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Fernstudium > Managerial Economics > Flashcards

Managerial Economics Flashcards

1
Q

Change in Qd (formula)

A

% Change in Qd = ((Change in Qd)/(Initial Qd)) x 100

Change = Delta
initial Qd = quanity demanded at the initial (original) price

Note: Q1 is often used to denote the original quantity and Q2 the new quantity.

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2
Q

Price elasticity of demand (formula)

A

PED = (% Change in Qd) / (% Change in P)

Qd = demand
P = Price
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3
Q

demand curve

A

The demand curve shows that the demand is higher when the price is lower and the demand is lower when the price is higher

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4
Q

law of demand

A

there is a negative relationship between price and quantity demanded

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5
Q

what ist Demand?

A

is the quantity of a good or service that buyers are willing and able to buy at a given price, in a given market, in a given period of time.

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6
Q

PED is equal to:

A

PED = (Delta Qd / Q1) x (P1 / Delta P)

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7
Q

What is it called when the PED coefficient is greater than one

A

price elastic

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8
Q

What is it called when the PED coefficient is smaller than one

A

price inelastic

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9
Q

What are the macroeconomic goals?

A 
- sustainable economic growth
• price stability (low inflation)
• full employment (low unemployment)
• balance of payments equilibrium
• sustainable national debt (including low budget deficits)
• more equitable distribution of income
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10
Q

Factors that Affect Price Elasticity of Demand

A

(1) the availability
of close substitutes,
(2) the proportion of income spent on the product/service,
(3) whether
the product/service is a luxury or necessity,
(4) time

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11
Q

examples of inelastic products

A
  • petrol
  • salt
  • milk
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12
Q

When does a rise in price dont effect the amount of buyings?

A

When the proportion of income spent on a good is small

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13
Q

examples of luxury goods

A
  • vacation
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14
Q

examples of necessity goods

A
  • water
  • bread
  • mild
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15
Q

Is the demand for alcohol, cigarettes , and drugs tends are elastic or inelastic?

A

Inelastic, because there are linked to habit or addiction use.

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16
Q

income elasticity of demand (formula)

A

YED = (% Change in Demand) / (% Change in Income)

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17
Q 
Income elasticity
of demand (YED)
A

measures the percentage change in demand divided by the percentage change in income.

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18
Q

Is the elasticity coefficient for a normal good positive or nagativ?

A

always positive

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19
Q

Is demand and income related?

A

Yes, there are positive related.

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20
Q

superior goods

A

are luxury items that have an income elasticity of demand greater than one

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21
Q

What kind of goods have a negative income of elasticity of demand

A

inferior goods

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22
Q

Cross price elasticity of demand (XED)

A

measures how much the demand for one product/ service changes when the price of another product/ service changes.

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23
Q

cross price elasticity of demand (formula)

A

XED(AB) = (% Change in Demand for Good A) / (% Change in Price of Good B)

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24
Q

What does it mean when the cross price elasticity of demand coefficient is positive or neagtive number?

A

negative: Then the two goods are substitutes
positive: then the two goods are complementary

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25
Q

What is regression analysis and what does it need?

A

(1) statistical procedure

(2) relies on using appropriate, relevant, and good data

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26
Q

What do you have to avoid when you collect data from a survey?

A

you have to avoid sample bias, for instant:

  • answers according to the surveying organization wants to hear
  • answers to purposely influence the decisions of an organization
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27
Q

What is importent when you want to properly estimate the demand of a good?

A
  • identify all the factors that could influence the demand
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28
Q

What is cross-sectional data?

A

information obtained

about variables for a specific time period

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29
Q

What is times series data?

A

represents information about a variable over a period of time

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30
Q

What is the t-test significance acceptable level for estimating demand?

A

.05 -> 5 %

That means that you can be 95 percent confident that the results
obtained from a sample are representative of the statistical population that you are studying

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31
Q

degrees of freedom (formula)

A

n - (k + 1)

n = number of observations
k = independent variables
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32
Q

The coefficient of

determination (R^2)

A

indicates the proportion of variation in the dependent variable that is explained by the explanatory (independent) variables.

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33
Q

What is a ‘Coefficient of Determination’ ?

A

…is a measure used in statistical analysis that assesses how well a model explains and predicts future outcomes.

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34
Q

What are the certain limitations and potential

problems by regression analysis?

A

(1) misspecification of the equation
(2) multicollinearity
(3) the identification problem
(4) problems with random errors

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35
Q

Misspecification of equation

A

(1) incorrectly specifying the form
of the regression equation
(2) equation be inadequate - not include important predictors

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36
Q

Multicollinearity

A
  • variables are related to each

other

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37
Q

Identification problem

A

equilibrium price and quantity in a market are simultaneously determined by demand and supply
-> it difficult to identify the separate and simultaneous effects of demand
and supply

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38
Q

Problems with the random errors

A
  • Every regression equation has a random term
  • independent of everything else

(1) Heteroscedasticity - the variance is not constant and changes over time
(2) Serial correlation - random error is affected in one period by its value in the
previous period

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39
Q

What does elasticity measures?

A

responsiveness

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40
Q

What does it mean when the elasticity of demand coefficient is positive or negative?

A

(1) positive - Normal and superior goods

(2) negative - Inferior goods

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41
Q

What do Cross price

elasticity of demand measures?

A

he responsiveness of demand for one good due to a change in the price of another good

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42
Q

What does it mean when the Cross price

elasticity of demand coefficient is positive or negative?

A

(1) positive - the two goods are substitutes

(2) negative - the goods are complements

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43
Q

Is it possible to estimate demand?

A

Yes, you can use regression analysis.

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44
Q

What does the regression analysis do to estimate the demand?

A

It estimates the separate influence of independent (predictor) variables on a dependent variable

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45
Q

Supply

A

is the quantity of a good or service that producers or sellers are willing and able to offer for sale at different prices over a given period of time in a given market.

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46
Q

Law of supply

A

states that, ceteris paribus, an increase in price results in an increase in quantity supplied.

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47
Q

What is the supply curve?

A

graphical representation of the relationship between price and quantity supplied

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48
Q

price rises (supply curve)

A

extension of supply

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49
Q

price falls (supply curve)

A

contraction of supply

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50
Q

How is the supply curve build?

x-y-axis and line segments

A

x-axis - Quantity
y-axis - Price (€)
line segments - supply curve

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51
Q

What are Examples of Non-Price Determinants of Supply?

A
  • weather
  • costs of production
  • expectations of the future
  • prices of other products supplied by the seller
  • number of sellers in
    the market
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52
Q

Whats happen with the supply curve when the amount of products increase or decrease?

A

increase - the supply curve shifting to the right
decrease - the supply curve shifting to the left

It is important to understand that the supply curve shifts because the amount offered for sale at different prices changes, as reflected in a new supply schedule

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53
Q

Price elasticity of supply

A

(PES) measures the percentage change in quantity supplied arising from a given percentage change in price

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54
Q

Price elasticity of supply (formula)

A

PES = (% Change in Qs) / (% Change in P)

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55
Q

percentage change in quantity supplied (formula)

A

% Change in Qs = ((Delta in Qs) / (Initial Qs)) x 100

Delta Qs = Q2 - Q1

Note: Q1 is often used to denote the original quantity and Q2 the new quantity.

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56
Q

percentage change in price (formula)

A

% Change in P = ((Delta in P) / (Initial P)) x 100

Note: P1 is often used to denote the original price and P2 the new price.

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57
Q

PES (Formula)

A

PES = % Delta in Qs / % Delta in P = (Delta in Qs / Initial Qs) / (Delta in P / Initial P) = (Delta Qs / Q1) x (P1 / Delta P)

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58
Q

When is the supply inelastic?

A

When the percentage change in quantity

supplied is smaller than the percentage change in price

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59
Q

What is the most important determinant of price elasticity of supply?

A

time

short-term, if prices rise, firms may not be able to increase (farming)
long-term, supply becomes more price elastic

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60
Q

What is the law of demand?

A

The law of demand states that there is a negative relationship between price and quantity demanded.

  • Price (P) falls, quantity demanded (Qd) rises.
  • Price rises, the quantity demanded falls.
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61
Q

What factors determine the demand for a product or service?

A
  • price
  • tastes and preferences
  • income expectations
  • prices of related goods,
  • number of buyers
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62
Q

What are the four main determinants of price elasticity of demand?

A

(1) the availability of close substitutes,
(2) the proportion of income spent on the product/service,
(3) whether the product/service is a luxury or necessity,
(4) time

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63
Q

equilibrium price

A

Pe = P(Qd = Qs)

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64
Q

What is the name of the point where the demand curve intersect with the supply curve?

A

equilibrium

x-axis - Quantity
y-axis - Price (€)

demand curve: top-left to down-right

supply curve: down-left to top-right

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65
Q

When does the demand and the price for a good rise?

A

Its rise when the income of the buyers increase, which led to a higher price

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66
Q

Whats happen with the equilibrium when the demand increases or decreases (ceteris paribus)?

A

increases - equilibrium price and equilibrium
quantity will both rise

decreases - quilibrium price and equilibrium quantity will both fall

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67
Q

Effect of Changes in Non-Price Determinants of Demand on Market Equilibrium

A
  • Successful advertising
    (1) Change in tastes and preferences in favor of good
    (2) Increase in income (effect on normal goods)
    (3) Increase in the price of substitute goods
    (4) Increase in the number of potential buyers

(5) Consumers become more optimistic regarding the future
state of the economy or they expect prices to rise in the future

  • > Effect on demand: increases
  • > Direction of demand curve shift: shifts to the right
  • > Effect on Pe and Qe: rise
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68
Q

Whats happen with the equilibrium when the supply increases or decreases (ceteris paribus)?

A

increases - equilibrium price will fall and equilibrium
quantity will rise

decreases - quilibrium price will rise and equilibrium quantity will fall

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69
Q

Effect of Changes in Non-Price Determinants of Supply on Market Equilibrium

A

(1) Favorable weather (mainly for agricultural products)
(2) Decrease in input costs
(3) Advances in technology
(4) Decrease in indirect taxes
(5) Increase in government subsidies
(6) Increase in the number of sellers
(7) Business managers expect prices to fall in the future and want to sell more now
(8) Decrease in the price of other products the firm sells
- >Effect on supply: increases
- >Direction of supply curve shift: shifts to the right
- >Effect on Pe and Qe: rise

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70
Q

When is there a opposing effect on the market price and/or equilibrium quantity?

A

non-price determinants of demand and supply changing at the same time

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71
Q

Production

A

is a process during which inputs such as raw materials are transformed into output using other inputs

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72
Q

production function

A

The production function indicates how much output can be produced within a given time period using a given combination of inputs and level of technology.

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73
Q

short run

A

The short run is the period of time during which the size or quantity of at least one factor of production cannot be changed.

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74
Q

long run

A

The long run is the period of time during which the quantity or size of all factor inputs
including capital and land can be increased.

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75
Q

What is the differents between long run and short run?

A

short run - at least one factor is fixed

long run - there are no fixed factors

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76
Q

Labor productivity

A

is the averageproduct producedper unit of labor in a given period of time.

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77
Q

TP

A

Total product

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78
Q

Q_L

A

Quantity of labor

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79
Q

MP_L

A

Marginal product

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80
Q

AP_L

A

Average product

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81
Q

Why do MP_L initially rises by adding more worker to a task and then begin to fall?

A

It divides the required tasks between the workers and they can specialize (AP_L and MP_L rise)

The declining marginal product that results from adding more and more of a variable
input to a fixed quantity of another input

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82
Q

law of diminishing

marginal returns

A

states that as more and more units of a variable
input are added to a fixed amount of another input, eventually the marginal product will start to decrease and thus output will begin to rise at a diminishing rate.

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83
Q

How do you plotte a Short Run Total Product Curve?

A

Stage I) average product of labor rises (MP_L being greater than AP_L)

Stage II) MP_L curve cuts the AP_L curve

Stage III) TP begins to fall as MPL becomes negative

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84
Q

When cuts the MP_L curve the AP_L curve?

A

AP_L is at its maximum level.

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85
Q

In which case can you use a quadratic

function?

A

It can be used to represent a situation where there are no increasing returns but rather diminishing returns occur immediately as variable inputs are increased (MPL and APL begin to decrease)

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86
Q

In which stages should a business manager try to engage the capacity planing?

A

Stage II, because its the most effectively

stage I, they would be underutilizing their fixed inputs

stage III, they would be operating inefficiently in the sense of not being able to utilize further their fixed capacity while employing additional variable inputs

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87
Q

What does experienced increasing returns to scale mean?

A

output increases proportionately more than its inputs

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88
Q

What does experienced decreasing returns to scale mean?

A

output increases proportionately less than its inputs

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89
Q

What does experienced constant returns to scale mean?

A

he percentage increase in output is the same as the percentage increase in all of the inputs

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90
Q

Relevant costs

A

Relevant costs are the incremental costs (explicit and implicit) of a decision.

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91
Q

Implicit costs

A

Implicit costs refer to the opportunity cost of resources used.

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92
Q

Opportunity cost

A

Opportunity cost refer to the benefits foregone of the next best alternative use of a resource.

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93
Q

Sunk costs

A

Sunk costs are expenses that have already been incurred and cannot be recovered.

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94
Q

cost function

A

A cost function expresses total cost as a function of a given level of output.

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95
Q

Fixed costs

A

Fixed costs are costs that remain the same whether output increases or decreases.

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96
Q

Variable costs

A

Variable costs are costs that vary in relation to output.

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97
Q

profit(s)

A

Profits are the difference between a firm’s total revenues and total costs.

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98
Q

firm’s total cost

A

TC

is comprised of all fixed costs and all variable costs

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99
Q

TFC

A

total fixed cost

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100
Q

TVC

A

total variable cost

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101
Q

MC

A

marginal cost is the additional cost of producing one more unit of output.

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102
Q

Marginal cost (formula)

A

MC = Delta TC / Delta Q = Delta TVC / Delta Q

TC = TFC + TVC

fixed
costs do not change

103
Q

Average Fixed Cost

A

AFC = TFC / Q

104
Q

Average Variable Cost

A

AVC = TVC / Q

105
Q

Average Total Cost

A

ATC = AFC + AVC

106
Q

Are they fixed costs in the short or in the long run? Why?

A

short run: there are fixed factors of production and therefore are fixed costs

long run: all factors of production can be varied and therefore there are no fixed costs

107
Q

Internal economies of scale

A

Internal economies of scale occur when a firm’s LRAC falls as output
increases

108
Q

LRAC

A

long run average cost

109
Q

diseconomies of scale

A

diseconomies of scale occur when a firm’s LRAC

rises as output increases.

110
Q

Internal Economies and Diseconomies of Scale (graph)

A

x-axis = quantity
y-axis = price
curve - LRAC (long run average cost)

curve decrise - internal economies of scale down to the price minimum

curve incrise - internal diseconomies of scale

111
Q

What can happen when a firm increases all its inputs and outputs?

A

(1) commercial economies
(2) financial economies
(3) managerial economies
(4) marketing economies
(5) R&D economies - Research and development
(6) technical economies

112
Q

commercial economies

A

economies may arise from discounted prices on bulk purchases of supplies

113
Q

financial economies

A

may arise if a large firm is able to obtain a loan at a lower interest rate because it is considered a less risky borrower compared to smaller firms

114
Q

managerial economies

A

may arise due to a large firm using specialist managers in different functional areas such as finance, marketing, production, and human resources

115
Q

marketing economies

A

may arise due to lower average advertising costs

116
Q

R&D economies - Research and development

A

may arise as large firms spread the cost of R&D over a greater level of output

117
Q

technical economies

A

may arise from increased specialization and division of labor, or due to the container principle

118
Q

When does a firm experiences internal diseconomies?

A

when a firm becomes too big and it experiences managerial diseconomies
of scale

communication and coordination between different departments, divisions, and organizational layers becomes slower and more difficult.

decreased productivity of workers - not being heard or cared for

119
Q

What are the most popular firm goals?

A

(1) profit maximization
(2) revenue maximization
(3) sales (output) maximization
(4) profit satisficing

120
Q

What are the most popular firm goals?

A

(1) profit maximization
(2) revenue maximization
(3) sales (output) maximization
(4) profit satisficing

121
Q

What means Marginal revenue?

A

Marginal revenue is the additional

revenue generated from selling one more unit of output

122
Q

How long can a firm increase its profit by producing more?

A

As long as the MR of an additional unit of output is greater than the MC associated with producing and selling that unit

123
Q

When is equal on the profit maximizing level?

A

the marginal revenue (MR) of the last unit sold is equal to the marginal cost (MC) of selling that last unit

124
Q

How long can a firm increase its profit by producing more?

A

As long as the MR of an additional unit of output is greater than the MC associated with producing and selling that unit

125
Q

Who assumes that a firm aim to maximize profits?

A

Neoclassical economics

126
Q

What do Neoclassical economics argue about managers?

A

They say that managers make decisions based on heuristics and gut feelings instead of using good data

127
Q

Normal profit

A

is the minimum amount of profit that a person is willing to earn to remain in business.

128
Q

Sales maximization

A

involves selling as much output as possible without making a loss.

129
Q

Normal profit

A

is the minimum amount of profit that a person is willing to earn to remain in business.

130
Q

Name four market structures

A

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

131
Q

Name four market structures

A

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

132
Q

Number of firms

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

A

very large
(e.g., 100)

many
(e.g., 30–40)

few

one

133
Q

Size of firms

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

A

very small

small

large

large

134
Q

Control over price

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

A

no control,
price taker

some control

control but interdependent on other firms

large, price maker

135
Q

Differentiated or homogeneous product

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

A

homogeneous, perfect substitutes

differentiated, close substitutes

differentiated but homogeneous in some industries

no close substitutes

136
Q

Pricecompetition or non-price competition

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

A

compete on price, no non-price competition

may compete on price but also nonprice competition

mainly non-price competition but also price competition in certain markets

may engage in PR activities or restrictive trade practices

137
Q

Example

(1) perfect (pure) competition
(2) monopolistic competition
(3) oligopoly
(4) pure monopoly

A

arguably farming and currency markets

café and restaurant markets

airplane manufacturing industry

electricity provider

138
Q

Perfect information

A

refers to the conditions under perfect competition where all producers and consumers have equal access to all available market information and prices accurately reflect all available information.

139
Q

Perfect information

A

refers to the conditions under perfect competition where all producers and consumers have equal access to all available market information and prices accurately reflect all available information.

140
Q

maximize its profits

A

MR = MC

141
Q

What means Marginal revenue?

A

Marginal revenue is the additional

revenue generated from selling one more unit of output

142
Q

What does a firm need to earn abnormal profits in the short run?

Perfectly Competitive Firm

A

TR > TC

revenue (TR)
total cost (TC)

P > ATC

-average total cost (ATC)

143
Q

What is happen when new firms enter to compete?

  • Perfectly Competitive Firm
  • ceteris paribus
  • long run
A

the industry supply increases and the industry supply curve shifts to the right. This makes the equilibrium market price fall, shifting each firm’s individual demand curve down and lowering the price that each firm can charge

long run P is no longer above ATC

144
Q

productively efficient

A

A firm is productively efficient when the price
charged by the
firm for the units supplied is equal to the minimum ATC and allocatively efficient when the price charged is equal to marginal cost.

145
Q

When exist a Allocative efficiency?

A

P = MC

perfect (pure) competition

146
Q

What is usually for a monopoly to exist and what are examples?

A

legal barriers

lectricity and water supply industries are considered
natural monopolies

147
Q

What do firms aim to achieve?

A

(1) profit maximization
(2) revenue maximization
(3) sales (output)maximization
(4) profit satisficing

148
Q

LRAC

A

long run average cost

149
Q

What barriers make it difficult to enter as a new firm?

Natural Monopoly

A
  • high capital costs,
  • strong brand names of existing firms
  • patents
  • copyrights
  • ownership of a scarce resource
150
Q

When is a firm considered to be dominant in the market?

A

40 percent of the market share although in some countries a firm that has over 25% of the market share

151
Q

When is a firm considered to be dominant in the market?

A

40 percent of the market share although in some countries a firm that has over 25% of the market share

152
Q

How can a firm maximize its profit in a monopolistic cometition?

A

have to charge a price and produce a level of output at which MR = MC

153
Q

What means Sales maximization?

A

Sales maximization is not the same as revenue maximization. The goal of sales maximization
is to sell as much output as possible without making a loss.

154
Q

What means Normal profit?

A

Normal profit is the minimum amount of profit that a person is willing to earn to remain in
business.

155
Q

Is the monopolistically competitive or perfectly competitive firm more efficient and which one will charge a lower price?

A
  • monopolistically competitive firm is less efficient than a perfectly competitive one.
  • monopolistically competitive firm theoretically will charge a lower price
156
Q

What possitive effect can have non-price characteristics?

A
  • increase a firm’s demand
  • less price elastic
  • slightly higher price
  • remain competitive
157
Q

What are Natural monopolies and the barriers to entry?

A

A natural monopoly is one in which the internal economies of scale are very large and extend
over a large range of output, so large that not even one firm satisfying the whole market
demand produces and sells enough to be able to experience all internal economies of scale.

The existence of high capital costs, strong brand names of existing firms (that may
also be due to high quality), patents and copyrights, ownership of a scarce resource, and
restrictive trade practices such as limit pricing

158
Q

Explain the Kinked-demand curve model.

A

According to the kinked-demand curve model, oligopoly
firms will be reluctant to change prices because of the anticipated response of their competitors.According to this model, if an oligopoly firm were to lower its price to attract more customers,
competing firms in the market will also lower their prices to.If, instead of lowering prices, an oligopoly firm were to increase its prices, the kinked-demand
curve model posits that competing firms will not increase their prices in the hope of luring
customers with their relatively lower prices away from the competitor that increased prices.

159
Q

Call 3 theories for pricing behavior of oligopoly firms.

A

price leadership model, collusive behavior, and game theory

160
Q

price leadership model

A

other firms follow the pricing behavior of the leader therefore the sold is relatively price inelastic

161
Q

maximize sales revenue

A

MR = 0

162
Q

maximize sales of output

A

harge a price that is equal to ATC

163
Q

maximize sales revenue

A

MR = 0

164
Q

maximize sales of output

A

harge a price that is equal to ATC

165
Q

How many Pricing Strategies are there and name them?

A

1) Barometric price leadership
2) Cartels and price fixing
3) Limit pricing
4) Predatory pricing
5) Price discrimination
6) Cost-plus pricing
7) Multiproduct pricing
8) Transfer pricing

166
Q

barometric price leadership

A

in oligopoly market does not have a clear dominant leader

-> the price changes initiated by any oligopoly firm in the industry may act as a barometer that other firms follow.

167
Q

Limit pricing

A

they charge a price that is lower than the one that will maximize its profits in order to discourage potential new rivals from entering the market

accept lower profits in the short run to maintain their market share in the long run

168
Q

Predatory pricing

A

occurs when a firm charges a price low enough to drive a competitor out of business.

169
Q

Penetration pricing

A

occurs when a firm charges a low price in order to establish itself in an industry and obtain a desired market share.

170
Q

Prestige pricing

A

occurs when a firm charges a higher price for a product or service as buyers believe that the product or service conveys some level of prestige.

171
Q

Name the three degrees of price discrimination

A
  1. ) charging the maximum price that each buyer is willing to pay for each unit of a good or service
  2. ) occurs when a firm charges buyers different prices according to how much they purchase
  3. ) occurs when the seller divides or segments buyers into distinct markets and charges a different price in each market
172
Q

Consumer surplus

A

is the difference between the maximum price a buyer is willing to pay for a good and the actual price charged.

173
Q

Peak-load pricing

A

is where a firm charges customers a higher price during peak demand and a lower price at offpeak times.

174
Q

Price skimming

A

is where a firm charges high prices and earn abnormal profits until new competitors arise.

175
Q

Intertemporal pricing

A

is where a firm charges different prices in different time periods.

176
Q

Two-part tariff

A

is where a firm charges a fixed access fee plus a usage fee determined by the amount of goods or services consumed.

177
Q

What is mark-up or cost-plus pricing?

A

firms etermine their average cost of production and then add a certain percentage (mark-up) for profit

  • higher when price inelastic
  • lower when price elastic
178
Q

Full-range pricing

A

is where a firm sets the price of all complementary and substitute products jointly to maximize profits.

179
Q

What are transfer pricing and why it could be bad for a firm?

A

Every profit center has its own profit target. When the product from one center become input to another, then it could preventing the organization from maximizing its profits

The divisional profit target creates a conflict of interest.

180
Q

What different goals purcue firms?

A

(1) profit maximization
(2) profit satisficing
(3) revenue maximization
(4) sales maximization

181
Q

What must a firm do to maximize its profits or total revenue?

A

profits: produce at an
output MR = MC

revenue: produce
an output MR = 0

182
Q

perfectly competitive markets,

A
  • no barriers to entry
  • many small firms that produce homogeneous goods that are perfect substitutes
  • firms are price takers
  • earn only normal profits in the long run
  • allocative and productive efficiency
183
Q

What is it called when there is only one firm on the market?

A

monopoly

184
Q

pure monopoly

A
  • high barriers
  • price maker
  • can earn abnormal profits -> short/ long run
  • economically inefficient
185
Q

Where exist imperfect competition?

A

monopolistically competitive and oligopoly markets

186
Q

Monopolistically competitive markets

A
  • weak barriers
  • many small firms producing differentiated product/ service
  • some control over price
  • able to earn abnormal profits (short run) / likely to earn normal profits (long run)
187
Q

Oligopoly markets

A
  • strong barriers
  • number of large, interdependent firms
  • monitor the behavior of their competitors
  • pend large sums of money on advertising and prefer to engage in nonprice competition
188
Q

MSC

A

marginal social costs

189
Q

MSB

A

marginal social benefits

190
Q

When is the socially optimal level of output?

A

MSB = MSC

191
Q

Positive spillover effects

A

occur when the consumption of a good or service results in a benefit to a third party
not involved in the production and purchase of that good or service.

192
Q

MPB

A

marginal private benefit

193
Q

Merit goods

A

are those goods
that would be under-consumed if provided only by the private sector; it is conceived that individuals and
groups should have access to merit goods based on need, rather than ability and willingness to pay.

194
Q

negative externality

A

occurs when the production and/ or consumption of a good creates a cost to third
parties external to the production and consumption of that good.

195
Q

MPC

A

marginal private cost

196
Q

When is MSC = MPC?

A

absence of any negative externality

197
Q

Why are negative externalities are a form of inefficiency?

A
  • not taken into consideration by a firm’s managers when deciding how much to produce and what price to charge
  • When the production and consumption of a good creates an external cost, too much of the good is being produced and consumed
198
Q

deadweight loss

A
  • occurs when supply and demand are not in equilibrium

- economic inefficiency by productiong more then equilibrium

199
Q

free-rider

A

The free-rider problem occurs when those who consume or benefit from a good or service do not pay for it.

200
Q

Non-excludability

A

mean that once a good or service has been provided, it is difficulty or too costly to exclude non-payers from benefiting from the good or service

201
Q

Non-rivalry

A

Non-rivalry means that the use or consumption of the good or service by one person does
not result in less of the good or service being available for other people.

202
Q

What kind of public goods exist?

A

non-excludability and non-rivalry in consumption

203
Q

Producer surplus

A

is the difference between the lowest price that a firm is willing to sell a good and the price that it actually receives.

204
Q

Asymmetric information

A

refers to the situation under imperfect competition where at least one party in an economic transaction has more information than the other party

205
Q

SMC

A

In the absence of externalities, the MC is the SMC curve

206
Q

Government Policies to Reduce Market Failure

A

market failures created by externalities, monopoly power, and missing information

-> government is unable to correct the market failures and that in trying to reduce one type of market failure, it may create other inefficiencies.

207
Q

What can the goverment do to correct market failure?

A

(1) provide subsidies to firms
(2) provide subsidies to buyers
(3) provide the good itself

208
Q

Cost-plus pricing

A

Firms that adopt mark-up or cost-plus pricing determine their average cost of production and
then add a certain percentage (mark-up) for profit.

209
Q

Full-range pricing

A 
is where a firm
sets the price of
all complementary
and substitute
products jointly to
maximize profits.
210
Q

Market Failures

A

A market failure exists when resources are not allocated efficiently. Resources are allocated
efficiently if an economy produces those goods that its citizens value the most.

The socially optimal level of output is Qs.

MSB = marginal social benefits
MSC=marginal social costs

211
Q

Positive spillover

effects

A 
occur when
the consumption of
a good or service
results in a benefit
to a third party
not involved in the
production and
purchase of that
good or service.
212
Q

Merit goods

A 
are
those goods
that would be
under-consumed
if provided only by
the private sector;
it is conceived that
individuals and
groups should have
access to merit
goods based on
need, rather than
ability and willingness
to pay.

For instance: Education and health

213
Q

negative externality

A 
occurs when
the production and/
or consumption
of a good creates
a cost to third
parties external
to the production
and consumption of
that good
214
Q

what are free-riders?

A 
The free-rider
problem occurs
when those who
consume or benefit
from a good or
service do not pay
for it.

For instance: Street lighting, light houses, etc..

215
Q

What are Public goods?

A

Public goods
have two characteristics: non-excludability and non-rivalry in consumption.

Non-excludability: mean that once a good or service has been provided, it is difficulty or too costly to exclude
non-payers from benefiting from the good or service.

Non-rivalry: means that the use or consumption of the
good or service by one person does not result in less of
the good or service being available for other people.

Example: Street lighting, light houses, and national defense are examples of public goods

216
Q

How much subsidy or tax deduction should the goverment provid?

A

large enough to increase the MPB (demand) curve of the buyers up to the point where MSB = MSC

217
Q

How is it possible to decrise the external damage of a product for third parties?

A

to give them the right to sue for damages

if the firm incur higher costs due to the fines, they will lead to higher prices, lower demand, and lower output

218
Q

When occurs market failure?

A

when resources are not allocated in an efficient way

MSB <> MSC

219
Q

When arise market failure:

A

(1) positive externalities
(2) negative externalities
(3) missing markets
(4) very large market power
(5) imperfect information

220
Q

How can negatice externalities be reduced?

A

(1) imposing regulations
(2) pollution taxes,
(3) issuing tradeable
(4) pollution permits
allowing third parties to sue for damages

221
Q

zerosum game

A

In a zero-sum game, one player wins at the expense of the other player

222
Q

non-zero- sum game

A

both players win or lose depending on the actions of the other player

223
Q

What shows a payoff matrix?

A

the various payoffs for each player (e.g., prisoner) based on the strategy chosen by both players

224
Q

nash equilibrium

A

is the outcome that results from the players making their best decision based on what they believe the other player will decide

Nash equilibrium is a stable

225
Q

Producer surplus

A

is the difference between the lowest
price that a firm is willing to sell a
good and the price that it actually receives.

226
Q

Asymmetric information

A

refers to the situation under imperfect competition
where at least one party in an economic transaction
has more information than the other party.

227
Q

What ways can the government attempt to increase the output and consumption?

A
  • provide subsidies to firms

Providing subsidies to the firms lowers their costs of production and creates incentives for them to produce more.The lower costs allow the firms in turn to lower their prices.

  • provide subsidies to buyers
    The government can also give subsidies to the buyers. For instance, the government can give
    students who attend private schools and universities a grant that can be used only for tuition
    fees.
  • provide the good itself

The government can also choose to provide public education and operate public hospitals
itself and cover the costs using tax revenues.

228
Q

Cooperative equilibrium

A

is where players elect to cooperate in order to jointly maximize their payoff.

229
Q

Adverse selection

A

is a problem created by asymmetric information before an agreement or transaction is made.

230
Q

Moral hazard

A

occurs when an individual increases their exposure to risk when another party bears the risk.

231
Q

What kind of procedures and policies create banks/insurance companies to reduce adverse selection and moral hazard problems?

A
  • background check (income, employment and credit history, and asset ownership)
  • require collateral from borrowers
  • funds available by presenting the invoice
232
Q

Principal-agent problems

A

occurs when the agent has an incentive to behave not in the best interests of the principal.

233
Q

Competitive bidding

A

is a method of procurement where two or more suppliers submit separate bids to win the available contract.

234
Q

sealed-bid auction

A

is where bidders simultaneously submit sealed bids which are unknown to other bidders.

235
Q

english auction

A

is a public auction where the auctioned item is sold for the final highest bid.

236
Q

When do asymmetric information exists?

A

when one party has more information than the other

237
Q

To what problems leads asymmetric information?

A
  • adverse selection

- moral hazard

238
Q

For what can a form use a auction?

A
  • for conducting competitive procurements
  • regarding purchasing decisions
  • obtain higher prices for their products
239
Q

Capital budgeting

A

involves determining which capital projects the firm should invest in, how much this
investment will cost the company, and how the investment expenditure will be financed.

240
Q

examples of the different types of investment decisions

A
  • the purchase of new capital to produce a new product
  • the construction of additional factories, warehouses, and offices to meet increasing demand, or the company’s expansion into other geographic markets
  • deciding whether to buy or lease equipment, machines, and vehicles
  • deciding whether to produce a product or to outsource its production
  • replacing obsolete plants and equipment
241
Q

time value of money

A

refers to the fact that the value of a monetary amount today is worth more than in the future.

242
Q

Present value (PV)

A

refers to the present- day value of an amount of money, subject to a rate of return that affects its future value.

243
Q

present value (formula)

A

cash flow:
PV = CF / (1+i)^n

stream of cash flows:
PV = CF / (1+i) + CF / (1+i)^2 + CF / (1+i)^3 + … + CF / (1+i)^n

i = annual interest rate
n = number of years
244
Q

Name two methods for future cash flows and the time value of money

A

-net present value (NPV)

-internal rate of
return (IRR)

245
Q

net present value (formula)

A

NPV = Sum (t=1 -> n) [Rt / (1+d)^t] - Sum (t=1 -> n) [Et / (1+d)^t]

t = time period (years, months)
n = last period of the project
Rt = revenues (cash inflows) in period t
Et = expenditures (cash outflows) in period t
d = discount rate (cost of capital)
246
Q

profitability index (PI)

A

is the ratio of payoff to investment for a specific project.

247
Q

profitability index

A

PV= PV of the Stream of Future Cash Inflows / Initial Investment Outlay

248
Q

Risk

A

is a future event with a measurable probability

249
Q

Uncertainty

A

is a future event with an indefinable or incalculable probability.

250
Q

expected value

A

is the average of all possible outcomes for a project.

251
Q

sensitivity analysis

A

analyzes how different values of variables will affect a project’s NPV.

252
Q

scenario analysis

A

analyzes how different values of multiple variables will affect a project’s NPV

253
Q

What involves capital budgeting?

A

involves determining which capital projects the firm should invest in, how much this investment will cost, and how the investment expenditure will be financed.

Fernstudium (2 decks)

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