Slides Flashcards
(75 cards)
Manager
A person who directs resources to achieve a stated goal
Economics
The science of making decisions in the presence of scarce resources
Resources
Anything used to produce a good or service to achieve a goal
Managerial economics
The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
Effective managers must
Idnetify goals and constraints, recognize the nature and importance of profits, understand incentives, understand markets, recognize the time value of money, and use marginal analysis
Economic profits
The difference between total revenue and total opportunity cost in producing the firm’s goods or services
Opportunity cost
Includes the explicit cost of the resource and the implicit cost of giving up the best alternative use of the resource
Opportunity cost example
You run a pizzeria that generates $20,000 in profits, but you give up a job that would have paid $50,000. You opportunity cost is the $50,000. Your implicit profits for the business are the -$30,000.
Profits are a signal
Profits signal to resource holders where resources are most highly valued by society
Five Forces
Entry, power of suppliers, power of buyers, industry rivalry, and substitutes and complements
Three sources of rivalry
Consumer-Producer Rivalry, Consumer-Consumer Rivalry, Producer-Producer Rivalry
Consumer-Producer Rivalry
Occurs because of the competing interests of consumers and producers. Consumers want low prices and producers wants high prices (e.g. Car salesman vs buyer).
Consumer-Consumer Rivalry
Consumers competing for the right to purchase available goods. Consumers outbid each other for the right to buy goods (e.g. Auctions).
Producer-Producer Rivalry
Multiple sellers of a product compete in the marketplace. Ex: Two gas stations across the street from one another competing on price.
Time value of money
$1 today is worth more than $1 in the future
Present value
The amount that would have to be invested today at the prevailing interest rate to generate the given future rate
Marginal analysis
Optimal managerial decisions involve comparing the marginal (or incremental) benefis of a decision with the marginal (or incremental) costs
Marginal benefit
The additional benefits that arise by using an additional unit of the managerial control variable
Marginal cost
The additional cost incurred by using an additional unit of the managerial control variable
Implicit cost
The cost of giving up the best alternative
Asymmetric information
Adverse selection & moral hazard
Adverse selection
Individuals have hidden characteristics (but know themselves) and in which a selection process results in a pool of individuals with undesirable characteristics.
Moral hazard
One party to a contract takes a hidden action that benefits him or her at the expense of another party.
What can result from asymmetric information?
Bad products can drive out good and the market fails.
