Chapter 1 Managers, Profits, and Markets

microeconomics

study of individual behavior of consumers, business firms, and markets

business practices

routine business decisions managers must make to earn the greatest profit under the prevailing market conditions facing the firm

industrial organization

branch of microeconomics focusing on the behavior and structure of firms and industries

strategic decisions

business actions taken to alter market conditions and behavior of rivals in ways that increase or protect the strategic firm's profit

economic forces that promote LR profitability

few close substitutes, strong entry barriers, weak rivalry within market, abundant complementary products, limited government intervention

opportunity cost

what a firm's owner gives up to use resources to produce goods or services

market supplied resources

resources owned by others and hired, rented, or leased in resource markets (ex. labor services, raw materials from suppliers, etc.)

owner supplied resources

resourced owned and used by a firm, 3 important types: money, time and labor services, and capital

total economic cost

sum of opportunity costs of market-supplied resources + opportunity costs of owner-supplied resources

explicit costs

monetary opportunity costs of using market-supplied resources

implicit costs

non-monetary opportunity costs of using owner-supplied resources

equity capital

money provided to businesses by the owners

economic profit

difference between total revenue and total economic cost

accounting profit

total revenue minus explicit costs

value of a firm

the price for which the firm can be sold (PV of future profits)

risk premium

an increase in the discount rate to compensate investors for uncertainty about future profits

common mistakes managers make

increase output to reduce average costs, pursue market share, focus on profit margin, maximize total revenue

principal-agent problem

conflict that arises when the goals of management (agent) do not match the goals of the owner (principal)

moral hazard

exists when either party to an agreement has an incentive not to abide by all provisions of the agreement and one party cannot cost effectively monitor the agreement

price-taker

a firm that can't set the price of the product it sells, since price is determined strictly by the market forces of demand and supply

price-setting firm

a firm that can raise its price without losing all of its sales

market power

a firm's ability to raise price without losing all sales

market

any arrangement through which buyers and sellers exchange anything of value

transaction costs

costs of making a transaction happen, other than the price of the good/service itself

market structure

market characteristics that determine the economic environment in which a firm operates

market structure characteristics

number and size of the firms operating in the market, degree of product differentiation among competing producers, likelihood of new firms entering a market when incumbent firms are earning economic profits

4 different market structures

perfect competition, monopoly, monopolistic competition, oligopoly

perfect competition

a large number of relatively small firms sell an undifferentiated product in a market without barriers to the entry of new firms

monopoly

a single firm, protected by some kind of barrier to entry, that produces a product for which no close substitutes are available

monopolistic competition

a large number of firms that are small relative to the total size of the market produce differentiated products without the protection of barriers to entry

oligopoly

a few firms produce most or all of the market output so any one firm's pricing policy will have a significant effect on the sales of other firms in the market

globalization of markets

economic integration of markets located in nations around the world