Managerial Economics and Business Strategy Vocabulary Review

Vocabulary flashcards covering key definitions and economic terminology from Managerial Economics and Business Strategy.

Manager

A person who directs resources to achieve a stated goal.

Economics

The science of making decisions in the presence of scarce resources.

Managerial Economics

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

Accounting Profits

The total amount of money taken in from sales (total revenue, or price times quantity sold) minus the dollar cost of producing goods or services.

Economic Profits

The difference between total revenue and total opportunity cost.

Opportunity Cost

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

Present Value (PV)

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.

Marginal Benefit

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

Marginal Cost

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

Incremental Revenue

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

Incremental Cost

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

Law of Demand

The principle stating that as the price of a good rises (falls) and all other things remain constant, the quantity demanded of the good falls (rises).

Normal Good

A good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good.

Inferior Good

A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.

Substitutes

Goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.

Complements

Goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.

Consumer Surplus

The value consumers get from a good but do not have to pay for.

Law of Supply

The principle stating that as the price of a good rises (falls) and other things remain constant, the quantity supplied of the good rises (falls).

Producer Surplus

The amount producers receive in excess of the amount necessary to induce them to produce the good.

Price Ceiling

The maximum legal price that can be charged in a market.

Price Floor

The minimum legal price that can be charged in a market.

Own Price Elasticity of Demand

A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good, calculated as the percentage change in quantity demanded divided by the percentage change in the price of the good.

Cross-Price Elasticity of Demand

A measure of the responsiveness of the demand for a good to changes in the price of a related good.

Income Elasticity of Demand

A measure of the responsiveness of the demand for a good to changes in consumer income.

Indifference Curve

A curve that defines the combinations of two goods that give a consumer the same level of satisfaction.

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction.

Budget Line

The bundles of goods that exhaust a consumer's income.

Production Function

A function that defines the maximum amount of output that can be produced with a given set of inputs.

Marginal Product (MP)

The change in total output attributable to the last unit of an input.

Average Product (AP)

Total product divided by the quantity used of the input.

Value Marginal Product

The value of the output produced by the last unit of an input.

Isoquant

Defines the combinations of inputs that yield the same level of output.

Isocost Line

A line that represents the combinations of inputs that will cost the producer the same amount of money.

Marginal Rate of Technical Substitution (MRTS)

The rate at which a producer can substitute between two inputs and maintain the same level of output.

Economies of Scale

Exist whenever long-run average costs decline as output increases.

Economies of Scope

Exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms.

Cost Complementarity

Exists when the marginal cost of producing one type of output decreases when the output of another good is increased.

Spot Exchange

An informal relationship between a buyer and seller in which neither party is obligated to adhere to specific terms for exchange.

Contract

A formal relationship between a buyer and seller that obligates the buyer and seller to exchange at terms specified in a legal document.

Vertical Integration

A situation where a firm produces the inputs required to make its final product.

Specialized Investment

An expenditure that must be made to allow two parties to exchange but has little or no value in any alternative use.

Principal-Agent Problem

The incentive problem that arises when an owner (principal) cannot directly monitor the manager's or worker's (agent's) effort.

Four-Firm Concentration Ratio

The fraction of total industry sales generated by the four largest firms in the industry.

Herfindahl-Hirschman Index (HHI)

The sum of the squared market shares of firms in a given industry multiplied by $10\text{,}000$.

Rothschild Index

A measure of the sensitivity to price of a product group as a whole relative to the sensitivity of the quantity demanded of a single firm to a change in its price.

Lerner Index

A measure of the difference between price and marginal cost as a fraction of the product's price, given by $L = \frac{P - MC}{P}$.

Perfect Competition

A market structure in which there are many buyers and sellers, each firm produces a homogeneous product, buyers and sellers have perfect information, there are no transaction costs, and there is free entry and exit.

Monopoly

A market structure in which a single firm serves an entire market for a good that has no close substitutes.

Monopolistic Competition

A market structure in which there are many buyers and sellers, each firm produces a differentiated product, and there is free entry and exit.

Oligopoly

A market structure in which there are only a few firms, each of which is large relative to the total industry.

Sweezy Oligopoly

An industry in which there are few firms serving many consumers, firms produce differentiated products, and each firm believes rivals will respond to a price reduction but will not follow a price increase.

Cournot Oligopoly

An industry in which there are few firms serving many consumers, firms produce either differentiated or homogeneous products, and each firm believes rivals will hold their output constant if it changes its output.

Stackelberg Oligopoly

An industry in which a single firm (the leader) chooses an output before all other firms (the followers), who then take the leader's output as given and select outputs that maximize profits.

Bertrand Oligopoly

An industry in which few firms serve many consumers, produce identical products at constant marginal cost, and compete in price, reacting optimally to competitors' prices.

Contestable Market

A market in which all firms have access to the same technology, consumers respond quickly to price changes, existing firms cannot respond quickly to entry by lowering prices, and there are no sunk costs.

Price Discrimination

The practice of charging different prices to consumers for the same good or service.

Two-Part Pricing

A pricing strategy in which consumers are charged a fixed fee for the right to purchase a product, plus a per-unit charge for each unit purchased.

Block Pricing

A pricing strategy in which identical products are packaged together in order to enhance profits by forcing customers to make an all-or-none decision to purchase.

Commodity Bundling

The practice of bundling several different products together and selling them at a single bundle price.

Peak-Load Pricing

A pricing strategy in which higher prices are charged during peak hours than during off-peak hours.

Cross-Subsidy

A pricing strategy in which profits gained from the sale of one product are used to subsidize sales of a related product.

Transfer Pricing

A pricing strategy in which a firm optimally sets the internal price at which an upstream division sells an input to a downstream division.

Risk Averse

Preferring a sure amount of $M$ dollars to a risky prospect with an expected value of $M$ dollars.

Risk Loving

Preferring a risky prospect with an expected value of $M$ dollars to a sure amount of $M$ dollars.

Risk Neutral

Being indifferent between a risky prospect with an expected value of $M$ dollars and a sure amount of $M$ dollars.

Asymmetric Information

A situation that exists when some people in a market have better information than others.

Adverse Selection

A situation in which individuals have hidden characteristics and a selection process results in a pool of individuals with undesirable characteristics.

Moral Hazard

A situation where one party to a contract takes a hidden action that benefits him or her at the expense of another party.

Winner's Curse

The bad news conveyed to the winner of a common-value auction that his or her estimate of the item's value exceeds the estimates of all other bidders.