Managerial economics chapter 2

benefits of off shoring

* Cheaper wages, * Increase GDP * Competitive market *lower prices.

Signs of Re-shoring

* increase wages, energy costs go up, decrease of value of a dollar over there.

Maximizing the wealth of Stockholders explained

*A company tries to manage its business in such a way that dividends over time paid from its earnings and the risk incurred to bring about the stream of dividends always create the highest price of the company stock. * When stock options are a substantial part of executive compensation, management objectives tend to be more aligned with stockholders objective.

How position of stockholders affects Satisfying

*Larger firms owned by 1000's of shareholders. *Stockholders generally own only minute interest in the firm and hold diversified holdings in other firms.

Two forces that lead to satisfying

*Position and power of stockholders *Position and power of management

Goals other than profit (non-economic objectives)

*Quality of work *Good work environment *Good corporate citizenship and social responsibility

Economic profits vs. accounting profits

-Accountants measure explicit incurred costs, as allowed by GAAP. - Accountants use historical costs.

How positions and power of management effects satisfying

-high-level managers may own little stock - Managers don't take risks -managers may be more interested in maximizing their own income -"principal-agent problem" which is a divergence in objectives.

Economic Value Added

= (Return on total capital -cost of capital) times total capital.

optimal decision

Decisions that best bring a firm to it's goals. (EVERYONE needs to be aware of the firms exact goals)

satisfice

Firms seek to achieve a satisfactory goal- one that may not require the firm to "do it's best."

Economic Profile

Include not only the historical costs and explicit costs recorded by the accountants, but also the replacement costs and implicit costs (normal profits) that must be earned on the owners recourse.

Market Value Added cont...

Includes value of both equity and debt. * 'capital' includes book value of equity and debt as well as certain adjustments. * While the market value of the company will always be positive, MVA may be positive or negative.

Goals other than profit ( Economic/financial objectives)

Market share, growth rate, profit margin, return on investments, return on assets, technological advancement, customer satisfaction, shareholder value.

Profit Equation

Price times units sold= revenue-costs=profits

Sarbanes-Oxley Act

The act sets stricter standards on the behavior of public corporation and more transparent of corporate information.

Market Value Added

The difference between the market value of the company and that capital that the investors have paid into the company.

profit maximization hypothesis

The hypothesis that the primary goal of the firm (to economics) is to maximize profits. (unless it's been otherwise said)

Economic profits

Total revenue minus all the economic costs

Maximizing stockholders wealth

Views the firm from the perspective of a stream of profits over time. The clues of the stream, depends on when cash flows occur.

Global application

When doing business in other countries and other cultures, business decision-making becomes more complicated due to * Foreign currencies *legal differences *language *attitudes *role of government

The Firm

a collection of resources that is transformed into products demanded by customers.

Financial risk

concerns the variation in returns that is inducted by leverage.

Leverage

is the proportion of a company financed by debt.

Coase Theorem

the argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities

transactions costs

the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. (Investigating, negotiating, enforcing contracts)

Off-shoring

the practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs.

Re-shoring

the reversal of offshore outsourcing, i.e. the transfer of business operations back to its country of origin

Business risk

variation in returns due to ups and downs of the economy, the industry and then the firm.