ECON 301 Exam 1 Review CH 1, 2, 3, 5

question

Economics

answer

The science of making decisions in the presence of scarce resources
-resources are anything used to produce a good or service, or achieve a goal
-Decisions are important because scarcity implies trade-offs
-Maximizing objectives when we have some constraints

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Manager

answer

A person who directs resources to achieve a stated goal
-is the decider
-directs the efforts of others
-purchases inputs used in the production of firm's output
-directs the product price or quality decisions

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Managerial Economics

answer

The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal

question

Basic principles comprising effective management:

answer

1. Identify goals and constraints
2. Recognize the nature and importance of profits (or some kind of objective)
3. Understand incentives (useful in predicting behavior)
4. Understand markets
5. Recognize the time value of money
6. Use marginal analysis

question

Identify Goals and Constraints

answer

Goals:
-a typical firm's objective is to maximize profit

Constraints
-Technology (how you make your product)
-Price of inputs
-reaction of competitors or regulators

question

Accounting profits

answer

Total amount of money from sales (TR) - the dollar cost of producing goods or services

question

Economic Profits

answer

TR-Opportunity cost and the other costs of producing goods and services

question

Opportunity cost

answer

explicit cost of a resource plus the implicit cost/resources that are given up when a decision is made

question

Understanding incentives

answer

within a firm, incentives impact how resources are used and how hard workers work

question

understanding the market

answer

2 sides to every market transactions: Buyer (consumer) and seller (producer)

question

Recognize the time value of money

answer

Gap exists between the time when costs are borne and benefits received

Simple Interest:
FV=PV + PV * rt
FV= PV (1 + rt)

Compound Interest:
FV= PV (1+r)^t

question

Net Present Value

answer

Present value of an income stream of a project - the current cost of the project

NPV= PV- C0
NPV > 0 should do project
NPV < 0 should not do project

question

Profit maximization principle

answer

Maximizing profits for a firm means maximizing the value of the firm

Which is the present value of current and future profit

question

Marginal analysis Form

answer

want to maximize an objective and have a "control" or choice variable (Q)
-Total benefits B(Q)
-Total costs C(Q)

Managers objective is to maximize net benefits
N(Q) = B(Q) - C(Q)

question

Optimal Quantity to Produce

answer

B'(Q) = Marginal benefit
- change in total benefit from a change in control variable (Q)
C'(Q) = Marginal cost
-change in total cost from a change in the control variable (Q)

question

Marginal Net Benefits

answer

N'(Q) = B'(Q) - C'(Q)
Optimal decision when N'(Q)=0

question

Determining how much to produce

answer

Profit=P*Q - C(Q)

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Marginal Analysis Principle

answer

-To maximize net benefits
-manager should increase the managerial control variable up to the point where marginal benefits B'(Q)= marginal cost C'(Q)
-level of the managerial control variable corresponds to the level at which marginal net benefits are zero
-

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Time Value of Money

answer

Present Value (PV) of a single Future Value

FV= PV (1 +r) ^t <=> PV = (FV)/ (1+r)^t

PV=FV-Opportunity cost of waiting

question

Competitive Market

answer

-Many buyers and sellers
-Homogenous product
-No barriers to entry
-Perfect information

question

Law of demand

answer

The quantity of a good consumers are willing and able to buy increases (decreases) as the price falls (rises)

question

Change in quantity demanded vs. change in demand

answer

A change in a good's price leads to a change in quantity demanded. Moves along a given demand curve

Other factors that influence the demand curve. Shift the entire demand curve: a change in demand

question

Demand shifters

answer

price of related goods, income, number of buyers, tastes and expectation

With these shift factors come related concepts
-substitutes and complements; normal and inferior

question

Law of Supply

answer

The quantity of a good producers are willing and able to sell increases (decreases) as the price rises (falls)

question

Supply Shifters

answer

Input prices, prices of substitutes, expectations, number of buyers, technology, regulations, weather

question

Market Equilibrium

answer

Price of a good is determined by the interactions of the market demand and market supply for the good

A price and quantity such that there is no shortage or surplus in the market

Forces that drive market demand and market supply are balanced, and there is no pressure on prices or quantities to change

question

Market equilibrium Surplus

answer

At a price greater than the equilibrium price, excess quantity supplied, would exist

Sellers would be willing to sell more than demanders would be willing to buy

Frustrated suppliers would cut their price and cut back on production, and consumers would buy more

question

Market equilibrium Shortage

answer

At a price lower than the equilibrium price, excess quantity demanded, would exist

Buyers would be willing to buy more than sellers would be willing to sell

Frustrated buyers would compete for the existing supply, causing the price to rise, and producers to increase the quantity supplied

question

Economic welfare: Consumer surplus

answer

Difference between max price willing to pay and price they actually pay

Extra value that consumers derive from a good but do not pay for

Total consumer value - Total consumer expenditure

question

Economic welfare: Producer surplus

answer

Amount producers receive in excess of the amount necessary for them to produce the good

Area above supply curve and below equilibrium price

question

Price Ceiling

answer

The maximum price a product can be charged

Results in Shortage

question

Price Floor

answer

The lowest price a product can be charged

Results in Surplus

question

Total Economic Surplus

answer

Consumer surplus + Producer Surplus

question

Elasticity

answer

Measure of responsiveness of one variable to a change in another variable

E= % Change in G / % Change in S
Elastic is absolute vale is > 1
Inelastic if absolute value is < 1
Perfect inelastic = 0 (vertical line)
Perfect elastic = infinity (horizontal line)

question

Total Revenue

answer

The price of the good (P) times the quantity of the good sold (Q)

TR= P * Q

question

Cross- price elasticity

answer

Measure of responsiveness of a % change in quantity demand for good X / to a % change in price of good Y

E > 0 X and Y are substitutes
E < 0 X and Y are complements

question

Income elasticity

answer

Measure of responsiveness of a % change in quantity demanded for good X / to a % change in income (M)

E > 0 X is normal good
E < 0 X is an inferior good

question

Relationship between elasticity demanded and Total Revenue

answer

demand is relatively price elastic (E>1), total revenues will rise as the price declines and vise versa

Occurs bc the % increase in the quantity demanded is greater than the % reduction in price

question

Product Function

answer

Mathematical function that defines the maximum amount of output that can be produced with a given set of inputs Q=f (K,L)
Q= level of output
K=the quantity of capital input
L= the quantity of labor input

question

Total Product

answer

Maximum level of output that can be produced with a given level of inputs

question

Average Product

answer

A measure of the output produced per unit of input

AP = Q/L

AFC= FC/Q
AVC= VC(Q)/Q
ATC= TC / Q = (FC + VC (Q)) / Q

question

Marginal Product

answer

Change in total output attributable to the last unit of an input

MP= Change Q / Change L (or K)
First derivative of total production

MC= Change in TC/ Change in Q

question

Short-run

answer

Period of time where some factors of production (inputs) are fixed, and constrain a manager's decisions

Fixed cost: remain the same as output changes
Sunk cost
SR VC = VC (Q)
SR TC = FC + VC (Q)

question

Long-run

answer

Period of time over which all factors of production (inputs) are variable, and can be adjusted by a manager

Variable cost: change as output changes
All costs are variable
No fixed costs

question

Law of diminishing marginal returns

answer

At some point, adding more of a variable input (labor), to the same amount of a fixed input (capital), will cause the marginal product of the variable input to decline

As you add more units of input, will cause marginal product to decline

Also a reason with the average cost curve is U shaped

question

Long-run average cost curve

answer

Curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production

question

Economies of scale

answer

Portion of the long-run average cost curve where long-run average costs decline as output increases

GOOD

question

Diseconomies of scale

answer

Portion of the long-run average cost curve where long-run average costs increase as output increases

BAD

question

Economies of scope

answer

Total cost of producing 2 items together is less than each separately

question

Cost complementarity

answer

Marginal cost of producing 1 product decreases when the output of another product is increased

question

Value of marginal product

answer

Should = the wage

1 of 51

question

Economics

answer

question

Manager

answer

question

Managerial Economics

answer

The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal

question

Basic principles comprising effective management:

answer

question

Identify Goals and Constraints

answer

Goals:
-a typical firm's objective is to maximize profit

Constraints
-Technology (how you make your product)
-Price of inputs
-reaction of competitors or regulators

question

Accounting profits

answer

Total amount of money from sales (TR) - the dollar cost of producing goods or services

question

Economic Profits

answer

TR-Opportunity cost and the other costs of producing goods and services

question

Opportunity cost

answer

explicit cost of a resource plus the implicit cost/resources that are given up when a decision is made

question

Understanding incentives

answer

within a firm, incentives impact how resources are used and how hard workers work

question

understanding the market

answer

2 sides to every market transactions: Buyer (consumer) and seller (producer)

question

Recognize the time value of money

answer

Gap exists between the time when costs are borne and benefits received

Simple Interest:
FV=PV + PV * rt
FV= PV (1 + rt)

Compound Interest:
FV= PV (1+r)^t

question

Net Present Value

answer

Present value of an income stream of a project - the current cost of the project

NPV= PV- C0
NPV > 0 should do project
NPV < 0 should not do project

question

Profit maximization principle

answer

Maximizing profits for a firm means maximizing the value of the firm

Which is the present value of current and future profit

question

Marginal analysis Form

answer

want to maximize an objective and have a "control" or choice variable (Q)
-Total benefits B(Q)
-Total costs C(Q)

Managers objective is to maximize net benefits
N(Q) = B(Q) - C(Q)

question

Optimal Quantity to Produce

answer

B'(Q) = Marginal benefit
- change in total benefit from a change in control variable (Q)
C'(Q) = Marginal cost
-change in total cost from a change in the control variable (Q)

question

Marginal Net Benefits

answer

N'(Q) = B'(Q) - C'(Q)
Optimal decision when N'(Q)=0

question

Determining how much to produce

answer

Profit=P*Q - C(Q)

question

Marginal Analysis Principle

answer

question

Time Value of Money

answer

Present Value (PV) of a single Future Value

FV= PV (1 +r) ^t <=> PV = (FV)/ (1+r)^t

PV=FV-Opportunity cost of waiting

question

Competitive Market

answer

-Many buyers and sellers
-Homogenous product
-No barriers to entry
-Perfect information

question

Law of demand

answer

The quantity of a good consumers are willing and able to buy increases (decreases) as the price falls (rises)

question

Change in quantity demanded vs. change in demand

answer

A change in a good's price leads to a change in quantity demanded. Moves along a given demand curve

Other factors that influence the demand curve. Shift the entire demand curve: a change in demand

question

Demand shifters

answer

price of related goods, income, number of buyers, tastes and expectation

With these shift factors come related concepts
-substitutes and complements; normal and inferior

question

Law of Supply

answer

The quantity of a good producers are willing and able to sell increases (decreases) as the price rises (falls)

question

Supply Shifters

answer

Input prices, prices of substitutes, expectations, number of buyers, technology, regulations, weather

question

Market Equilibrium

answer

question

Market equilibrium Surplus

answer

question

Market equilibrium Shortage

answer

question

Economic welfare: Consumer surplus

answer

Difference between max price willing to pay and price they actually pay

Extra value that consumers derive from a good but do not pay for

Total consumer value - Total consumer expenditure

question

Economic welfare: Producer surplus

answer

Amount producers receive in excess of the amount necessary for them to produce the good

Area above supply curve and below equilibrium price

question

Price Ceiling

answer

The maximum price a product can be charged

Results in Shortage

question

Price Floor

answer

The lowest price a product can be charged

Results in Surplus

question

Total Economic Surplus

answer

Consumer surplus + Producer Surplus

question

Elasticity

answer

question

Total Revenue

answer

The price of the good (P) times the quantity of the good sold (Q)

TR= P * Q

question

Cross- price elasticity

answer

Measure of responsiveness of a % change in quantity demand for good X / to a % change in price of good Y

E > 0 X and Y are substitutes
E < 0 X and Y are complements

question

Income elasticity

answer

Measure of responsiveness of a % change in quantity demanded for good X / to a % change in income (M)

E > 0 X is normal good
E < 0 X is an inferior good

question

Relationship between elasticity demanded and Total Revenue

answer

demand is relatively price elastic (E>1), total revenues will rise as the price declines and vise versa

Occurs bc the % increase in the quantity demanded is greater than the % reduction in price

question

Product Function

answer

question

Total Product

answer

Maximum level of output that can be produced with a given level of inputs

question

Average Product

answer

A measure of the output produced per unit of input

AP = Q/L

AFC= FC/Q
AVC= VC(Q)/Q
ATC= TC / Q = (FC + VC (Q)) / Q

question

Marginal Product

answer

Change in total output attributable to the last unit of an input

MP= Change Q / Change L (or K)
First derivative of total production

MC= Change in TC/ Change in Q

question

Short-run

answer

Period of time where some factors of production (inputs) are fixed, and constrain a manager's decisions

Fixed cost: remain the same as output changes
Sunk cost
SR VC = VC (Q)
SR TC = FC + VC (Q)

question

Long-run

answer

Period of time over which all factors of production (inputs) are variable, and can be adjusted by a manager

Variable cost: change as output changes
All costs are variable
No fixed costs

question

Law of diminishing marginal returns

answer

question

Long-run average cost curve

answer

Curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production

question

Economies of scale

answer

Portion of the long-run average cost curve where long-run average costs decline as output increases

GOOD

question

Diseconomies of scale

answer

Portion of the long-run average cost curve where long-run average costs increase as output increases

BAD

question

Economies of scope

answer

Total cost of producing 2 items together is less than each separately

question

Cost complementarity

answer

Marginal cost of producing 1 product decreases when the output of another product is increased

question

Value of marginal product

answer

Should = the wage

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ECON 301 Exam 1 Review CH 1, 2, 3, 5

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