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The New Managerial Economics - Chapters 1 through 4
The New Managerial Economics - Chapters 1 through 4 - Exam 1
36
Economics
Graduate
05/25/2011

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Term
Scare
Definition
Where needs or wants exceed means, therefore people have to make a choice. Can't read a book and watch TV, can only do one.
Term
Opportunity costs
Definition
Things that are given up, or forgone, are the costs of a decision.
Term
Production Possibilities Curve (PPC)
Definition
Illustrates the idea of scarcity. The combinations along the line are the maximum that can be producted with the given resources; there is no way, with the current resources, to produce any combination outside of the curve.
Term
Absolute Advantage
Definition
Ability to beat competition: the ability of a provider of goods or services to conduct business more profitably or efficiently than any competitor.

Able to produce more of a good than a competitor.
Term
Comparative Advantage
Definition
More efficient production: a higher relative efficiency in the production of a particular good in one country or company as opposed to another.

Example. Only giving up 1/2 unit of tech for 1 unit of agriculture, vs a country that has to give up 1 unit of tech for 1 unit of agriculture.
Term
Gains from trade
Definition
Each country can get more units by specializing and trading than by being self-sufficient.
Term
Exports
Definition
Sales to other countries.
Term
Imports
Definition
Purchases from other countries.
Term
Efficiency
Definition
A measure of how well a system (Price, First-come-first-served, Government, Random) satisfies the wans and needs of individual human beings.
Term
Pareto Efficient
Definition
An efficient allocation of resources where no other available allocation that makes someone better off without making another person worse off exists.
Term
Externalities
Definition
When all costs and benefits are not included in a transaction, then the decisions buyers and sellers make is based on incomplete information and the resulting price/quantities bought and sold are not efficient.

Consequence of production ignored in pricing: a factor such as environmental damage that results from the way something is produced but is not taken into account in establishing the market price of the goods or materials concerned.

Can be Negative (imposing costs on others, fixed by taxes) or Positive (grant benefits to others, fixed by governement subsidies).

Often refered to as a "Market Failure"
Term
Market Failure
Definition
An externality that does not take into account all costs and benefits and therefore is not efficient.
Term
Public Good
Definition
Type of Market Failure where people can consume a product without having to pay for it. No one would have an incentive to purchase the good.
Term
Transaction costs
Definition
Include the costs of bargaining and negotiating.
Term
Vertically Integrated
Definition
More efficient for the firm to carry out transactions between suppliers and producers internally rather than externally.
Term
Horizontally Integrated
Definition
More efficient to include parallel activities within the firm than to use the market.
Term
Law of one price
Definition
Identical goods selling in different markets will naturally have the same price.
Term
Determinants of Demand
Definition
Income, prices of related goods, and tastes or preferences.
Term
Demand vs Quantity Demanded
Definition
Quantity Demanded = The amount of a product that people are willing and able to purchase at a specific price.

Demand = The amount that people would be willing and able to purchase at every possible price.
Term
Determinants of Supply
Definition
Prices of resources used to produce the good or service, technological changes enabling more to be produced with the same amoung of resources, expectations of producers, and number of sellers affect supply.
Term
Supply vs Quantity Supplied
Definition
Quantity Supplied = The amount of a product that sellers are willing and able to offer for sale at a specific price.

Supply = The amount that sellers would be willing and able to sell at every possible price.
Term
Arbitrage
Definition
simultaneous buying and selling: the simultaneous buying and selling of the same negotiable financial instruments or commodities in different markets in order to make an immediate profit without risk
Term
Adding Value
Definition
To create an output that is more valueable than the cost of the inputs used to produce the output.
Term
Four Factors of Production
Definition
Capital, Land (natural resources), Labor. The fourth isn't really a fourth, but some dude think "human capital" is one as well. It's not accepted though.
Term
Land
Definition
All natural resources, raw materials, land, and sea.
Term
Land
Definition
All natural resources, raw materials, land, and sea.
Term
Labor
Definition
Skilled and unskilled labor.
Term
Capital
Definition
Structures, equipment, and inventories.
Term
Added value
Definition
The excess of revenues over the cost of all resources.
Term
Economic Profit
Definition
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used.

Economic Profit = Accounting Profit - Capital Costs
Term
Accounting Profit
Definition
The value of output less the cost of inputs but not including the opportunity cost of the owner's capital.
Otherwise known as operating profit or net operating profit.

Accounting Profit = Revenue - Cost of land and labor
Term
Negative Economic Profit
Definition
Firms that subtract value.
Term
Zero Economic Profit
Definition
A firm that neither adds value nor subtracts it. Revenue is sufficient to pay the cost of all of the inputs it uses, but with nothing left over.
Term
Zero Economic Profit
Definition
A firm that neither adds value nor subtracts it. Revenue is sufficient to pay the cost of all of the inputs it uses, but with nothing left over.
Term
Capital Asset Pricing Model (CAPM)
Definition
The model calculates how risky a compay is and devises a risk premium that must be added to teh average cost of equity capital.
Term
WACC
Definition
Equal to the cost of debt multiplied by the proportion of total capital made up of debt plus the cost of equity multiplied by the proportion of total capital made up of equity.
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