Managerial economics Salvatore 8th Edition, chapter 1

What is the risk-bearing theory of profit?

Above normal returns are required by firms to enter and remain in such fields as petroleum exploration with above average risks.

What is a firm?

An organization that combines and organizes resources for the purpose of producing goods and/or services for sale.

What is econometrics?

Applies statistical tools to real world data to estimate the models postulated by economic theory for forecasting.

All decision making processes can be subdivided into what basic steps?

Define the problem. Determine the objective. Identify possible solutions. Select the best possible solution. Implement the decision.

What concept is best used when making correct investment decisions?

Economic profit.

Which concept is important to use when directing resources to different sectors of the economy?

Economic profit.

What is "economic profit"?

Equals the revenue of the firm minus its explicit costs and implicit costs.

What is the monopoly theory of profit?

Firms with complete market power can restrict output and charge higher prices than under perfect competition, thereby earning a profit.

The "business profit" concept is best used how?

For accounting and tax purposes.

Explain the "circular flow of economic activity".

In the process of supplying goods and services that society demands, firms provide employment to workers and pay taxes, which government uses to provide services that firms could not provide at all or as efficiently.

What is the theory of the firm

It postulates that the goal or objective of the firm is to maximize wealth or the value of the firm.

What is the sales-maximization model?

Managers of modern corporations seek to maximize sales after an adequate rate of profit has been earned to satisfy stockholders.

What is the single most important element in managerial economics?

Microeconomic theory.

Economic theory their refers to what?

Microeconomics and Macroeconomic economics.

What is the innovation theory of profit?

Postulates that profit is the reward for the introduction of a successful innovation.

How does profits serve a crucial function in a free-enterprise economy?

Profits are a signal that consumers want more or less output from an industry. Profits provide incentive for firms to increase their efficiency and/or produce less of a commodity, and/or leave the industry for more profitable ones.

What is "business profit"?

Refers to the revenue of the firm minus the explicit or accounting costs of the firm.

What is the managerial efficiency theory of profit?

Rests on the observation that if the average firm tends to earn only normal return on its investments in the long run, firms that are more efficient than average would earn above-normal returns and profits.

What is the frictional theory of profit?

Stresses that profits arise as a result of disturbances from long-run equilibrium.

What are "Explicit costs"?

The actual out of pocket expenditures of the firm to purchase or hire the inputs it requires in production.

Managerial economics refers to what?

The applications of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Describe satisficing behavior.

The larger corporation is satisficing, rather than a maximizing organization.

What is the "principle-agent problem"?

The manager may be more interested in maximizing his or her benefits than maximizing the owner's interest.

What is constrained optimization?

The primary goal or objective of the firm is to maximize wealth or the value of the firm subject to the constraints it faces.

Microeconomics refers to what?

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.

Macroeconomics refers to what?

The study of the total or aggregate level of output, income, employment, consummation, investment and prices for the economy viewed as a whole.

What is "Implicit costs"?

The value of the inputs owned and used by the firm in its own production processes.

What is mathematical economics used for?

To formalize (to express in equation form) the economic models postulated by economic theory.

What is the main goal or objective of the firm?

To maximize the wealth or the value of the firm.

Society imposes constraints onto firms why?

To modify their behavior and make it more nearly consistent with broad social welfare goals.

Why do firms exist?

To save on transaction costs.

How can the principle-agent problem be resolved?

Tying the manager's reward to the firms performance in relation to other firms in the same industry.

What are some examples of explicit costs?

Wages to hire labor, interest on borrowed capital, rent on land and buildings, expenditures on raw materials.