Introducing Supply Decisions Key terms

Question 1

limited liability

Answer 1

Shareholders of a company have limited liability. The most they can lose is the money they spent buying shares.

Question 2

Stocks vs flows

Answer 2

Stocks are measured at a point in time; flows are corresponding measures during a period of time.

Question 3

Revenue

Answer 3

is what the firm earns from selling goods or services in a given period,

Question 4

cost

Answer 4

is the expense incurred in production in that period and profit is revenue minus cost.

Question 5

cash flow

Answer 5

A firm’s cash flow is the net amount of money actually received during the period.

Question 6

Physical capital

Answer 6

is machinery, equipment and buildings used in production.

Question 7

Depreciation

Answer 7

is the loss in value of a capital good during the period.

Question 8

Inventories

Answer 8

are goods held in stock by the firm for future sales.

Question 9

A firm’s net worth

Answer 9

is the assets it owns minus the liabilities it owes.

Question 10

Retained earnings

Answer 10

are the part of after-tax profits ploughed back into the business.

Question 11

Opportunity cost

Answer 11

is the amount lost by not using a resource (labour, capital) in its best alternative use

Question 12

Supernormal profit

Answer 12

is pure economic profit and measuring all economic costs properly

Question 13

principal–agent problem

Answer 13

A principal or owner may delegate decisions to an agent. If it is costly for the principal to monitor the agent, the agent has inside information about its own performance, causing a principal–agent problem.

Question 14

Marginal cost

Answer 14

is the rise in total cost when output rises 1 unit.

Question 15

Marginal revenue

Answer 15

is the rise in total revenue when output rises 1 unit