Managers, Profits, and Market Flashcards
Study of the behavior of individual economic agents
Microeconomics
That the cost of something is what you gave up to get it
Opportunity cost
Owned by others and hired, rented, or leased
Market-supplied resources
Owned and used by the firm
Owner-supplied resources
Sum of the opportunity cost of both market-supplied resources and owner-supplied resources
Total Economic Cost
Monetary payments to owners of market-supplied resources can be seen in ledgers, journals, among others
Explicit Cost
Nonmonetary opportunity costs of using owner-supplied resources
Implicit Cost
Types of implicit costs
- ) Opportunity cost of cash provided by the owner
- ) Opportunity cost of using the land or capital owned by the firm
- ) Opportunity cost of the owner’s time spent in managing and working for the firm
The difference between the revenue received from the sale of an output and the cost of inputs used
Economic Profit
Economic profit
Total revenues - Total economic cost
Total revenues - explicit cost - implicit cost
It shows the amount of money a firm has left over after deducting the explicit cost of running the business
Accounting profit
Accounting Profit
Total revenues or sales - Explicit cost
Does not subtract the implicit cost from total revenues
Accounting profit
It covers all costs of all resources used by the firm, to maximize economic profit
Firm owners
Price of which it can be sold
Value of the Firm
Accounts of risk for not knowing the future profit
Risk Premium
Risk premium logic
The larger the risk, the higher the risk premium, and the lower the firm’s value
The conflict that arises when the goals of the management (agent) do not match the goals of the owner (principal)
Principal-agent problem
When either party to an agreement has incentives not to abide by all its provisions and one party cannot cost-effectively monitor the agreement
Moral Hazard
Price is determined strictly by market forces of demand & supply
Price-Taking Firm
Has a degree of market power, which is the ability to raise price without losing all sale
Price-Setting Firm
This market structure is selling homogenous or identical products
Perfect Competition
This market structure is protected by institutional barriers to entry
Monopoly
This market structure is selling differentiated products
Monopolistic Competition
This market structure depends on its profit on interdependence among few competitors
Oligopoly
