Module 5

Question 1

Business cycle: Peak

Answer 1

firms profits at highest level but facing capacity constraints and input shortages leading to higher costs and higher price levels.

Question 2

Business cycle: Trough

Answer 2

profits for firms are at lowest point. Experience excess production capacity, leading to reduce workforces and cut costs.

Question 3

Pure competition

Answer 3

• zero economic profit
• large # of suppliers and customers acting independently
• very little product differentiation
• no barriers to entry
• Firms are price takers
• maintaining market share and responsive of sale prices to market conditions

Question 4

Monopoly

Answer 4

positive economic profit in long run

• a single firm with a unique profit
• significant barriers to entry
• set output and prices
• No substitute products

Question 5

Monopolistic competition

Answer 5

• zero economic profits in the long run
• numerous firms with differentiated products
• few barriers to entry
• firms exert some influence over price but have more control over quantity produced
• Significant non-price competition in the market (brand loyalty)

Question 6

Oligopoly

Answer 6

• positive economic profit in the long run
• few firms with differentiated products
• Fairly significant barriers to entry (high capital costs)
• strongly interdependent firms (prices tend to be fixed)
• Kinked demand curve (firms match price cuts but ignore price increases)
• focus on enhancing market share and ways to adapt to price and volume changes

Question 7

gov’t policies that have significant impact on economy

Answer 7

• Fiscal policy
• Monetary policy
• Regulations
• Trade controls

Question 8

How gov’t use fiscal policy

Answer 8

increase gov’t spending and lower taxes expand company, the reverse dampens the economy

Question 9

3 ways the federal reserve increase money supply

Answer 9

1. Open market operations: purchase gov’t securities on open market
2. Lower discount rate
3. lower required reserve ratio

Question 10

3 trade controls gov’t uses to impact economy

Answer 10

1. embargoes
2. tariffs
3. quotas

Question 11

what is fundamental law of demand

Answer 11

price as an inverse relationship with quantity demanded

Question 12

Factors that shift demand curve (WRITEN)

Answer 12

changes in wealth, prices of related goods, consumer income, consumer tastes, consumer expectations, number of buyers in a market

Question 13

What is fundamental law of supply

Answer 13

price and supply are positively related. the higher the price received for a good, the more quantity sellers are willing to produce.

Question 14

Factors that shift supply curves (ECOST)

Answer 14

changes in price expectation of supplying firm, production costs, demand fo other goods, subsidies or taxes, and technology.

Question 15

What is cross elasticity of demand

Answer 15

• % change in quantity demanded of a good is due to a price change of another good
• % change in # of units in x demanded/% change in price of y

Question 16

elasticity

Answer 16

measure of how sensitive the demand for or the supply of a product is to a change in its price

Question 17

price elasticity of demand

Answer 17

the % change in the quantity demanded/% change in price

Question 18

price elasticity of supply

Answer 18

% change in quantity supplied/% change in price

Question 19

what is quantitative values of inelasticity of demand and supply, elasticity of demand and supply, and unit elasticity of demand and supply

Answer 19

inelasticity: less than 1
elasticity: greater than 1
unit elasticity: exactly 1

Question 20

Price ceiling

Answer 20

prices are artificially low, more quantity is demanded than supply is available (market shortage)

Question 21

Price floor

Answer 21

prices are artificially high, less quantity is demanded than is available (market surplus)

Question 22

inflation and impact on value of money

Answer 22

Sustained increase in the general prices of goods and services. As prices increase, value of money decreases.

Question 23

SWOT Analysis

Answer 23

lists strengths and weaknesses (internal factors) and opportunities and threats (external factors).
used by business to develop strategic plans.

Question 24

Porter’s 5 external forces (BBBEM)

Answer 24

• barriers to market entry
• bargaining power of customers
• bargaining power of suppliers
• existence of substitutes
• market competitiveness

Question 25

what is strategic planning

Answer 25

establishes general direction of the organization

Question 26

Horizontal Combo

Answer 26

companies in same industry (competitors) join together. example, Heinz and Kraft foods

Question 27

Vertical Combo

Answer 27

companies combining at different stages of production. example, raw materials co. combine with company that uses them for finished goods.

Question 28

Circular Combo

Answer 28

remote connections come together under single mgmt. example, pharm company acquires senior citizen building

Question 29

Diagonal Combo

Answer 29

combine with company that provides ancillary support. example, met farm combines with tractor trailer company that transports it meats.

Question 30

Tender offer

Answer 30

company makes offer directly to shareholders to buy outstanding shares of company. Shareholders approve or deny

Question 31

purchase of assets

Answer 31

portion of all of selling company’s assets are purchased by acquiring company, which results in dissolution of selling company. Shareholders must approve.

Question 32

Sell off

Answer 32

outright sale of subsidiary due to lack of synergy

Question 33

Spin off

Answer 33

separating subsidiary which is more profitable apart from larger co. can distribute stock in subsidiary to shareholders.

Question 34

Equity carve out

Answer 34

Subsidiary is made public through IPO. Parent maintains controlling interest. Unlike Spin off, cash is generated for parent company.