BUSI 620 Salvatore Managerial Economics in A Global Economy
Comparative static analysis
Examines the effect on equilibrium of a change in the external conditions affecting a market such as supply and demand.
Value of the firm
The present value of all expected future profits of the firm. Future profits must be discounted because a dollar of profit in the future is worth less than a dollar of profit today.
arc price elasticity of demand
The price elasticity of demand between two points on the demand curve in the real world. p 133 A measurement of the price elasticity of demand where the base quantity or price is calculated as the average value of the starting and ending quantities or prices
(P)
The price of the commodity.
Theory of the firm
The primary goal of the firm is to maximize the wealth or value of the firm.
Microeconomics
The study of the economic behavior of individual decision making units such as individual consumers, resource owners, and business firms in a free enterprise system.
Principle-Agent Problem
When the agent (worker or manager) doesn't act in the best interest of the principle (owner).
Income effect
When the price of a commodity falls a consumer can purchase more of a commodity with a given income.
bandwagon effect
When there is demand because others are purchasing it.
moving average
a forecasting model that computes a forecast as the average of demands over a number of immediate past periods
scatter diagram
a graph that shows the degree and direction of relationship between two variables
Perfect Competition
a market structure in which a large number of firms all produce the same product and each firm is too small to affect the price by its own actions.
monopolistic competition
a market structure in which many companies sell products that are similar but not identical
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of X divided by the percentage change in the price of commodity Y.
Circular flow of economic activity
a model that shows the relationship between households and businesses in a free market economy
Individual demand schedule
a schedule that shows the relationship between price and quantity demanded. The inverse relationship between the price and the quantity demanded of the commodity per time period.
Oligopoly
a state of limited competition, in which a market is shared by a small number of producers or sellers.
Market Supply Schedule
a table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price
Non clearing market
arises when a economic agent reacts to both price signals and quantity signals.
Law of demand
consumers buy more of a good when its price decreases and less when its price increases
Market Demand Curve
the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product. For a commodity it is the horizontal summation of the demand curves of all consumers in the market.
least squares regression line
the line with the smallest sum of squared residuals
price elasticity of demand
the percentage change in quantity demanded relative to a percentage change in price
equilibrium price
the price that balances quantity supplied and quantity demanded
marginal analysis
the study of the costs and benefits of doing a little bit more of an activity versus a little bit less
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
The decision making process
1, Define the problem 2. Determine the objective, 3. Identify Possible Solutions, 4. Select the best solution, 5. Implement the decision.
price floor
Minimum price above the equilibrium price.
Times Series Data
data collected over several time periods
Surplus
quantity supplied (QS) is greater than quantity demanded (QD)
Point Price Elasticity of Demand
(P/Q)(change in q/change in p)
perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, so much so that each cannot affect the price, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. (4) resources are mobile. (5) Knowledge is perfect.
Shortage
A situation in which quantity demanded (QD) is greater than quantity supplied (QS)
Functional areas of business administration studies
Accounting, finance, marketing, production, personnel or HR management.
regression analysis
An analytic technique where a series of input variables are examined in relation to their corresponding output results in order to develop a mathematical or statistical relationship.
Market
An institutional arrangement under which buyers and sellers can exchange some quantity of goods or services for a mutually agreeable price.
Econometrics
Applies statistical tools to real world data to estimate the models postulated by economic theory and for forecasting.
market experiments
Conducted in the actual marketplace. Firms try different prices and observe the change in quantity demanded that results
Benchmarking
Finding out in a reputable above board way how other firms may be doing something better (cheaper) so a company can improve upon its technique.
arc cross price elasticity of demand
Formula on P. 144
Observational research
Gathering information on consumer preferences by watching them scanners and people meters.
Normal goods
Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
Inferior goods
Goods for which demand tends to fall when income rises.
Firm
Is an organization that combines and organizes resources for the purpose of producing goods and services for sale. Types of firms: Proprietorship: owned by one person. Corporation: Owned by shareholders. Partnership: Owned by two or more individuals.
Total Revenue (TR)
Is equal to Price x Quantity
Macroeconomics
Is the study of the total of aggregate level of output, income, employment, consumption, investment and prices for the economy viewed as a whole.
Mathematical Economics
Is used to formalize the economic models postulated by economic theory. Express in equation form.
Consumer clinics
Laboratory experiments where consumers are asked to buy goods and can keep the goods they purchase.
regression line
Ordinary least squares, OLS. Minimizing the sum of the squared vertical deviations of each point from the regression line.
Value of Wealth of the firm formula
PV= 3.14/ (1 + r)^1 or PV= Future value/ (1+r)^n Where PV= Present Value and Pie1, Pie2, Pie 3= the expected values in in n number of years.
Q=f(P,Y,Pc,Ps)
Pc Complimentary Ps Substitute Used to estimate the empirical econometric relationship.
Consumer demand theory formula
Qd x =f(Px,I,Py,T) where Qdx= quantity demanded of commodity X by an individual per time period (year, month, week, day, etc) Px= Price per unit of commodity x. I=consumer income. Py= Price of related commodities. T= Consumer taste.
(Q)
Quantity demanded of a commodity.
Demand function faced by a firm
Qx=a0 + a1Px+a2N +a3I +a4Py + a5T + ... p129
Economic Theory
Refers to microeconomics and macroeconomics.
Reengineering
Reorganizing the firm in a new way. A hot trend in the 1990's that involves restructuring and re envisioning.
Value of Firm formula
TRt - TCt / (1 + r)^t
Import Tariff
Tax on each unit of the imported commodity.
Model
The beginning of an economic theory.
Constrained optimization
The constraints an organization faces.
(Y)
The income of the consumers.
Market Supply Curve
The various price quantity combinations of a supply schedule can be plotted on a graph to obtain the market supply curve.
Average Costs (AC) Formula
Total costs (TC) divided by the number of units produced (q).
Income elasticity of demand
Used to measure the responsiveness of demand to a change in consumer income. This is given by the percentage change in demand divided by the percentage change in income holding constant all other variables including price.
Learning Organization
Values continuous learning both individual and collective and believes that competitive advantage derives from and requires learning in the information age. Peter Senge describes its 5 principles as (New Mental Model, Personal mastery, System thinking, Sharved Vision, Team Learning)
Total Quality Management
a comprehensive approach - led by top management and supported throughout the organization - dedicated to continuous quality improvement, minimizing costs, improving training, and customer satisfaction
constrained optimization
determining the most effective way to use constrained resources by finding the good that gives us the highest contribution margin per unit relative to the constraint
Delphi Method
form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast. Each stakeholder is asked for their opinion in private.
Durable goods
goods not for immediate consumption and able to be kept for a period of time.
Individual demand curve
illustrates the relationship between quantity demanded and price for an individual consumer
Consumer Surveys
involves questioning consumers about how they would respond to particular changes in the price of a commodity, incomes, related commodities, advertising expenditures, and other determinants.
Consumer demand theory
postulates that the quantity demanded of a commodity is a function of or depends on the price of the commodity, the consumers income, the price of related commodities and the tastes of the consumer.
secular trend
refers to the long run increase or decrease in the data series; the solid line in figure 6-1 p 226.
Changes in Demand
shifts of the demand curve due to changes in tastes, income, price of related other goods, or expectations
smoothing techniques
technique that indicates an underlying trend
Managerial Economics
the application of economic theory and tools of analysis of decision science to examine how an organization can achieve its goals most effectively.
Marginal Cost (MC)
the change in total costs associated with a one-unit change in output
Marginal Revenue (MR)
the change in total revenue resulting from the sale of an additional unit of a product