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Law of Diminishing Utility
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added satisfaction declines as a consumer acquires additional units of a given product
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Utility
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want-satisfying power. The utility of a good or service is the satisfaction or pleasure one gets from consuming it.
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Total utility
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the total amount of satisfaction or pleasure a person derives from consuming some specific quantity
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Marginal utility
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the extra satisfaction a consumer realizes from an additional unit of that product
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Utility-Maximizing Rule
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To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility
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income effect
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the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good.
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endowment effect
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the tendency that people have to put a higher valuation on anything that they currently possess (are endowed with) than on identical items that they do not own but might purchase
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economic cost
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the payment that must be made to obtain and retain the services of a resource. It is the income the firm must provide to resource suppliers to attract resources away from alternative uses.
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explicit costs
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the monetary payments it makes to those from whom it must purchase resources that it does not own. Because these costs involve an obvious cash transaction
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implicit costs
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the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash. Because these costs are present but not obvious
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accounting profit
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the profit number that accountants calculate by subtracting total explicit costs from total sales revenue.
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normal profit
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the typical (or "normal") amount of accounting profit that you would most likely have earned in one of these other ventures.
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economic profit
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the result of subtracting all of your economic costs—both explicit costs and implicit costs—from revenue: Economic Profit = Revenue − Explicit Costs − Implicit Costs.
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Total product (TP)
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the total quantity, or total output, of a particular good or service produced
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Marginal product (MP)
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the extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process. Thus, Marginal Product= change in total product/change in labor input
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Average product (AP),
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also called labor productivity, is output per unit of labor input: Average Product= total product/units of labor
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law of diminishing returns
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It states that as successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline
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Fixed costs
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those costs that do not vary with changes in output
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Variable Costs
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costs that change with the level of output.
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Total cost
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the sum of fixed cost and variable cost at each level of output:
TC = TFC + TVC
TC = TFC + TVC
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Average fixed cost (AFC)
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found by dividing total fixed cost (TFC) by that amount of output (Q).
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Average variable cost (AVC)
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is calculated by dividing total variable cost (TVC) by that amount of output (Q):
AVC = TVC/Q
AVC = TVC/Q
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Average total cost (ATC)
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found by dividing total cost (TC) by that output (Q) or by adding AFC and AVC at that output
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Marginal cost (MC)
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the extra, or additional, cost of producing one more unit of output. MC can be determined for each added unit of output by noting the change in total cost that unit's production entails
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marginal decisions
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decisions to produce a few more or a few less units
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diseconomies of scale
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the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer
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minimum efficient scale (MES)
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the lowest level of output at which a firm can minimize long-run average costs
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Pure competition
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involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily
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Pure monopoly
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a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility). Since the entry of additional firms is blocked, one firm constitutes the entire industry. The pure monopolist produces a single unique product, so product differentiation is not an issue.
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Monopolistic competition
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characterized by a relatively large number of sellers producing differentiated products (clothing, furniture, books). Present in this model is widespread non-price competition, a selling strategy in which a firm does not try to distinguish its product on the basis of price but instead on attributes like design and workmanship (an approach called product differentiation).
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Oligopoly
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involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output
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imperfect competition
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All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly
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"Price takers"
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In a purely competitive market, individual firms do not exert control over product price
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average revenue
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revenue per unit
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Marginal revenue
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the change in total revenue (or the extra revenue) that results from selling one more unit of output.
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break-even point
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an output at which a firm makes a normal profit but not an economic profit
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Constant-cost industry
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This means that the entry and exit of firms does not affect resource prices or, consequently, the locations of the average-total-cost curves of individual firms.
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increasing-cost industries
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firms experience higher costs as their industry expands
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decreasing-cost industries
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firms experience lower costs as their industry expands
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patent
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the exclusive right of an inventor to use, or to allow another to use, her or his invention
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price discrimination,
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the practice of selling a specific product at more than one price when the price differences are not justified by cost differences.
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Price discrimination can take three forms
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charging different prices to different customers for the same product
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Monopoly power
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some ability to control output and price.
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Herfindahl index
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This index is the sum of the squared percentage market shares of all firms in the industry.
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game theory
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The study of how people behave in strategic situations
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law of demand.
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as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded
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law of supply
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As price rises, the quantity supplied rises; as price falls, the quantity supplied falls.
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equilibrium price
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(or market-clearing price) is the price where the intentions of buyers and sellers match. It is the price where quantity demanded equals quantity supplied
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price elasticity of demand.
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For some products—for example, restaurant meals—consumers are highly responsive to price changes. Modest price changes cause very large changes in the quantity purchased.
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inelastic
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If a specific percentage change in price produces a smaller percentage change in quantity demanded
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If demand is unit elastic
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a decrease in price will cause no change in quantity demanded
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If demand is elastic
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a decrease in price will increase total revenue
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If demand is inelastic
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a price decrease will reduce total revenue
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The underlying purpose of antitrust policy (antimonopoly policy......
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is to prevent monopolization, promote competition, and achieve allocative efficiency
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horizontal merger
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a merger between two competitors that sell similar products in the same geographic market
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vertical merger
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a merger between firms at different stages of the production process
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conglomerate merger
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any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas
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natural monopoly
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exists when economies of scale are so extensive that a single firm can supply the entire market at a lower average total cost than could a number of competing firms.
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gross domestic product (GDP)
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defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year
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To measure aggregate output accurately, all goods and services produced in a particular year must be counted......
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......once and only once
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GDP includes only the market value of final goods and ignores........
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...........intermediate goods altogether
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net exports
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Exports minus imports.
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national income
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the total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports. National income is all the income that flows to American-supplied resources, whether here or abroad, plus taxes on production and imports
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business cycles
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alternating rises and declines in the level of economic activity, sometime over several years.
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The typical business cycle goes through four phases:
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peak, recession, trough, and expansion
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There are three types of unemployment:
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frictional, structural, and cyclical
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Frictional Unemployment
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"between jobs."
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Structural Unemployment
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Changes over time in consumer demand and in technology alter the "structure" of the total demand for labor, both occupationally and geographically
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Cyclical Unemployment
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Unemployment that is caused by a decline in total spending. As the demand for goods and services decreases, employment falls and unemployment rises
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Inflation
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a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before
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Consumer Price Index (CPI),
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The main measure of inflation in the United States
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demand-pull inflation
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When resources are already fully employed, the business sector cannot respond to excess demand by expanding output. The essence of this type of inflation is "too much spending chasing too few goods."
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cost-push inflation
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explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output
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Decreases in aggregate demand cause ......
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.......recessions and cyclical unemployment
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Decreases in aggregate supply cause ........
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..........cost-push inflation
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expansionary fiscal policy
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This policy consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP.
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budget deficit
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government spending in excess of tax revenues
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contractionary fiscal policy
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This policy consists of government spending reductions, tax increases, or both, designed to decrease aggregate demand and therefore lower or eliminate inflation.
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subprime mortgage loans
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high-interest-rate loans to home buyers with higher-than-average credit risk
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Mortgage-backed securities
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bonds backed by mortgage payments
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Interest rates and bond prices are......
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...... inversely related
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open-market operations
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consist of buying government bonds (U.S. securities) from or selling government bonds to commercial banks and the general public.
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reserve ratio
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The fraction of checkable deposits that a bank must hold as reserves in a Federal Reserve Bank or in its own bank vault; also called the reserve requirement
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discount rate
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Just as commercial banks charge interest on the loans they make to their clients, so too Federal Reserve Banks charge interest on loans they grant to commercial banks. The interest rate they charge is called the discount rate.
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prime interest rate
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the benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals.
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ethnocentricity
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Belief in the superiority of one's own ethnic group
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sociocultural components of culture
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(1) aesthetics, (2) attitudes and beliefs, (3) religion, (4) material culture, (5) language, (6) societal organization, (7) education, (8) legal characteristics, and (9) political structures.
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Discuss Hofstede's four cultural value dimensions.
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(1) individualism versus collectivism, (2) large versus small power distance, (3) strong versus weak uncertainty avoidance, and (4) masculinity versus femininity.
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labor quality
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The skills, education, and attitudes of available employees
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labor quantity
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The number of available employees with the skills required to meet an employer's business needs
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labor mobility
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The movement of people from country to country or area to area to get jobs
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environmental scanning
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A procedure in which a firm scans the world for changes in the environmental forces that might affect it
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Explain market indicators and market factors.
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Market indicators are economic data used to measure relative market strengths of countries or geographic areas. Market factors are economic data that correlate highly with the market demand for a product.
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Explain the difference between country screening and segment screening
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If we utilize country screening, we assume that countries are homogeneous units (i.e., "everyone living in Mexico or Chad is essentially the same"). In segment screening, we focus our attention not on the nation as a homogeneous unit but on groups of people with similar wants and desires (market segments) across as well as within countries
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indirect exporting
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The exporting of goods and services through various types of home-based exporters
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direct exporting
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The exporting of goods and services by the firm that produces them
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sales company
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A business established for the purpose of marketing goods and services, not producing them
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export trading company (ETC)
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A firm established principally to export domestic goods and services and to help unrelated companies export their products
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cooperative exporters
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Established international manufacturers that export other manufacturers' goods as well as their own
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manufacturers' agents
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Independent sales representatives of various noncompeting suppliers
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distributors
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Independent importers that buy for their own account for resale
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trading companies
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Firms that develop international trade and serve as intermediaries between foreign buyers and domestic sellers and vice versa
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multidomestic company (MDC)
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An organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences
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global company (GC)
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An organization that attempts to standardize and integrate operations worldwide in all functional areas
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international company (IC)
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Either a global or a multidomestic company
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value chain analysis
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An assessment conducted on the chain of interlinked activities of an organization or set of interconnected organizations, intended to determine where and to what extent value is added to the final product or service
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expatriate
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A person living outside his or her country of citizenship
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ethnocentric
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As used here, related to hiring and promoting employees on the basis of the parent company's home-country frame of reference
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polycentric
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As used here, related to hiring and promoting employees on the basis of the specific local context in which the subsidiary operates
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regiocentric
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As used here, related to hiring and promoting employees on the basis of the specific regional context in which the subsidiary operates
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geocentric
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As used here, related to hiring and promoting employees on the basis of ability and experience without considering race or citizenship
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Models
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representations of real objects or situations and can be presented in various forms
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Iconic model
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A physical replica, or representation, of a real object
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Analog model
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Although physical in form, does not have a physical appearance similar to the real object or situation it represents.
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Mathematical model
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Mathematical symbols and expressions used to represent a real situation
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Constraint
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A restriction or limitation imposed on a problem
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Discrete probability distribution
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A table, graph, or equation describing the values of the random variable and the associated probabilities.
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Expected value
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A weighted average of the values of the random variable, for which the probability function provides the weights. If an experiment can be repeated a large number of times, the expected value can be interpreted as the "long-run average."
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Uniform probability distribution
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A continuous probability distribution in which the probability that the random variable will assume a value in any interval of equal length is the same for each interval
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Binomial probability distribution
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The probability distribution for a discrete random variable, used to compute the probability of x successes in n trials
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Poisson probability distribution
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The probability distribution for a discrete random variable, used to compute the probability of x occurrences over a specified interval.
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Normal probability distribution
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A continuous probability distribution whose probability density function is bell-shaped and determined by the mean, µ, and standard deviation, σ.
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Standard normal distribution
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A normal distribution with a mean of 0 and a standard deviation of 1.
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Exponential probability distribution
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Acontinuous probability distribution that is useful in describing the time to complete a task or the time between occurrences of an event
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Decision alternatives
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Options available to the decision maker.
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Chance event
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An uncertain future event affecting the consequence, or payoff, associated with a decision.
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Consequence
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The result obtained when a decision alternative is chosen and a chance event occurs. A measure of the consequence is often called a payoff
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States of nature
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The possible outcomes for chance events that affect the payoff associated with a decision alternative.
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Influence diagram
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A graphical device that shows the relationship among decisions, chance events, and consequences for a decision problem.
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Node
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An intersection or junction point of an influence diagram or a decision tree.
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Decision nodes
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Nodes indicating points where a decision is made.
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Chance nodes
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Nodes indicating points where an uncertain event will occur.
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Consequence nodes
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Nodes of an influence diagram indicating points where a payoff will occur
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Payoff
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A measure of the consequence of a decision such as profit, cost, or time. Each combination of a decision alternative and a state of nature has an associated payoff (consequence).
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Payoff table
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tabular representation of the payoffs for a decision problem
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Decision tree
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A graphical representation of the decision problem that shows the sequential nature of the decision-making process
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Branch
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Lines showing the alternatives from decision nodes and the outcomes from chance nodes
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Optimistic approach
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An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative corresponding to the largest payoff; for a minimization problem, it leads to choosing the decision alternative corresponding to the smallest payoff
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Conservative approach
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An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative that maximizes the minimum payoff; for a minimization problem, it leads to choosing the decision alternative that minimizes the maximum payoff.
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Minimax regret approach
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An approach to choosing a decision alternative without using probabilities. For each alternative, the maximum regret is computed, which leads to choosing the decision alternative that minimizes the maximum regret.
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Opportunity loss, or regret
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The amount of loss (lower profit or higher cost) from not making the best decision for each state of nature.
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Expected value approach
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An approach to choosing a decision alternative based on the expected value of each decision alternative. The recommended decision alternative is the one that provides the best expected value
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Utility
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A measure of the total worth of a consequence reflecting a decision maker's attitude toward considerations such as profit, loss, and risk
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Risk avoider
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Adecision maker who would choose a guaranteed payoff over a lottery with a better expected payoff.
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Utility function for money
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A curve that depicts the relationship between monetary value and utility
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Game theory
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The study of decision situations in which two or more players compete as adversaries. The combination of strategies chosen by the players determines the value of the game to each player
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Saddle point
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A condition that exists when pure strategies are optimal for both players in a two-person, zero-sum game. The saddle point occurs at the intersection of the optimal strategies for the players, and the value of the saddle point is the value of the game.
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forecasts
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A forecast is simply a prediction of what will happen in the future. Managers must learn to accept the fact that, regardless of the technique used, they will not be able to develop perfect forecasts
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Causal forecasting methods
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are based on the assumption that the variable we are trying to forecast exhibits a cause—effect relationship with one or more other variables.
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Exponential smoothing
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uses a weighted average of past time series values as the forecast; it is a special case of the weighted moving averages method in which we select only one weight—the weight for the most recent observation.
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