Chapter 1: Managers, Profits and Markets

Question 1

accounting profit

Answer 1

The difference between total revenue and explicit costs.

Question 2

business practices or tactics

Answer 2

Routine business decisions managers must make to earn the greatest profit under the prevailing market conditions facing the firm.

Question 3

economic profit

Answer 3

The difference between total revenue and total economic cost.

Question 4

equity capital

Answer 4

Money provided to businesses by the owners

Question 5

explicit costs

Answer 5

Monetary opportunity costs of using market-supplied resources (while implicit costs are non-monetary opportunity costs of using owner-supplied resource).

Question 6

globalization of markets

Answer 6

Economic integration of markets located in nations around the world.

Question 7

implicit costs

Answer 7

Non-monetary opportunity costs of using owner-supplied resource (while explicit costs are monetary opportunity costs of using market-supplied resources).

Question 8

industrial organization

Answer 8

Branch of microeconomics focusing on the behavior and structure of firms and industries.

Question 9

market

Answer 9

Any arrangement through which buyers and sellers exchange anything of value.

Question 10

market power

Answer 10

A firm’s ability to raise price without losing all sales.

Question 11

market structure

Answer 11

Market characteristics that determine the economic environment in which a firm operates.

Question 12

market-supplied resources

Answer 12

Resources owned by others and hired, rented, or leased in resource markets.

Question 13

microecomics

Answer 13

The study of individual behavior of consumers, business firms, and markets, and it contributes to our understanding of business practices and tactics.

Question 14

moral hazard

Answer 14

Exists when either party to an agreement has an incentive not to abide by all provisions of the agreement and one party cannot cost effectively monitor the agreement.

Question 15

opportunity cost

Answer 15

What a firm’s owners give up to use resources to produce goods or services

Question 16

owner-supplied resources

Answer 16

Resources owned and used by a firm.

Question 17

price-setting firm

Answer 17

A firm that can raise its price without losing all of its sales.

Question 18

price-taker

Answer 18

A firm that cannot set the price of the product it sells, since price is determined strictly by the market forces of demand and supply.

Question 19

principal-agent problem

Answer 19

The conflict that arises when the goals of the management (the agent) do not match the goals of the owner (the principal).

Question 20

risk premium

Answer 20

An increase in the discount rate to compensate investors for uncertainty about future profits.

Question 21

strategic decisions

Answer 21

Business actions taken to alter market conditions and behavior of rivals in ways that increase and/or protect the strategic firm’s profit.

Question 22

total economic cost

Answer 22

Sum of opportunity costs of market-supplied resources plus opportunity costs of owner-supplied resources.

Question 23

transaction costs

Answer 23

Costs of making a transaction happen, other than the price of the good or service itself.

Question 24

value of a firm

Answer 24

The price for which the firm can be sold, which equals the present value of future profits.