The Fundamentals of Managerial Economics

Vocabulary flashcards covering key concepts from the lecture on The Fundamentals of Managerial Economics.

Manager

A person who directs resources to achieve a stated goal; directs the efforts of others, purchases inputs, and directs product price or quality decisions.

Economics

The science of making decisions in the presence of scarce resources, implying trade-offs.

Resources

Anything used to produce a good or service, or achieve a goal.

Managerial Economics

The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

Firm's Overall Goal (Managerial Economics)

To maximize profits.

Constraints (Managerial Economics)

Factors like available technology and input prices that make it difficult to achieve goals.

Accounting Profit

Total amount of money taken in from sales (total revenue) minus the dollar cost of producing goods or services.

Economic Profit

The difference between total revenue and opportunity cost.

Opportunity Cost

The explicit cost of a resource plus the implicit cost of giving up its best alternative.

Role of Profits

A signal to resource holders where resources are most highly valued by society.

Five Forces Framework

A framework used to analyze the sustainability of an industry4s profits.

Incentives

Factors (like changes in profits) that impact how resources are used and how hard workers work, with a manager's role to construct them for maximal employee effort.

Market Transaction

Involves a buyer and a seller, with bargaining positions limited by consumer-producer, consumer-consumer, and producer-producer rivalries.

Time Value of Money

The concept that a gap often exists between the time when costs are borne and benefits received.

Present Value Analysis

A tool used by managers to properly account for the timing of receipts and expenditures.

Present Value of a Single Future Value

The amount that would have to be invested today at the prevailing interest rate to generate a given future value.

Net Present Value (NPV)

The present value of the income stream generated by a project minus the current cost of the project.

Present Value of Indefinitely Lived Assets (Constant Cash Flow)

The present value of a perpetual income stream when the same cash flow is generated, calculated as CF / i.

Profit Maximization (Firm Value)

Maximizing the value of the firm, which is the present value of current and future profits.

Maximizing Short-Term vs. Long-Term Profits

If the profit growth rate is less than the interest rate and both are constant, maximizing current (short-term) profits is equivalent to maximizing long-term profits.

Factors Promoting Long-Run Profitability

Few close substitutes, strong entry barriers, weak rivalry within the market, low market power of input suppliers and consumers, abundant complementary products, and limited harmful government intervention.

Net Benefits (Profit)

Total benefits (total revenue) minus total costs; the manager's objective is to maximize this.

Marginal Analysis

A method used to maximize net benefits by examining the change in total benefits and costs arising from a change in a managerial control variable.

Marginal Benefit (MB)

The change in total benefits arising from a change in the managerial control variable.

Marginal Cost (MC)

The change in the total costs arising from a change in the managerial control variable.

Marginal Net Benefits (MNB)

The change in net benefits arising from a change in the managerial control variable; it equals marginal benefit minus marginal cost (MB - MC).

Marginal Principle

To maximize net benefits, a manager should increase the managerial control variable up to the point where marginal benefits equal marginal costs (i.e., marginal net benefits are zero).

Marginal Value Curves

Represent the slopes of total value curves; for a continuous function, the derivative is the marginal value at that point.

Incremental Revenues

The additional revenues that stem from a yes-or-no decision.

Incremental Costs

The additional costs that stem from a yes-or-no decision.

"Thumbs Up" Decision (Incremental)

Occurs when incremental revenues are greater than incremental costs.

"Thumbs Down" Decision (Incremental)

Occurs when incremental revenues are less than incremental costs.