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Absolute performance evaluation

is based on a predetermined standard of performance—see relative-performance evaluation.

adverse selection

refers to the tendency of individuals with private information about factors that affect a potential trading partner's benefits to make offers that are detrimental to the trading partner—see precontractual information problems.

agency relationship

is an agreement under which one party, the principal, engages another party, the agent, to perform some service on the principal's behalf.

alienable property rights

are private property rights that can be transferred (sold or given) to other individuals.

arbitrage

is a simultaneous set of transactions designed to make profits without risk (for example, if equivalent assets are traded in two markets, buying at the lower price and selling at the higher price).

arc elasticities

are estimated between two points (elasticities also can be calculated at a point); they relate the percentage change in one variable, such as quantity, to a percentage change in another variable, such as price.

asset specificity

occurs when a given asset is especially useful to one or to a small number of buyers—for physical assets, this results from product design or site specificity; for human capital, it results from investments in specialized knowledge or skills.

asymmetric information

occurs when one party to a transaction has information different from that of another party.

average cost (AC)

is the total cost divided by total output; average cost can be defined for either the long run or the short run.

average product (AP)

of an input is the total product divided by the quantity of the input employed.

average revenue (AR)

is the total revenue divided by total output.

Backward integration

occurs when an organization produces its own inputs—also called upstream integration. (købe en supplier længere oppe i kæden)

bargaining failures

occur due to asymmetric information; parties fail to reach an agreement, even when in principle a contract could be constructed that would be mutually advantageous

barriers to entry

are factors that limit the entry of new firms to a market, even though the existing firms are making economic profits.

benchmarking

is identifying the best practices of firms operating within similar environments, so that the benchmarking firm can learn from the experience of the others.

blockholder

is a name given to the holder of a "large" amount (at least 5 percent of the outstanding shares) of common stock.

block pricing

sets a high price for the first unit or block of units purchased and lower prices for subsequent units or blocks.

boundary setting

occurs when managers empower employees to make decisions within prespecified limits.

brand-name capital

refers to a firm's intangible reputational capital; by establishing a reputation for quality products or living up to its end of a contract, the firm can receive more favorable terms from contracting parties because it is a more desirable partner.

broad task assignment

has individual employees performing a relatively large set of tasks—see specialized task assignments.

bundling

occurs when a company packages two or more products together and offers the package for sale as a unit.

business environment

includes the technology, markets (product and input), and regulations facing the firm.

business ethics

is the study of behaviors that businesspeople should and should not follow (however, this term also is used in a variety of ways that range from making firms socially responsible to attempting to induce employees to ignore their self-interest).

business judgment rule

states that in the absence of bad faith or some other corrupt motive, directors are normally not liable to the corporation for mistakes of judgment. The rule has functioned as a barrier to prevent courts from exercising regulatory powers over the activities of corporate managers.

business norms

are expectations in market transactions that do not have the force of law, yet nonetheless represent expected behavior.

business strategy

focuses on strategy at the business-unit level; the primary consideration is whether to focus on being the low-cost producer in an industry or to develop differentiated products for which customers are willing to pay a price premium.

Corporations

are the most common form of organization among large companies; income faces double taxation; shareholders have limited liability; there are few restrictions on the number or type of shareholders that can own stock in the firm—see S corporations.

cafeteria-style benefit plans

are plans in which individual employees allocate a fixed-dollar fringe-benefit allowance among a variety of choices—also called menu plans.

career earnings

are the total wages that employees expect to earn over their entire careers.

cartels

consist of formal agreements among a set of firms to cooperate in setting prices and output levels.

centralized decision system

is one that assigns the most important decisions to senior executives within the organization.

certainty equivalent

is the certain income that an individual considers equivalent to an activity with risky payoffs.

changes in demand

are movements of the demand curve motivated by factors other than changes in the good's own price (such as changes in income or changes in the prices of related goods).

cost-plus pricing

is where firms set prices by marking up average total cost by an amount designed to yield a target rate of return.

Cournot model

examines producer interaction, assuming each firm treats the output level of its competitors as fixed and then decides how much to produce—see oligopolistic market.

credit rating agencies

rate the publicly traded debt of corporations in terms of the probability of default (e.g., Fitch, Moody, and Standard and Poor's).

cross elasticity

relates the percentage change in the quantity of a good purchased to a percentage change in the price of some other good.

cross-training

occurs when employees are taught to complete more than one task or function.

cumulative production

is the total output produced by the firm across all previous production periods.

Deadweight loss

involves the forgone gains from trade (for instance, the forgone producer and consumer surplus when a firm with market power sets price above marginal cost).

decentralized system

is one that assigns many important decision rights to lower-level employees.

decision control

encompasses the ratification and monitoring of decisions.

decision management

encompasses the initiation and implementation of decisions.

decision rights

represent the authority to decide how resources will be used within the organization.

decreasing returns to scale

for a production function occur when a 1 percent change in all inputs results in a less than 1 percent change in output.

dedicated assets

are those whose purchase is necessitated by the requirements of one or only a few buyers.

demand curve

displays the relation between the quantities of a product that will be purchased at each price over a stated period of time, holding all other factors fixed; demand curves slope downward because customers are more likely to purchase if the price is lower—see law of demand.

demand function

is the relation between the quantity demanded for a product and all factors that influence its demand.

dominant strategies

exist when it is optimal for a firm to choose a particular strategy no matter the choices of its rivals—especially used in game theory.

double markups

are the increments in the product's price above marginal cost first by the manufacturer and then by the distributor; this problem occurs with decentralized pricing decisions when the producer has market power.

double taxation

refers to the case with C corporations where income is taxed both at the corporate level when earned and at the personal level when distributed to the owners (shareholders).

downstream integration —see forward integration.

dual-class shares

are common stock shares issued for a single company with varying classes indicating different voting rights.

duopoly

is a market setting in which two firms compete in a market—see oligopolistic market.

Economic Darwinism

is the economic counterpart of the biological theory of natural selection; an organization selects features that increase its ability to survive within its environment; the basic idea is that a competitive marketplace creates pressures that favor organizations that are relatively most efficient.

economic profit

is an above-competitive (or extra-normal) rate of return on assets; economic profits are eroded in competitive markets.

Economic Value Added (EVA—registered trademark of Stern Stewart)

is a measure of residual income; it is the after-tax operating profit of the division minus the total annual cost of capital invested in the division.

economies of scale

occur in industries in which average cost declines over a broad range of output levels.

economies of scope

occur when the cost of producing a set of products jointly within one firm is lower than the cost of producing the products separately across independent firms.

efficiency wages

are wage premiums paid to reduce shirking because employees are afraid that if they are caught, they will be fired and lose this premium; efficiency wages also discourage employee turnover.

elastic demand

occurs when the price elasticity is greater than one; in this case, a small increase in price decreases total revenue.

elasticity of demand

relates the percentage change in the quantity demanded to a given percentage change in its price. Higher price elasticities mean greater price sensitivity. Although the law of demand implies that this ratio will be negative, convention dictates that this elasticity is stated as a positive number—also called price elasticity of demand.

equilibrium

refers to a stable situation where no party has a reason to change its strategy (for example, in a competitive market, this occurs when the quantity supplied of a product equals the quantity demanded).

goal-based system

provides each employee a set of goals for the year and then evaluates employees based on

the extent to which the goals are achieved.

going private transaction

is a term used to describe reorganizations where a publicly traded corporation converts to a closely held corporation.

group incentive pay

bases employee compensation on group performance.

group pricing

occurs when a firm separates its customers into classes and sets different prices for each class—also called third-degree price discrimination.

Historical costs

reflect the original purchase price of resources and not necessarily their current opportunity cost; historical costs generally are not relevant for decision making (except for their tax effects).

holdup problems

can occur when parties invest in specific assets; for example, after the investment is made, the buyer might be able to force a price concession, since it will be in the interests of the seller to continue to operate as long as variable costs are covered.

horizon problems

are the incentive conflicts that can arise between owners and employees due to differential horizons with the firm; employees' claims on the firm generally are tied to their tenure with the firm, but owners are interested in the present value of the entire stream of future cash flows.

horse race

is a model used by some companies for top management succession. A pool of internal candidates compete to replace the CEO. The "winner of the contest" becomes the new CEO when the existing CEO retires.

human asset specificity— see specific human capital and asset specificity.

human capital

is a term that characterizes individuals as having a set of skills that can be "rented" to employers.

Identification

is a statistical problem that arises in separating the effects of simultaneous equations; for example, separating supply versus demand shifts in explaining the observed changes in market prices and quantities.

implementation rights

involve the execution of ratified business decisions.

implicit contracts

consist of promises and shared understandings that are not expressed by formal legal documents.

incentive coefficients

are weights that the compensation plan places on the various tasks assigned to an employee.

income elasticity

relates the percentage change in the quantity purchased for a good to a given percentage change in income.

free cash flow problems

are incentive conflicts between owners and managers over retaining cash within the firm beyond that necessary to fund value-increasing investment projects; managers prefer to take projects which expand firm size beyond that which maximizes the firm's value, rather than to distribute the cash to owners.

free-rider problems

occur in team efforts; each member of the team has an incentive to shirk because each receives the full benefit from shirking, but bears only a part of the costs.

fringe benefits

are components of the compensation package other than salary and incentive compensation; they are either in-kind or deferred (such as medical insurance and pensions).

full-cost transfer prices

use full cost to value goods exchanged between business units; full cost is the sum of fixed and variable cost.

function

refers to a primary activity within the process that a firm employs to provide a product to customers; major functions include research, manufacturing, finance, marketing, sales, and service.

functional myopia

occurs when employees focus on their individual function at the expense of the larger array of activities that must be accomplished to capture as much value as possible given the firm's business opportunities.

functional subunits

group all jobs performing the same function into the same department.

Gain from trade

is the difference between the minimum value that an owner or a supplier is willing to accept for an item and the maximum price that a prospective buyer is willing to pay.

game theory

is concerned with the general analysis of strategic interaction; it focuses on optimal decision making when all decision makers are presumed to be rational, with each attempting to anticipate the likely actions and reactions of its rivals.

general human capital

consists of training and education that is useful across a wide variety of different firms.

general knowledge

is that which is relatively inexpensive to transfer.

general partnerships

are unincorporated businesses with two or more co-owners.

Generally Accepted Accounting Principles (GAAP)

are that set of accounting methods commonly used or proscribed by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) for financial reporting.

just-in-time production (JIT)

is a production system whereby each component is produced immediately as needed by the next step in the production process.

Keiretsu

is a form of network organization employed in Japan; it consists of an affiliation of quasi-independent firms with ongoing, fluid relationships; typically, the firms have cross-holdings in each other's common stock.

Law of demand

states that normal demand curves slope downward to the right—quantity demanded varies inversely with price.

law of diminishing returns

states that the marginal product of a variable factor will eventually decline as the use of the factor is increased—also called the law of diminishing marginal product.

leadership

is the process of persuasion or example by which an individual induces a group to pursue objectives held by the leader; it has at least two important components: establishing goals and motivating others.

learning curves

display the relation between average cost and cumulative production; learning-curve effects refer to average cost

falling as production experience accumulates.

leveraged buyout (LBO)

is defined as a takeover of a company, financed by borrowed funds (often, the target company's assets are used as security for the loans acquired to finance the purchase; the acquiring company or group then repays the loans from the target company's profits or by selling its assets); leveraged buyouts occur at both the corporate and divisional levels (sometimes only part of the firm is sold off); through these buyouts, the companies (or divisions) are converted from publicly traded to closely held corporations.