Slides Flashcards
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.
Negative externalities
The private costs (or benefits) of a behavior are different from the social costs (or benefits) of the behavior
3 Tenants from Ronald Coase
- If the circumstances are right, one party to an externality can pay the other party to change their behavior. 2. The private parties will always come to the same efficient solution regardless of which party starts out with the property right. The “only difference” is who ends up paying whom. 3. The transaction costs related to striking this kind of deal – all in – must be reasonably low for the private parties to work out an externality on their own.
How does the clean air act attempt to get to a socially efficient equilibrium?
Public good
Nonrivalrous: The cost of offering the good to additional users is very low or even zero.
Nonexclusionary: It is very hard, if not impossible, to keep persons who have not paid for the good from using it.
Free rider problem
When a group of individuals relies on the efforts or payments of others to provide a good.
Demand for a public good
The big picture
The Economy’s Circular Flow
The circular flow (expanded)
Explain recession and recovery
Expansion and Recovery
Say’s Law
Hensen’s Law
Demand-led recovery
Why is inflation bad?
Demand-pull and Cost-push inflation
Types of unemployment
Monetary policy
Expansionary monetary policy
Contractionary monetary policy
Monetary policy’s impact on interest rates
Multiplier model
Long-run growth
Example test question
Macroeconomic Policy in a Nutshell
GDP
AS-AD Framework
Fiscal Policy
Business cycles
Inflation / Deflation
Keynes
Friedman
Friedman vs Keynes
Friedrick von Hayek
What is a market?
Law of demand
Demand curve
Demand determinants
Prices changes for related goods
Demand function
Demand function vs demand curve
Inverse demand function
Consumer surplus
Law of Supply
Market equilibrium
Total Surplus
Price Controls
Tax impact on consumer surplus
