Week 2- Business opportunities, costs, benefits and decisions

Question 1

what is the simple definition of value?

Answer 1

willingness to pay for a product

Question 2

what is the simple definition of wealth?

Answer 2

the value of assets owned

Question 3

how is wealth created?

Answer 3

by moving assets from lower-valued uses to higher-valued ones through voluntary transactions between individuals or firms

Question 4

If a buyer values a house at £130,000 and the seller values it at 120,000 what must the price be for the sale to go through voluntarily?

Answer 4

anywhere between £130,000 and £120,000 so that its a win-win for both parties

Question 5

what is consumer/seller surplus?

Answer 5

the difference between what the consumer/seller is willing to pay/sell for a product and what they actually pay/sell for the product

Question 6

how do you calculate total surplus?

Answer 6

You add the consumers and sellers surplus together

Question 7

Is it always obvious that an asset is in a low valued use?

Answer 7

no

Question 8

Can the external environment have an impact on wealth-creating transactions?

Answer 8

yes it can move low valued assets to become high valued assets. eg hand sanitiser during covid-19

Question 9

How can mergers/acquisitions move assets to higher-valued uses?

Answer 9

when two businesses join together it can lead to greater synergy eg. Pixar and Disney acquisition lead to Disney getting hold of Pixar’s technology advancements and Pixar getting access to Disneys wider distribution channels

Question 10

when is an economy efficient?

Answer 10

When all of the wealth-creating transactions have been consummated

Question 11

how are actions by governments judged by economists?

Answer 11

If the action takes us away or towards greater efficiency( by creating wealth or destroying it)

Question 12

Give an example of a government policy that destroys wealth

Answer 12

price caps on houses: if the price cap is below the value of a new house it discourages the firms building the new houses to build them because they are not able to get the full value. Therefore this leads to a further shorter supply of homes –> making it more expensive

Question 13

what are explicit costs?

Answer 13

1) costs of raw materials
2) operating costs
3) Depreciation costs of buildings and other assets

Question 14

are explicit costs missing from the income statement?

Answer 14

no

Question 15

what are implicit costs?

Answer 15

Payments to other shareholders(dividends)

Question 16

are implicit costs missing from income statements?

Answer 16

yes

Question 17

what is the difference between economic profit and accounting profit?

Answer 17

economic profit incorporates implicit and explicit costs but accounting profit only incorporates explicit costs

Question 18

what is economic value added?

Answer 18

the opportunity cost of doing something else eg. Cadburys could have used the money from the empty flats to make more chocolate

Question 19

what is opportunity cost?

Answer 19

what you give up to pursue something else. eg the opportunity cost of making more chocolate was greater than keeping the empty flats in the case of Cadbury

Question 20

what are fixed costs?

Answer 20

costs that do not vary with the level of output eg.rent

Question 21

what are variable costs?

Answer 21

costs that do vary with the level of output eg. raw materials

Question 22

what is a sunk cost?

Answer 22

A cost that has already been paid and cannot be recovered.

Question 23

what are some examples of sunk costs?

Answer 23

Research and development and advertising

Question 24

what is the sunk cost fallacy?

Answer 24

when you let sunk costs (irrelevant) influence a decision

Question 25

what is hidden cost fallacy?

Answer 25

ignoring relevant costs that do vary with the consequences of your decision

Question 26

Give an example of the hidden cost fallacy

Answer 26

If you bought concert tickets for £50 and then someone offered you £100 for them. You would commit hidden cost fallacy if you decide to go the concert instead of selling the tickets

Question 27

What are capital costs?

Answer 27

what it would cost to obtain your assets eg. the cost of a bank loan or shares.

Question 28

Which cost does EVA help with identifying? sunk or hidden?

Answer 28

hidden

Question 29

what is economic cost?

Answer 29

the cost of having money tied up and not getting the full value from it

Question 30

What does negative economic profit show to investors?

Answer 30

that the firm is earning less than equity holders expect to make from their investment

Question 31

how do governments play a critical role in wealth creation?

Answer 31

by enforcing property rights and contracts

Question 32

Give examples of things that destroy wealth

Answer 32

anything that impedes the movement of assets from lower to higher-valued uses eg. taxes, price controls and subsidies

Question 33

what is a price ceiling?

Answer 33

outlaws trade at prices above the ceiling

Question 34

what is a price floor?

Answer 34

outlaws trade at prices below the floor