profit

63
Q

where is there excess supply

A

prices above equilibrium price

EC 260 (11 decks)

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