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Adverse Selection
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Situation in which an individual's demand for insurance is aligned to their risk of loss (i.e. people with the highest expected value will buy insurance) and the insurer cannot account for this correlation in the price.
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Consumer Surplus
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Economic gain achieved when consumers purchase a product for a price less than their willingness to pay.
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Economies of Scale
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The average cost per unit for a business entity is reduced by increasing the scale of production.
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Economies of Scope****
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The average cost for a business entity is reduced by producing two or more products.
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Elasticity
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highly elastic price (E>1) means to decrease price to increase revenue; low elastic price (E<1) means lowering the price will lower revenues
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Law of Diminishing Returns
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At some point in production, adding one more unit of output, holding everything else constant will lead to decrease in per unit returns
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Marginal cost
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Cost of one more unit of output
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Monopoly****
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Entity is the only supplier of particular good (lack of competition, barriers are government regulation, networks, patents, revenue is midpoint of demand curve)
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Moral Hazard
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Unobservable actions and risks humans may take once a contract is signed since they don't bear consequences. Case of Information asymmetry that affects cost of transaction
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Perfect competition
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Firms take price (MR = P)
Maximum profit = MR = MC
Maximum profit = MR = MC
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Price Discrimination
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Situation in which identical goods are sold at different prices from the same provider (1st degree - different price for different willingness to pay, 2nd degree - different price for different quantities, 3rd degree - different price for different segments)
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Risk averse
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individuals who prefer certainty over uncertain for same expected value
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Risk neutral
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individuals who are indifferent on risk taking if expected value is the same
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Risk seeking
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individuals who prefer risk even if expected value for certain event and risk is same
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Arbitrage
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purchase of securities on one market for immediate resale on another market in order to profit from price discrepancy
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Break-even
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total amount of revenue needed to offset the sum of a firm's costs. Implied firm's profit will be 0
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CAGR
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compound annual growth rate (ending value/beginning value)^(1/# years)-1
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Capacity
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Maximum level of output of goods and/or services that a given system can potentially produce over a set period of time
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Competitive advantage
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when a firm is able to deliver benefits equal to competitors but at a lower cost OR able to deliver greater benefits than competitors
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Contribution margin****
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Contribution margin = Price per unit - Variable cost per unit, where P is unit price, V is variable cost per unit
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Core competencies*****
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The activities that a firm does well to create competitive advantage
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Customer segmentation
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Subdivision of market into discrete groups that share similar characteristics
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Discount rate****
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Cost of capital - there is an opportunity cost associated with every investment, cost being the expected return on an alternate investment
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Entering new market****
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start from scratch, joint venture, acquire an existing player
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Fixed costs
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costs that don't change with increase or decrease in amount of goods or services produced
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Gross Margin (don't confuse with contribution margin)
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Total Sales (revenues) - Cost of Goods sold / total sales (revenues)
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Horizontal integration
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The acquisition of additional business activities at same level of value chain
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International expansion*****
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Main mechanisms: exporting, licensing, franchising, joint venture, foreign direct investment
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Inventory turnover******
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A ratio showing how many times a company's inventory is sold and replaced over a period. Should be benchmarked with industry: low turnover implies poor sales or excess inventory; high ratio implies strong sales or ineffective buying
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Learning curve
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Shows how new skills or knowledge can be acquired initially, but subsequent learning becomes much slower. Steeper curve indicates faster, easier learning. flatter curve indicates slower more difficult learning.
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Market share*****
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percent of market size controlled by an individual firm
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Payback period******
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length of time required to recover the cost of an investment
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Product lifecycle****
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four stages - market introduction, growth, maturity, decline
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Market size
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Total size of a population (# people, # units, $ value) that would purchase a company's goods or services. Market size is always relevant and question that should be asked.
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Net present value
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Difference between present value cash inflows and present value cash outflows
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Product Mix*****
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Total number of product lines a company offers to customers (explore product mix in profitability cases to identify loss making products)
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Promotion*****
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coupons, discounts, trials, etc
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Rule of 72*****
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70 in numerator, and growth rate (annual) in the denominator to give amount of time until investment doubles
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Sales per square foot****
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average revenue a business creates for every square foot of sales (used in retail industry as measure of efficiency)
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same store sales*****
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statistic used in retail industry to determine what portion of new sales has come from sales growth, and what portion from opening new stores
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synergies
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idea that the value and performance of two companies combines is greater than sum of separate individual parts (in M and A)
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value chain
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logistics, operations, outbound logistics, marketing and sales
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variable costs
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costs that vary depending on company's production volume
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vertical integration
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degree to which a firm owns backward suppliers or forward buyers
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weighted average
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average in which each quantity is assigned a weight
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