Microeconomics Test 1

What is the importance of economics?

It is what the world revolves around, plays part in many things (wars, ect.)

Production

The making of goods and services

Division of Labor

Division of work into a number of separate tasks to be performed by different workers

Scarcity

The condition where goods and services are limited and where human wants are unlimited

Microeconomics

The actions of individual agents within the econemy

Macroeconomics

Looks at the economy as a whole

Fiscal Policy

Tax/spending policy of the government

Monetary Policy

Actions of the central banks

Economics

The study of how humans make chocies under the conditions of scarcity

Ceteris Paribus

With other conditions remaining the same

What does setting a price do?

It creates a market which is a place where goods or services are sold or exchanged

Diagram

Free Market

An economy where.. economic decentralized, resources owned by private individuals, businesses supply goods based on demand

Command Economy

An economy in which production, investment, prices, and incomes are determined centrally by a government.

Rank these contries from Free Market (Left) to Command Economy (Right): Europe, China, U.S. North Korea

U.S., Europe, China, North Korea

Who is Adam Smith?

The father of modern economics who wrote The Wealth of Nations, published in 1776. He also wrote about Laissez-Faire capitalism and the benefits of division of labor.

'Invisable Hand' Theory

The indivisual goes to better themself for themself or family but actually benefits society more then he wants. Chain reaction. From The Wealth of Nations.

Market Failure

When we do not produce the right combination of output (too much of one or not enough of the other)

Mission Statemnet

Breif statment of purpose that guides or directs values and principles

Corporate Governance

The system of governing a company so that the interests of corporate owners and other stakeholders are protected

3 Reasons Why DE is popular for business

1. Legal system

- De laws are really business friendly + courts are run by Chancery

2. Really strong corporate secrecy laws

- Let anyone register a company

3. tax Haven

- High corporate tax but there is a loophole.. there is no copyright tax so royalties from that are tax-free

DEPC

Companies will funnel funds (intellectual) form other states into DE so there is no tax

Sole Proprietorship

One owner, "mom and pop shops", Formation = easy, funding = could be difficult to raise start-up capital, taxation = earnings taxed on personal income tax form (no double taxation) liability = personal liability for business (can insure against some liabilities)

Sole Proprietorships...

95% go out of business in 7 years

Partnership

two or more owners (law firms, restaurants), formation = medium difficulty, need partnership agreement (contract) funding = more woners to contribute start up capital; often easier to get bank loans, taxation = the business is taxed on profit/ owners are tax on dividends (double taxation), liability = personal liability for business (can insure against some liabilities)

Corperation

Owned by shareholders, stock sold publicly or privatly, usally 100+ emolyees, formation = more difficult, lawyaers and banks invloved in setting up; feas, funding = easier to fun via stock sale; easier to get bank loans, taxation = earnings taxed on personsal income tax form and buisness earrings, yes double taxation, Liabilty = no personal liabilities for owners, the corperation is its own legal entity

LLC

limited liability company, hybrid - cross between sole proprietor/partnership and corperation, popular in DE, profit loss/gain go to individual tax returns, liabilty protection similar to a corperation, do not need to disclose memebrs - only the agent who set it up

Contract

written promise or legal pledge

Articles of partnership

(a contract)

partner names and roles

purpose of the business and location

entry and exit rules

each partners start up contribution (capital)

each partners percentage of intrest

how aprtnership profits will be distributed

Management rules

salieries for some, all, or none

genral vs. limited partners outlined

Capital

refers to money

Goverance

a set of rules, policies, and roles that give an organization structure and a system of controls

CEO

chief executive officer

Order of governance structure

board of directors - cheif executive officer - cheif Financial officer and other top officers (COO CIO CAO) - departments or divison heads - mangaers - employees

stakeholders

employees, stockholders, banks and creditors, supplies/vendors

Principle

owner of a company

Agent

Working on behalf of the princle, agent is not the owner

Agents are...

managers or employees who dont own stock, given rewards or incentives to work in intrest of the prinicle, dont have same intrest or incentives as owners, tending to care about their own finincal circumstances first

To prevent agency conflict...

There are string rules and consequences, rewards for good behavior, focus on long-term results vs short ter,, oversight by audit committe of the board of directors

Agency Conflict

Conflict of interest between principal and agent

SEC stands for

Securities and Exchange Commission

Security is...

stocks and bonds

SEC (what it does)

established in 1933, regulates stock market transactions and public companies based in the U.S.

requires public companies to share financial statements every 3 months and provide an annual report (10k) every year to shareholders

Holds CEOs and boards of directors accountable for providing accurate financial information that does not mislead investors

ensures that company insiders are not trading stock based on insider knowledge

protects "whistle blowers"

Share Holders

people who own stock in a corporation

whistle blowers

employees who report unethical or illegal actions of their employers/company

(In genral) the higher the degree..

The higher the salery

Trade Off

A chocie of one good thing or experience over another

Margin

the difference between the value that an activity generates and the cost of the activity

Marginal Cost

the cost of producing one more unit of a good

Making trade offs at the margin

comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less

PPF (Production Possibilities Frontier) / PPC (Production Possibilities Curve)

An economics model that shows the maxium combinations of 2 goods that can be produced with avaible reasources (labor equipment technology, space/room)

Oppertunity Cost

Value of what you are giving up (value of trade off)

Diagram

Productive Efficiency

impossible to produce more of one good with out decreasinbg the quantity that is the product of another good

Allocative Efficiency

Particular mix of goods being produced, that is the spesific choice among the production possibilities

The economy is in an equilibrium but changes when...

any time there is a change the econemy shifts to a new equilibrium

Economic situation

In equalibrium whne no individual would e better off doing something differnet

Utility

satisfaction, usefulness, or value one obtains from consuming goods and services

Law of demising returns

states that as more units of one resource are added to all other resources, marginal product (M.P) eventually declines- most important factor in production in the short run (ex. too many cooks in the kitchen) so there is a peak utility in that adding more will not cause satisfaction

Sunk Costs

costs that we make in the past that we cannot recover

Budget

is a fixed dollar amount that may be spent

Budget contraint is a...

line

production possibilities

Is based on a value but on output of good or servives, it is varible due to efficiencies. Includes specialization, divsion of labor, and econmies of scale (often there is a optium combination in a PPC)

Budget equasion

(P1Q1) + (P2Q2)

A manufacturere is a...

Whole saler

Revanue equasion

(price) x (quantity)

Revanue

the money earned when a business sells a product or service, also called sales or top line, not cash --> total money earned

Retailer

a business whose sales come primarily from retailing, or buy products from differnt companies to sell

Expenses are...

Costs

costs of sales/cost of goods sold

Main expense account in a buiness, this refelcts the cost to purchance the goods to be sold or the matericals to make the product and associated labor

Gross Profit equasion

Sales revenue - cost of sales

Operating expenses

Things like tac, advertising, rent, ect.

2 categories

sales, general/administrated expense (SG&A)

research and development (R&D)

Profit is...

The moeny left over after you pay all your costs, or the money that you have recorded that you earned, also called income or bottom line

Profit equation

revenue - expenses

Net Profit Margin procentange

(Net income) / (revenue) [tells how efficient a company is]

Economies of scale

(scale = size) the cost advantages a business gains as it increases its scale of operation, factors that cause a producer's average cost per unit to fall as output rises