Chapter 1 & 2 Flashcards

What is Managerial Economics?

Managerial economics involves applying economic principles to decision-making within an organization.

What are the Seven Fundamentals of Managerial Economics?

Identify Goals/Constraints, Understanding Profits, Incentives, Markets, Time Value of Money, Marginal Analysis, and Making Data Driven Decisions.

What is the firm's overall goal in Managerial Economics?

To maximize profits while acknowledging limitations.

How is Profit calculated?

Profit is defined as Total Revenue (TR) minus Total Costs (TC).

What are explicit costs?

Explicit costs are direct, out-of-pocket payments for goods and services.

What are implicit costs?

Implicit costs are indirect opportunity costs of resources invested.

What is the Time Value of Money?

It recognizes the gap between when costs are incurred and when benefits are received, contrasting present value (PV) with future value (FV).

What is Marginal Analysis?

Marginal Analysis involves comparing Marginal Benefit (MB) and Marginal Cost (MC) of any action.

What happens when Marginal Benefit exceeds Marginal Cost?

Increase quantity until MB equals MC.

What is the Law of Demand?

If the price of a good decreases, the quantity demanded increases, and vice versa; there's an inverse relationship between price and quantity demanded.

What does the Law of Supply state?

Higher prices motivate increased supply, which maintains an upward slope of the supply curve.

What are Demand Shift Factors?

Factors that influence the direction of demand, including income, price of substitutes and complements, taste and preference, population, and price expectation.

What is the opportunity cost?

The value of the next best alternative forgone.

How do sufficient incomes affect demand?

Higher incomes increase the demand for normal goods and decrease demand for inferior goods.

What role do governments play in markets?

Governments regulate market transactions and provide market discipline.

What does an increase in the price of a substitute do to demand?

It increases the demand for the primary good.

What should be done when Marginal Benefit is less than Marginal Cost?

Decrease quantity.

What is the effect of future expected price increases on current demand?

It leads to an increase in current demand.

What is present value?

The current worth of a future sum of money given a specified rate of return.

What happens to present value when discount rates increase?

Higher discount rates decrease present value.