Ch. 1 - Managers & Economics

Question 1

Microeconomics

Answer 1

The branch of economics that analyzes the decisions that individual consumers, firms, and industries make as they produce, buy, and sell goods and services

Question 2

Managerial Economics

Answer 2

Microeconomics applied to business decision making.

Question 3

Prices

Answer 3

The amounts of money that are charged for goods and services in a market economy. Prices act as signals that influence the behavior of both consumers and producers of these goods and services.

Question 4

Outputs

Answer 4

The final goods and services produced and sold by firms in a market economy.

Question 5

Inputs

Answer 5

The factors of production, such as land, labor, capital, raw materials, and entrepreneurship, that are used to produce the output, or final goods and services, that are bought and solid in a market economy.

Question 6

Macroeconomics

Answer 6

The branch of economics that focuses on the overall level of economic activity, changes in the price level, and the amount of employment by analyzing group or aggregate behavior in different sectors of the economy.

Question 7

Relative Prices

Answer 7

The price of one good in relation to the price of another, similar good, which is the way prices are defined in microeconomics.

Question 8

Markets

Answer 8

The institutions and mechanisms used for the buying and selling of goods and services. The four major types of markets in microeconomic analysis are perfect competition, monopolistic competition, oligopoly, and monopoly.

Question 9

Types of Markets

Answer 9

1) Perfect Competition
2) Monopolistic competition
3) Oligopoly
4) Monopoly

Question 10

Major Characteristics of 4 Types of Market Structures

Answer 10

1) The number of firms competing with one another that influences the firm’s control over its price
2) Whether the products sold in the markets are differentiated or undifferentiated
3) Whether entry into and exits from the market by other firms is easy or difficult
4) The amount of information available to market participants

Question 11

Perfect Competition Model Traits:
#1 Number of Firms in Market

Answer 11

1) A number of firms in the market
- so many firms that no single firm has any influence on the price of product
- Definition: Price-taker, a characteristic of a perfectly competitive firm in which the firm cannot influence the price of its product, but can sell any amount its output at the price established by the market.

Question 12

Price-taker

Answer 12

A characteristic of a perfectly competitive firm in which the firm cannot influence the price of its product, but can sell any amount its output at the price established by the market

Associated with:
1) Perfect Competition

Question 13

Perfect Competition Model Traits:
#2 An undifferentiated product

Answer 13

Homogeneous product:

1) consumers do not care about identity of the specific supplier of the product they purchase
2) knowledge of supplier would be irrelevant to their purchase decisions

Ex. Grade of agricultural product counts as homogeneous
- potatoes or peaches are undifferentiated

Question 14

Perfect Competition Model Traits:
#3 Market Entry/Exit

Answer 14

• Entry into the industry by other firms is costless
• If a perfectly competitive firm is making profit, other firms will also enter the market
• These actions will compete away excess profits

Question 15

Perfect Competition Model Traits:
#4 The amount of information available to market participants

Answer 15

• all participants know which firms are earning the greatest profits and how they are doing so.
• other firms can easily emulate strategies and techniques of the profitable firms
• results in greater competition and further pressure on any excess profits.

Question 16

Market Power

Answer 16

The ability of a firm to influence the prices of its products and develop other competitive strategies that enable it to earn large profits over longer periods of time.

Question 17

Imperfect Competition

Answer 17

Market structures of monopolistic competition, oligopoly, and monopoly, in which firms have some degree of market power.

Question 18

Profit

Answer 18

The difference between total revenue that a firm receives for selling its product and the total cost of producing that product.

Question 19

Monopoly

Answer 19

A market structure characterized by a single firm producing a product with no close substitutes.

Question 20

Monopoly Model Traits:
#1 Number of Firms in the Marketplace

Answer 20

• a single firm produces a product for which there are no substitutes/competition.

Question 21

Monopoly Model Traits:
#2 Product Differentiation

Answer 21

• monopoly firm: produces a product that has characteristics and qualities different from the products of its competitors

Question 22

Monopoly Model Traits:
#3 Market Entry/Exit

Answer 22

• There are barriers to entry that keep other firms from easily producing the same/similar products and that give firm market power
• While market power allows firm to influence the prices of its products/develop competitive strategies leading to larger profits… cannot sell any amount of output at a given market price, like perfect competition.
• Monopoly firms raises prices, less output; lower prices more output

Barrier types:

1) structural
2) legal
3) regulatory

Question 23

Monopolistic Competition

Answer 23

A market structure characterized by a large number of small firms that have some market power as a result of producing differentiated products. This market power can be competed away over time.

Question 24

Oligopoly

Answer 24

A market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals’ actions into account when developing their own competitive strategies

Question 25

Monopolistic Model Traits

Answer 25

1) Firms produce differentiated products 2) Have some degree of market power 3) Many firms competing with one another 4) Limited ability to earn above-average profits before they are competed away over time

Question 26

Oligopoly Model Traits

Answer 26

1) small number of LARGE firms dominate market (even if other producers are present) 2) Mutual interdependence between major firms

Question 27

Managers need to understand ____ in order to develop advantage and increase profitability:

Answer 27

1) How consumer behavior affects their revenues 2) How production technology and input prices affect their costs 3) How the market and regulatory environment in which managers operate influences their ability to set prices and to respond to the strategies of their competitors

Question 28

Circular Flow Model

Answer 28

The macroeconomic model that portrays the level of economic activity as a flow of expenditures form consumers to firms, or producers, as consumers purchase goods and services produced by these firms. This flow then returns to consumers as income received from the production process.

Question 29

Household to Business Firm Flow

Answer 29

Household Sector to Business Firms: - Consumers purchase goods and services produced by firms (Domestic Markets for Produced Goods/Services - Sold in the country’s output markets

Question 30

Firm to Consumers Flow

Answer 30

“Resource Market” - Flow returns to consumers as income - Income comes from firm expenses including land, labor, capital, raw materials, and entrepreneurship - Bought and sold in the resource market - Payments include wages, rents, interest, and profits become Consumer Income - which again used in the Domestic Markets for Produced Goods/Services

Question 31

Firms/Government/Foreign Sector

Answer 31

Circular Flow Model also includes spending by firms, governments, and the foreign sector. Total level of these expenditures and income are amounts of output produced and resources employed.

Question 32

Absolute Price Level

Answer 32

A measure of the overall level of prices in the economy.

Question 33

Personal Consumption Expenditures

Answer 33

Denoted as (C) The total amount of spending by households on durable goods, non durable goods, and services in a given period of time.

Question 34

Gross Private Domestic Investment Spending

Answer 34

Denoted as (I) The total amount of spending on nonresidential structures, equipment, residential structures, and business inventories in a given period of time.

Question 35

Government Consuption Expenditures and Gross Investment

Answer 35

Denoted as (G) The total amount of spending by federal, state, and local governments on consumption outlays for goods and services, depreciation charges for existing structures and equipment, and investment capital outlays for newly acquired structures and equipment in a given period of time.

Question 36

Net Export Spending

Answer 36

Denoted as (F) The total amount o spending on exports (X) minus the total amount of spending on imports (M) Or denoted as: (F = X - M) in a given period of time

Question 37

Import Spending

Answer 37

Denoted as (M) The total amount of spending on goods and service currently produced in other countries and sold to residents of a given country in a given period of time.