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