Lesson 1-Fundamentals of Managerial Economics

A comprehensive set of Q&A flashcards covering key concepts from the Fundamentals of Managerial Economics lecture notes.

What is a manager?

A person who directs resources to achieve a stated goal.

What is economics?

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

What is managerial economics?

The study of how to wisely use limited resources to achieve specific business goals efficiently, guiding decision-making within an organization to maximize its profit.

What is the first step to sound decision-making?

Know the information.

What is the second step to sound decision-making?

Collect the data.

What is the third step to sound decision-making?

Process/Analyze the data.

What does "People face trade-offs" mean?

Choosing one thing often means giving up another.

What is opportunity cost?

The cost of what you give up to get something.

What does "Rational people think at the margin" mean?

Decisions are made by comparing marginal benefits and marginal costs.

What does "People respond to incentives" mean?

Behavior changes when costs or benefits change (e.g., higher cigarette taxes reduce smoking).

What does "Trade can make everyone better off" mean?

Specialization and voluntary exchange allow all parties to benefit.

What is the role of markets in the economy?

Markets are usually a good way to organize economic activity; prices coordinate buyers and sellers.

How can governments improve market outcomes?

Regulation can help address market failures like externalities or market power.

What determines a country’s standard of living?

Productivity—the ability to produce goods and services; long-term growth tied to education and technology.

What causes inflation?

Prices rise when the government prints too much money.

What is the short-run trade-off between inflation and unemployment?

In the short term, boosting demand can lower unemployment but may increase inflation.

What is the first principle of effective managerial decision making?

Identify the goals and constraints.

What is the second principle of effective managerial decision making?

Recognize the nature and importance of profits.

What is the third principle of effective managerial decision making?

Understand incentives.

What is the fourth principle of effective managerial decision making?

Understand markets.

What is the fifth principle of effective managerial decision making?

Recognize the time value of money.

What is the sixth principle of effective managerial decision making?

Use marginal analysis.

What are GOALS in the goals and constraints concept?

The manager’s ambitions or targets for the company.

What are CONSTRAINTS?

Limitations that affect goal achievement.

What are explicit costs?

Out-of-pocket costs easily identified in financial statements (e.g., salaries, supplies).

What are implicit costs?

Costs not paid in cash but represent the opportunity cost of the next best alternative.

What is accounting profit?

Revenue minus explicit costs.

What is economic profit?

Revenue minus explicit costs minus implicit costs.

What is Porter's Five Forces used for?

A framework to analyze the profitability and competitive intensity of an industry.

What is the "Entry" force in Porter's Five Forces?

The ease with which new competitors can enter the industry; affects profit sustainability.

What is the "Power of input suppliers" in Porter's model?

Supplier bargaining power; higher power can reduce industry profits.

What is the "Power of buyers" in Porter's model?

Buyers’ bargaining power; higher power can reduce profits.

What is "Industry rivalry" in Porter's model?

The level of competition among existing firms.

What are substitutes and complements in Porter's model?

Related products; their price/value can affect profits.

Who proposed that incentives drive behavior?

Daniel Pink (2009).

What are the three types of economic rivalry?

Consumer-Producer Rivalry, Consumer-Consumer Rivalry, Producer-Producer Rivalry.

What is Consumer-Producer Rivalry?

Consumers want to pay less while producers want to earn more.

What is Consumer-Consumer Rivalry?

Consumers compete for limited resources or goods.

What is Producer-Producer Rivalry?

Sellers compete by offering lower prices or better quality.

What is Time Value of Money (TVM)?

Money today is worth more than the same amount in the future because it can earn interest.

What is the Present Value (PV) formula for a single future amount?

PV = FV / (1 + i)^t.

How is the present value of a stream of cash flows calculated?

PV = sum over t of FV_t / (1 + i)^t.

What is Net Present Value (NPV)?

PV of an income stream minus the initial cost.

When should a project be approved based on NPV?

Approve if NPV > 0; reject if NPV < 0.

In the NPV example, what were the cash flows and initial cost?

Initial cost: $300,000; annual cost savings: $50k, $60k, $75k, $90k, $90k.

What was the NPV in the example?

NPV = -$15,321 (negative).