Managerial Economics Book Flashcards

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Accounting Profit

answer

the total amount of money taken in from sales
(total revenue, or price times quantity sold)
minus the dollar cost of producing goods or services
what show up on the firm's income statement
reported to manager by firm's accounting department

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Economic Profits

answer

difference between the total revenue and the total opportunity cost of producing the firm's goods or services

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Opportunity Cost

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using a resource includes
- explicit (or accounting) cost of the resource
- implicit cost of giving up the best alternative use of the resource

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Substitues

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the presence of close substitutes erodes industry profitability

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Compliments

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complementarities also affect industry profitability

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Five Forces Framework

answer

tool for helping managers see the "big picture"
schematic used to organize industry conditions that affect industry profitability and look at effectiveness of alternative business strategies

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Incentives

answer

in a firm they affect how resources are used and how hard workers work

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Consumer-Producer Rivalry

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occurs because of the competing interests of con- sumers and producers. Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices

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Consumer-Consumer Rivalry

answer

reduces the negotiating power of consumers in the marketplace. It arises because of the economic doctrine of scarcity. When limited quantities of goods are available, consumers will compete with one another for the right to purchase the available goods

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Producer-Producer Rivalry

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Unlike the other forms of rivalry, this disciplining device functions only when multiple sellers of a product compete in the marketplace

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time value of money

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The opportunity cost of receiving the $1 in the future is the forgone interest that could be earned were $1 received today. This opportunity cost reflects the time value of money.

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present value

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an amount received in the future is the amount that would have to be invested today at the prevailing interest rate to generate the given future value

PV = FV / [(1 + i)ⁿ]

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present value of a future payment

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reflects the difference between the future value (FV) and the opportunity cost of waiting (OCW): PV FV OCW

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Net Present Value

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a project is simply the present value (PV ) of the income stream generated by the project minus the current cost

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Present Value of Indefinitely Lived Assets

answer

If the interest rate is i, the value of the asset is given by the present value of these cash flows

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perpetuity

answer

asset generates a perpetual stream of identical cash flows at the end of each period. If each of these future cash flows is CF

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Profit Maximization

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Maximizing profits means maximizing the value of the firm, which is the present value of current and future profits.

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value of a firm

answer

takes into account the long-term impact of man- agerial decisions on profits

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Maximizing Short-Term Profits May Maximize Long-Term Profits

answer

If the growth rate in profits is less than the interest rate and both are constant, maximizing long-term profits is the same as maximizing current (short-term) profits.

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Discrete Decisions

answer

...

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Marginal benefit

answer

additional benefits that arise by using an additional unit of the managerial control variable

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Marginal cost

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on the other hand, is the additional cost incurred by using an additional unit of the managerial control variable

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marginal net benefits

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marginal net benefits of Q—MNB(Q)—are the change in net bene- fits that arise from a one-unit change in Q

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...

answer

when marginal benefits exceed marginal costs, the net benefits of increasing the use of Q are positive; by using more Q, net benefits increase.

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...

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There is an important reason why MB = MC at the level of Q that maximizes net benefits: So long as marginal benefits exceed marginal costs, an increase in Q adds more to total bene- fits than it does to total costs

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Marginal Principle

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To maximize net benefits, the manager should increase the managerial control variable to the point where marginal benefits equal marginal costs. This level of the managerial con- trol variable corresponds to the level at which marginal net benefits are zero; nothing more can be gained by further changes in that variable.

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...

answer

The reason the net-benefit-maximizing level of Q is less than the level of Q that maximizes total benefits is that there are costs associated with achieving more total benefits

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...

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The slopes of the total benefits curve and the total cost curve are equal when net ben- efits are maximized. This is just another way of saying that when net benefits are maximized, MB = MC.

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Marginal Value of a function

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the derivative of a given function is the marginal value of that function

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Incremental Revenues

answer

additional revenues derived from a decision

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Incremental Costs

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additional costs that stem from the decision

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Excise Tax

answer

shifts the supply curve up by the amount of the tax

1 of 32

question

Accounting Profit

answer

question

Economic Profits

answer

difference between the total revenue and the total opportunity cost of producing the firm's goods or services

question

Opportunity Cost

answer

using a resource includes
- explicit (or accounting) cost of the resource
- implicit cost of giving up the best alternative use of the resource

question

Substitues

answer

the presence of close substitutes erodes industry profitability

question

Compliments

answer

complementarities also affect industry profitability

question

Five Forces Framework

answer

tool for helping managers see the "big picture"
schematic used to organize industry conditions that affect industry profitability and look at effectiveness of alternative business strategies

question

Incentives

answer

in a firm they affect how resources are used and how hard workers work

question

Consumer-Producer Rivalry

answer

occurs because of the competing interests of con- sumers and producers. Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices

question

Consumer-Consumer Rivalry

answer

question

Producer-Producer Rivalry

answer

Unlike the other forms of rivalry, this disciplining device functions only when multiple sellers of a product compete in the marketplace

question

time value of money

answer

The opportunity cost of receiving the $1 in the future is the forgone interest that could be earned were $1 received today. This opportunity cost reflects the time value of money.

question

present value

answer

an amount received in the future is the amount that would have to be invested today at the prevailing interest rate to generate the given future value

PV = FV / [(1 + i)ⁿ]

question

present value of a future payment

answer

reflects the difference between the future value (FV) and the opportunity cost of waiting (OCW): PV FV OCW

question

Net Present Value

answer

a project is simply the present value (PV ) of the income stream generated by the project minus the current cost

question

Present Value of Indefinitely Lived Assets

answer

If the interest rate is i, the value of the asset is given by the present value of these cash flows

question

perpetuity

answer

asset generates a perpetual stream of identical cash flows at the end of each period. If each of these future cash flows is CF

question

Profit Maximization

answer

Maximizing profits means maximizing the value of the firm, which is the present value of current and future profits.

question

value of a firm

answer

takes into account the long-term impact of man- agerial decisions on profits

question

Maximizing Short-Term Profits May Maximize Long-Term Profits

answer

If the growth rate in profits is less than the interest rate and both are constant, maximizing long-term profits is the same as maximizing current (short-term) profits.

question

Discrete Decisions

answer

...

question

Marginal benefit

answer

additional benefits that arise by using an additional unit of the managerial control variable

question

Marginal cost

answer

on the other hand, is the additional cost incurred by using an additional unit of the managerial control variable

question

marginal net benefits

answer

marginal net benefits of Q—MNB(Q)—are the change in net bene- fits that arise from a one-unit change in Q

question

...

answer

when marginal benefits exceed marginal costs, the net benefits of increasing the use of Q are positive; by using more Q, net benefits increase.

question

...

answer

question

Marginal Principle

answer

question

...

answer

The reason the net-benefit-maximizing level of Q is less than the level of Q that maximizes total benefits is that there are costs associated with achieving more total benefits

question

...

answer

The slopes of the total benefits curve and the total cost curve are equal when net ben- efits are maximized. This is just another way of saying that when net benefits are maximized, MB = MC.

question

Marginal Value of a function

answer

the derivative of a given function is the marginal value of that function

question

Incremental Revenues

answer

additional revenues derived from a decision

question

Incremental Costs

answer

additional costs that stem from the decision

question

Excise Tax

answer

shifts the supply curve up by the amount of the tax

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