question
stakeholders
answer
shareholders, board, management team, staff
question
vision
answer
expressed how owners want to deploy capital to generate a return, establish value proposition, is clear to stakeholders
question
strategy
answer
specify how vision is realized, is clear to stakeholders, identifies the market, identifies tactical approach for execution & growth
question
internal performance measures
answer
profitability, operational efficiency, liquidity
question
profitability measures
answer
total revenue, expenses, net revenue, return on assets, return on equity
question
operational efficiency measures
answer
asset turnover, inventory turnover, days in inventory, receivables turnover, current ratio
question
liquidity measures
answer
working capital, quick ratio
question
external performance measures
answer
standardized financial reporting, income statement, balance sheet, cash flow statement, market share, horizontal analysis
question
ways to increase value of a business enterprise
answer
increasing revenue, decreasing cost, reducing risk
question
microeconomics
answer
analysis of the components specific to the business enterprise itself (supply, demand, production costs, pricing decisions, etc)
question
macroeconomics
answer
analysis of the external components affecting the business environment (economic environment, interest rates, business cycle, growth prospect, foreign exchange rates, government/political environment, etc.)
question
econometrics
answer
use of data to support or derive decisions
question
managerial economics
answer
combination of micro, macro, and econometrics to solve business challenges
question
business practices or tactics
answer
Routine business decisions managers must make to earn the greatest profit under the prevailing market conditions facing the firm.
question
industrial organization
answer
branch of microeconomics focusing on the behavior and structure of firms and industries
question
strategic decisions
answer
business actions taken to alter market conditions and behavior of rivals in ways that increase and/or protect the strategic firm's profit.
question
opportunity cost
answer
what a firm's owners give up to use resources to produce goods or services; can be either explicit or implicit costs
question
market-supplied resources
answer
resources owned b others and hired, rented, or leased in resource markets
question
owner-supplied resources
answer
resources owned and used by a firm.
question
total economic cost
answer
sum of opportunity costs of market-supplied resources plus opportunity costs of owner-supplied resources
question
explicit costs
answer
monetary opportunity costs of using market-supplied resources
question
implicit costs
answer
nonmonetary opportunity costs of using owner-supplied resources
question
equity capital
answer
money provided to the businesses by the owners
question
economic profit
answer
the difference between total revenue and total economic cost
question
accounting profit
answer
the difference between total revenue and explicit costs
question
difference between economic & accounting profit
answer
accounting profit does not subtract from total revenue the implicit costs of using resources. Maximizing economic profit rather than accounting profit is the objective of firms owners
question
value of a firm
answer
the price for which the firm can be sold, which equals the present value of future profits
question
risk premium
answer
an increase in the discount rate to compensate investors for uncertainty about future profits
question
relation of discount rate to value of firm
answer
the larger the risk associated with future profits, the higher the risk-adjusted discount rate used to compute the value of the firm, and the lower will be the value of the firm. The smaller the risk associated with future profits, the lower the risk-adjusted discount rate used to compute the value of the firm, and the higher will be the value of the firm.
question
value maximization and profit maximization
answer
if cost and revenue conditions in any period are independent of decisions made in other time periods, a manager will maximize the value of a firm (the present value of the firm) by making decisions that maximize profit in every single time period.
question
principal-agent relationship
answer
relationship formed when a business owner (the principal) enters an agreement with an executive manager (the agent) whose job is to formulate and implement tactical and strategic business decisions that will further the objectives of the business owner (the principal).
question
principal-agent problem
answer
A manager takes an action or makes a decision that advances the interests of the manager but reduces the value of the firm. Arises when two conditions are met - objectives of owner and manager aren't aligned and the owner finds it too costly or impossible (moral hazard) to perfectly monitor the manager to block decisions that might be harmful to the owner.
question
complete contract
answer
an employment contract that protects owners from every possible deviation by managers from value-maximizing decisions
question
hidden actions
answer
actions or decisions taken by managers that cannot be observed by owners for any feasible amount of monitoring effort.
question
moral hazard
answer
a situation in which managers take hidden actions that harm the owners of the firm but further the interests of the managers
question
price-taker
answer
a firm that cannot set the price of the product it sells, since price is determined strictly by the market forces of demand and supply.
question
price-setting firm
answer
a firm that can raise its price without losing all of its sales
question
market power
answer
a firm's ability to raise price without losing all sales.
question
market
answer
any arrangement through which buyers and sellers exchange anything of value.
question
transaction costs
answer
Costs of making a transaction happen, other than the price of the good or service itself.
question
market structure
answer
market characteristics that determine the economic environment in which a firm operates.
question
globalization of markets
answer
economic integration of markets located in nations around the world.
question
common measures of productivity
answer
GDP, GDP Deflator, Real GDP, Output per capita, share employed, unemployment rate, labor productivity, retail sales, inventory measures, housing starts, consumer confidence, nonfarm payrolls, average weekly hours
question
primary components of macroeconomics
answer
productivity and interest rates
question
Gross Domestic Product (GDP)
answer
Value of all final goods and services produced in a period; a function of quantity sold and price; influenced by price inflation, which may make it appear more robust than actuality
question
Expenditure method
answer
most common way to calculate GDP. GDP = consumption + investments + gov spending + net exports
question
Consumption
answer
consumption of non-durable goods (<1yr) such as toothpaste, pencils, food, etc; purchases of durable goods (>1yr) such as new vehicles, appliances, etc
question
investments
answer
new home purchases are only included as investment if built in current period; a new truck used by a company to generate future revenues would be included
question
government spending
answer
includes money gov spends to operate (laptops, supplies, etc); transfer payments are not included (welfare, social security, etc)
question
net exports
answer
trade with other economies included only on a net basis; calculated by subtracting imports from exports, may be positive or negative
question
GDP Deflator
answer
a price index used to adjust GDP to account for inflation; represents the percentage change of price levels from a given base year; base year = 100; basket of goods and services used in the deflator is not fixed, it is adjusted to account for changes in consumption patterns.
question
Real GDP
answer
adjustment of nominal GDP for inflation using the GDP Deflator; Real GDP = Nominal GDP * GDP Deflator
question
Output per capita
answer
output per capita = Real GDP/ Total population; shows how much is being produced on a 'per person' basis; simply used to compare one period to another on a relative basis
question
Share employed
answer
share employed = employed persons/ total population
question
unemployment rate
answer
unemployment rate = unemployed persons/ total population; only includes those actively looking for work
question
discouraged workers
answer
those who have permanently removed themselves from the workforce
question
labor productivity
answer
labor productivity = output/ total labor hours worked
question
retail sales
answer
random sample of about 5k retail firms measuring consumer spending; shown with and without auto sales which can be volatile & largely influential
question
inventory measures
answer
trends in general inventory levels of retail and manufacturing businesses could provide insight into direction of prices in future
question
housing starts
answer
statistics on permits, construction progress and completion for new home construction ; provide perspective into demand for building materials and construction labor; informs inventory of housing units
question
consumer confidence
answer
provides subjective perspective into future demand for retail products
question
nonfarm payrolls
answer
measures net of goods, construction and manufacturing jobs gained/lost during the period; shows whether or not companies are preparing for greater or lesser output in anticipation of expected future demand
question
average weekly hours
answer
measures number of hours worked on average among nonfarm payroll; increases show strains on workforce
question
interest rates
answer
opportunity cost of doing something else with money
question
risk premiums
answer
represent different costs of borrowing, determined by market, based on 'risk-free' rate (US T-Bill)
question
how the Fed influences business cycles
answer
relative cost of money will impact level of business activity based on respective cost-benefit analysis
question
how does the Fed influence the supply and demand of money
answer
by influencing the cost of money; higher rates means higher cost to borrow, and fewer projects will meet the RROI & vice versa
question
how does the Fed move rates
answer
by buying or selling bonds in large volume through their Markets Group in a program called the 'Open Market Operations'
question
primary dealers
answer
a group within the money market participants authorized to transact with the Fed (the list is public and can be fund on the Fed's website)
question
money market
answer
subject to same economic forces as any other free market; when supply of cash is high, cost to borrow drops & extra cash is found on dealer balance sheets; when supply is low, cost to borrow increases and cash comes out of dealer balance sheets
question
federal funds or repurchase agreements
answer
fluctuations in the price of money or short term interest rates
question
how the Fed moves cash to/from the market
answer
Fed has balance sheet of securities (US Treasurys and mortgage-backed securities). They buy and sell these from the dealers.
question
quantity demanded
answer
the amount of a good or service consumers are willing and able to purchase during a given period of time
question
general demand function
answer
relation between quantity demanded and the six factors that affect quantity demanded.
question
six factors affecting quantity demanded
answer
price of good or service, consumer's income (per capita), price of related goods or services, taste patterns of consumers, expected price of the good in some future period, number of consumers in the market
question
normal good
answer
a good or service for which an increase (decrease) in income causes consumers to demand more (less) of the good, holding all other variables in the general demand function constant
question
inferior good
answer
a good or service for which an increase (decrease) in income causes consumers to demand less (more) of the good, all other factors held constant.
question
substitutes
answer
two goods are substitutes if an increase (decrease) in the price of one of the goods causes consumers to demand more (less) of the other good, holding all other factors constant
question
complements
answer
two goods are complements if an increase (decrease) in the price of one of the goods causes consumers to demand less (more) of the other good, all other things held constant
question
slope parameters
answer
parameters in a linear function that measure the effect on the dependent variable of changing one of the independent variables while holding the rest of these variables constant
question
when is quantity demanded directly (inversely) related to a particular variable?
answer
when the slope parameter of the variable is positive (negative) in sign
question
direct demand function
answer
a table, graph, or equation that shows how quantity demanded is related to product price, holding constant the five other variables that influence demand; also called 'demand'
question
demand schedule
answer
a table showing a list of possible product prices and the corresponding quantities demanded
question
demand curve
answer
a graph showing the relation between quantity demanded and price when all other variables influencing quantity demanded are held constant
question
inverse demand function
answer
the demand function when price is expressed as a function of quantity demanded
question
demand price
answer
the maximum price consumers will pay for a specific amount of a good or service
question
law of demand
answer
quantity demanded increases when price falls, and quantity demanded decreases when price rises, other things held constant
question
change in quantity demanded
answer
a movement along a given demand curve that occurs when the price of the good changes, all else constant
question
increase in demand
answer
a change in the demand function that causes an increase in quantity demanded at every price and is reflected by a rightward shift in the demand curve
question
decrease in demand
answer
a change in the demand function that causes a decrease in quantity demanded at every price and is reflected by a leftward shift in the demand curve.
question
determinants of demand
answer
variables that change the quantity demanded at each price and that determine where the demand curve is located
question
change in demand
answer
a shift in demand, either leftward or rightward, that occurs only when one of the five determinants of demand changes.
question
quantity supplied
answer
the amount of a good or service offered for sale during a given period of time
question
general supply function
answer
the relation between quantity supplied and the six factors that jointly affect quantity supplied
question
six factors jointly affecting quantity supplied
answer
the price of the good, the prices of the inputs used to produce the good, the prices of goods related in production, the level of available technology, the expectations of the producers concerning the future price of the good, the number of firms or the amount of productive capacity in the industry
question
substitutes in production
answer
goods for which an increase in the price of one good relative to the price of another good causes producers to increase production of the now higher priced good and decrease production of the other good
question
complements in production
answer
goods for which an increase in the price of one good, relative to the price of another good, causes producers to increase production of both goods
question
technology
answer
the state of knowledge concerning the combination of resources to produce goods and services
question
direct supply function
answer
a table, graph, or an equation that shows how quantity supplied is related to product price, holding constant the five other variables that influence supply.
question
determinants of supply
answer
variables that cause a change in supply (i.e. a shift in the supply curve)
question
change in quantity supplied
answer
a movement along a given supply curve that occurs when the price of a good changes, all else constant
question
supply schedule
answer
a table showing a list of possible product prices and the corresponding quantities supplied
question
supply curve
answer
a graph showing the relation between quantity supplied and price, when all other variables influencing quantity supplied are held constant
question
inverse supply function
answer
the supply function when price is expressed as a function of quantity supplied
question
supply price
answer
the minimum price necessary to induce producers to offer a given quantity for sale
question
increase in supply
answer
a change in the supply function that causes an increase in quantity supplied at every price, and is reflected by a rightward shift in the supply curve
question
decrease in supply
answer
a change in the supply function that causes a decrease in quantity supplied at every price and is reflected by a leftward shift in the supply curve
question
market equilibrium
answer
a situation in which, at the prevailing price, consumers can buy all of a good they wish and producers can sell all of the good they wish.
question
equilibrium price
answer
the price at which market equilibrium is reached.
question
equilibrium quantity
answer
the amount of a good bought and sold in market equilibrium.
question
excess supply (surplus)
answer
exists when quantity supplied exceeds quantity demanded
question
excess demand (shortage)
answer
exists when quantity demanded exceeds quantity supplied
question
market clearing price
answer
the price of a good at which buyers can purchase all they want and sellers can sell all they want at that price. This is another name for the equilibrium price.
question
economic value
answer
the maximum amount any buyer in the market is willing to pay for the unit, which is measured by the demand price for the unit of the good
question
consumer surplus
answer
the difference between the economic value of a good (its demand price) and the market price the consumer must pay.
question
producer surplus
answer
for each unit supplied, the difference between market price and the minimum price producers would accept to supply the unit (its supply price).
question
social surplus
answer
the sum of consumer surplus and producer surplus, which is the area below demand above supply over the range of output produced and consumed
question
qualitative forecast
answer
a forecast that predicts only the direction in which an economic variable will move.
question
quantitative forecast
answer
a forecast that predicts both the direction and the magnitude of the change in an economic variable.
question
When demand increases and supply is constant
answer
equilibrium price and quantity both rise
question
when demand decreases and supply is constant
answer
equilibrium price and quantity both fall
question
when supply increases and demand is constant
answer
equilibrium price falls and equilibrium quantity rises.
question
when supply decreases and demand is constant
answer
equilibrium price rises and equilibrium quantity falls
question
indeterminate
answer
term referring to the unpredictable change in either equilibrium price or quantity when the direction of change depends upon the relative magnitudes of the shifts in the demand and supply curves.
question
when demand and supply both shift simultaneously
answer
if the change in quantity(price) can be predicted, the change in price (quantity) is indeterminate
question
ceiling price
answer
the maximum price the government permits sellers to charge for a good. When this price is below equilibrium, a shortage occurs.
question
floor price
answer
the minimum price the government permits sellers to charge for a good. When this price is above equilibrium, a surplus occurs.
question
regression analysis
answer
attempts to quantify the change in a dependent variable for a given change in an independent variable - simple linear regression model is basic approach (y = mx+b)
question
correlation analysis
answer
attempts to measure the strength of a relationship between two random variables
question
forecasting methods
answer
quantitative analysis, direct methods
question
direct methods of forecasting
answer
interviews, surveys, market studies
question
limitations of direct methods of forecasting
answer
poor sample selection, response bias
question
objective function
answer
the business function being maximized or minimized by the manager (maximize revenue, minimize cost)
question
marginal analysis
answer
in order to optimize a function objective, the impact of changing activity in small increments must be determined
question
maximization problem
answer
solving for activity level that achieves highest revenue
question
minimization problem
answer
solving for activity level that achieves lowest cost
question
objective function
answer
the function the decision maker seeks to maximize or minimize
question
activities or choice variables
answer
variables that determine the value of the objective function
question
discrete choice variables
answer
a choice variable that can take only specific integer values
question
continuous choice variables
answer
a choice variable that can take any value between two end points
question
unconstrained optimization
answer
an optimization problem in which the decision maker can choose the level of activity from an unrestricted set of values
question
constrained optimization
answer
an optimization problem in which the decision maker chooses values for the choice variables from a restricted set of values
question
marginal analysis
answer
analytical technique for solving optimization problems that involves changing values of choice variables by small amounts to see if the objective function can be further improved.
question
net benefit
answer
the objective function to be maximized: net benefit = total benefit - total cost
question
optimal level of activity
answer
the level of activity that maximizes net benefit
question
marginal benefit
answer
the change in total benefit caused by an incremental change in the level of an activity; MB = change in total benefit/change in activity
question
marginal cost
answer
the change in total cost caused by an incremental change in the level of an activity; MC = change in total cost/ change in activity
question
how to measure marginal benefit & cost
answer
marginal benefit (marginal cost) of a particular unit of activity can be measured by the slope of the line tangent to the total benefit (total cost) curve at that point of activity
question
when is optimal level of an activity attained
answer
when no further increases in net benefit are possible for any changes in the activity; the activity level for which MB = MC
question
sunk costs
answer
costs that have previously been paid and cannot be recovered
question
fixed costs
answer
costs are constant and must be paid no matter what level of the activity is chosen
question
average (unit) cost
answer
cost per unit of activity computed by dividing total cost by the number of units of activity
question
what costs to ignore when looking to maximize the net benefit of an activity
answer
sunk costs, fixed costs, and average costs associated with the activity
question
utility
answer
a term used to identify satisfaction or benefit and cannot be measured
question
marginal rate of substitution
answer
number of units of Y to be given up for one unit of X
question
parameters
answer
the coefficients in an equation that determine the exact mathematical relation among the variables.
question
consumption bundle
answer
a particular combination of specific quantities of goods or services
question
complete
answer
consumers are able to rank all conceivable bundles of commodities
question
transitive
answer
consumer preferences are transitive if A>B, and B>C, then it follows that A>C
question
utility function
answer
an equation that shows an individuals perception of the level of utility that would be attained from consuming each conceivable bundle of goods
question
indifference curve
answer
a set of points representing different bundles of goods and services, each of which yields the same level of total utility
question
marginal rate of substitution (MRS)
answer
a measure of the number of units of Y that must be given up per unit of X added so as to maintain a constant level of utility
question
indifference curve qualities
answer
negatively sloped and convex; marginal rate of substitution decreases as the consumer moves down an indifference curve
question
marginal utility
answer
the addition to total utility that is attributable to the addition of one unit of a good to the current rate of consumption, holding constant the amounts of all other goods consumed.
question
indifference map
answer
made up of two or more indifference curves. The higher (or further to the right) an indifference curve, the greater the level of utility associated with the curve. Combinations of goods on higher indifference curves are preferred to combinations on lower curves.
question
budget line
answer
the line showing all bundles of goods that can be purchased at given prices if the entire income is spent
question
what changes budget line
answer
an increase (decrease) in income causes a parallel outward (inward) shift in the budget line. An increase (decrease) in the price of X causes the budget line to pivot inward (outward) around the original vertical intercept
question
how to maximize utility subject to a limited income
answer
at the combination of goods for which the indifference curve is just tangent to the budget line.
question
how to obtain maximum satisfaction from a limited income
answer
consumer allocates income so that the marginal utility per dollar spent on each good is the same for all commodities purchased, and all income is spent
question
market demand
answer
a list of prices and the quantities consumers are willing and able to purchase at each price in the list, other things being held constant
question
market demand curve
answer
the horizontal summation of the demand curves of all consumers in the market. It shows how much all consumers demand at each price over the relevant range of prices.
question
how can market demand be interpreted
answer
can be interpreted as the marginal benefit curve for a good because the demand prices at various quantities along a market demand curve give the marginal benefit (value) of the last unit consumed for every buyer in the market
question
corner solution
answer
the utility maximizing bundle lies at one of the endpoints of the budget line and the consumer chooses to consume zero units of a good
question
price elasticity of demand
answer
the percentage change in quantity demanded, divided by the percentage change in price. E is always a negative number because P and Q are inversely related.
question
elastic
answer
segment of demand for which |E| > 1
question
inelastic
answer
segment of demand for which |E|<1
question
unitary elastic
answer
segment of demand for which |E| = 1
question
Total revenue (TR)
answer
the total amount paid to producers for a good or service (TR = P x Q)
question
price effect
answer
the effect on total revenue of changing price, holding output constant.
question
quantity effect
answer
the effect on total revenue of changing output, holding price constant.
question
What is determined by the price elasticity of demand?
answer
The effect of a change in price on total revenue. When demand is elastic (inelastic), the quantity (price) effect dominates. Total revenue always moves in the same direction as the variable (P or Q) having the dominant effect. When demand is unitary elastic, neither effect dominates, and changes in price leave total revenue unchanged.
question
interval or arc elasticity
answer
price elasticity calculated over an interval of a demand curve; E = deltaQ/deltaP x Average P/ Average Q
question
point elasticity
answer
a measurement of demand elasticity calculated at a point on a demand curve rather than over an interval
question
marginal revenue
answer
the addition to total revenue attributable to selling one additional unit of output; the slope of total revenue; equal to 0 when total revenue is maximized.
question
inframarginal units
answer
units of output that could have been sold at a higher price had a firm not lowered its price to sell the marginal unit.
question
income elasticity
answer
a measure of the responsiveness of quantity demanded to changes in income, holding all other variables in the general demand function constant. Positive (negative) for normal (inferior) goods.
question
cross-price elasticity
answer
a measure of the responsiveness of quantity demanded to changes in the price of a related good, when all the other variables in the general demand function remain constant. Positive (negative) when the two goods are substitutes (complements)
question
empirical demand functions
answer
demand equations derived from actual market data
question
production
answer
the creation of goods and services from inputs or resources
question
production function
answer
a schedule (or table or mathematical equation) showing the maximum amount of output that can be produced from any specified set of inputs, given the existing technology
question
variable proportions production
answer
production in which a given level of output can be produced with more than one combination of inputs.
question
fixed proportions production
answer
production in which one, and only one, ratio of inputs can be used to produce a good.
question
technical efficiency
answer
producing the maximum output for any given combination of inputs and existing technology
question
economic efficiency
answer
producing a given level of output at the lowest possible total cost.
question
variable input
answer
input for which the level of usage may be varied to increase or decrease output
question
fixed input
answer
an input for which the level of usage cannot be changed and which must be paid even if no output is produced
question
quasi-fixed input
answer
a lumpy or indivisible input for which a fixed amount must be used for any positive level of output, and oneis purchased when output is zero
question
short run
answer
current time span during at least one input is a fixed input
question
long run
answer
time period far enough in teh future to allow all fixed inputs to become variable inputs
question
planning horizon
answer
set of all possible short-run situations the firm can face in the future.
question
sunk cost in production
answer
payment for an input that, once made, cannot be recovered should the firm no longer wish to employ that input. Fixed costs are sunk costs.
question
avoidable cost in production
answer
payment for an input that a firm can recover or avoid paying should the firm no longer wish to use that input. Variable costs and quasi-fixed costs are avoidable costs.
question
average product of labor (AP)
answer
total product (output) divided by the number of workers (AP = Q/L)
question
marginal product of labor (MP)
answer
the additional output attributable to using one additional worker with the use of all other inputs fixed (MP = deltaQ/deltaL)
question
law of diminishing marginal product
answer
the principle that as the number of units of the variable input increases, other inputs held constant, a point will be reached beyond which the marginal product decreases.
question
total fixed cost (TFC)
answer
the total amount paid for fixed inputs. Total fixed cost does not vary with output.
question
total variable cost (TVC)
answer
the amount paid for variable inputs. total variable cost increases with increases in output.
question
total cost (TC)
answer
the sum of total fixed cost and total variable cost. Total cost increases with increases in output (TC = TFC + TVC)
question
average fixed cost (AFC)
answer
total fixed cost divided by output (AFC = TFC/Q)
question
average variable cost (AVC)
answer
total variable cost divided by output (AVC = TVC/Q)
question
average total cost (ATC)
answer
total cost divided by output or the sum of average fixed cost plus average variable cost (ATC = TC/Q = AVC + AFC)
question
short-run marginal cost (SMC)
answer
the change in either total variable cost or total cost per unit change in output (delta TVC/deltaQ = deltaTC/deltaQ)
question
relationship between marginal product (average product) and marginal cost (average variable cost)
answer
When marginal product (average product) is increasing, marginal cost (average variable cost) is decreasing. When marginal product (average product) is decreasing, marginal cost (average variable cost) is increasing. When marginal product equals average product at maximum AP, marginal cost equals average variable cost at minimum AVC.
question
isoquant
answer
a curve showing all possible combinations of inputs physically capable of producing a given fixed level of output.
question
isoquant map
answer
a graph showing a group of isoquants
question
marginal rate of technical substitution (MRTS)
answer
the rate at which one input is substituted for another along an isoquant
question
isocost curve
answer
line that shows the various combinations of inputs that may be purchased for a given level of expenditure at given input prices.
question
expansion path
answer
the curve or locus of points that shows the cost minimizing input combination for each level of output with the input/price ratio held constant. Along the expansion path, the marginal rate of technical substitution equals the constant input price ratio. The expansion path indicates how input usage changes when output or cost changes.
question
long-run average cost (LAC)
answer
long run total cost divided by output (LAC = LTC/Q)
question
long-run marginal cost (LMC)
answer
the change in long run total cost per unit change in output (LMC = deltaLTC/deltaQ)
question
economies of scale
answer
occurs when long run average cost (LAC) falls as output increases
question
diseconomies of scale
answer
occurs when long run average cost (LAC) rises as output increases.
question
specialization and division of labor
answer
dividing production into separate tasks allows workers to specialize and become more productive, which lowers unit costs.
question
constant costs
answer
neither economies nor diseconomies of scale occur, thus LAC is flat and equal to LMC at all output levels.
question
minimum efficient scale (MES)
answer
lowest level of output needed to reach minimum long run average cost
question
economies of scope
answer
exist when the joint cost of producing two or more goods is less than the sum of the separate costs of producing the goods.
question
multiproduct total cost function : LTC(X,Y)
answer
gives the lowest total cost for a multiproduct firm to produce X units of one good and Y units of another good
question
joint products
answer
when production of good X causes one or more other goods to be produced as byproducts at little or no additional cost
question
common or shared inputs
answer
inputs that contribute to the production of two or more goods or services
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purchasing economies of scale
answer
large buyers of inputs receive lower input prices through quantity discounts, causing LAC to shift downward at the point of discount.
question
learning or experience economies
answer
when cumulative output increases, causing workers to become more productive as they learn by doing and LAC shifts downward as a result
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short-run expansion path
answer
horizontal line showing the cost minimizing input combinations for various output levels when capital is fixed in the short run
question
perfect competition
answer
a market structure that exists when firms are price takers, all firms produce a homogeneous product, and entry and exit are unrestricted
question
perfectly elastic demand
answer
horizontal demand facing a single, price taking firm in a competitive market
question
shut down
answer
a firm produces zero output in the short run but must still pay for fixed inputs.
question
profit margin
answer
the difference between price and average total cost
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average profit
answer
total profit divided by quantity. measures profit per unit and is equivalent to profit margin when all units sell for the same price.
question
what to ignore when making profit maximizing decisions
answer
managers should ignore profit margin or average profit when making profit maximizing decisions because you cannot maximize both profit and profit margin at the same level of output. When a firm can make positive profit in the short run, profit is maximized at the output level where MR=P=SMC.
question
break-even points
answer
output levels where P=ATC and profit equals zero
question
shut down decision
answer
in the short run the manager will choose to produce the output where P = SMC instead of shutting down as long as total revenue is greater than or equal to the firm's total avoidable cost or total variable cost. Or a firm should produce as long as price is greater than or equal to average variable cost. If total revenue cannot cover total avoidable cost, the manager will shut down and produce nothing, losing an amount equal to total fixed cost
question
shutdown price
answer
the price below which a firm shuts down in the short run (minimum AVC)
question
what do average variable costs tell a firm
answer
whether to produce
question
what do marginal costs tell a firm
answer
how much to produce
question
short run producer surplus
answer
the amount by which total revenue exceeds total variable cost and equals the area above the short run supply curve below market price over the range of output supplied. It exceeds economic profit by the amount of total fixed costs.
question
long run competitive equilibrium
answer
condition in which all firms are producing where P = LMC and economic profits are zero (P = LAC)
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increasing cost industry
answer
an industry in which input prices rise as all firms in the industry expand output
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constant cost industry
answer
an industry in which input prices remain constant as all firms in the industry expand output
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economic rent
answer
a payment to a resource in excess of the resource's opportunity cost
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marginal revenue product (MRP)
answer
the additional revenue earned when the firm hires one more unit of the input
question
when to hire an additional unit of a variable input
answer
if the MRP of an additional unit of a variable input is greater than the price of the input, it should be hired; if it is less than its price, it shouldn't be hired. If it varies constantly, the manager should employ the amount of the input at which MRP = input price
question
average revenue product (ARP)
answer
the average revenue per worker (ARP = TR/L)
question
describe the demand curve for a perfectly competitive firm
answer
perfectly elastic, horizontal at the market determined equilibrium price
question
what does marginal revenue equal for a competitive firm
answer
price
question
what 2 decisions do managers make in the short run
answer
produce or shut down; if produce - how much to produce
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