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ECON 101 > Chapters 6-7 > Flashcards

Chapters 6-7 Flashcards

1
Q

Two methods companies use for corporate financing

A

-Bonds (Debt Financing)
-Stocks

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2
Q

Bonds (Debt Financing)

A

-legal claim against company that represents debt

-bond holders are not owners, they are creditors, and they have little say about the corporations operations

-bonds usually have a maturity date at which the bondholders are repaid the face value of the bond plus any remaining interest

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3
Q

three forms debt financing can take:

A

-Bonds
-Bills and Notes

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4
Q

Loans

A

private agreements between the firm and a bank, usually calling for the periodic payments of interest and repayment of the principle

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5
Q

Bills and Notes

A

used for short term loans of up to one year. They carry no fixed interest rate, only a principal value and a redemption date.

-Interest arises because the corporation sells the bill at a price below the redemption value

eg: firm sells note worth 1000 for 950

interest = 50/950 =5.26%

——> bills are negotiable (bought and sold in an open market)

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6
Q

Bonds and Debentures

A

fixed redemption rates, and obligation to make periodic interest payments (typically used for long term loans and are negotiable)

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7
Q

Stocks (Equity Financing)

A

-also referred to as a share (represents ownership in corporation)

-all corporations must issue stocks

-stockholders have a right to the return of the stock called dividends

-no assurance of a fixed rate on stocks

-holders of common stock elect board of directors

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8
Q

the two types of returns from a stock

A

-dividends
-increase in stock price

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9
Q

two types of stocks

A

-common stock
-preferred stock

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10
Q

common stock

A

can vote for board of directors

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11
Q

preferred stock

A

can not vote for board of directors but gets preferential treatment on dividends

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12
Q

Two types of markets for stocks and bonds

A
  1. Primary Market
  2. Secondary Market
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13
Q

Primary Market

A

Company issues new stocks and bonds (first transaction occurs in the primary market)

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14
Q

Secondary Market

A

existing stocks and bonds are sold

ex: NASDAQ

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15
Q

11 factors that impact demand for a stock in the secondary market:

A
  1. Company profits, future profits
  2. Balance sheet (Assets, liabilities)
  3. Companies reputation
  4. Current Events
  5. Price of share, potential of future price
  6. Competitors Performance
  7. Performance of sector
  8. Rapid movement of stock prices
  9. Ethics
  10. Level of income in the people buying the stocks
  11. Interest rate (higher interest rate means people are less likely to invest in the stock)
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16
Q

Inputs

A

factors used to produce outputs

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17
Q

Outputs

A

products produced that realists from production

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18
Q

4 categories of inputs

A
  1. Land (natural resources)
  2. Labour (human capital)
  3. Capital (physical capital)
  4. Entrepreneurship
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19
Q

Land (natural resources)

A

natural capital, inputs provided by nature

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20
Q

Labour (human capital)

A

inputs provided by households, includes skill level

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21
Q

Capital (physical capital)

A

machinery, equipment (money is not capital)

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22
Q

Entrepreneurship

A

contribution of owners

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23
Q

Two types of inputs

A

-Variable inputs
-Fixed inputs

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24
Q

Variable inputs

A

quantity of the input can be changed within time period

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25
Q

Fixed Inputs

A

quantity of the input can not be changed with the time period

26
Q

Short Run Inputs

A

time period where at least one of the inputs is fixed

27
Q

Long Run Inputs

A

time period in which all the inputs are variable

28
Q

Total Product (Q) or output

A

the total amount produced in some time period

29
Q

Average Product (AP) types

A

Average product of labour??
Average product of capital??

30
Q

Average product of labour equation

A

Output (Q) / Quantity of Labour (L)

31
Q

Average product of capital equation

A

Output (Q) / Capital (K)

32
Q

Marginal Product (MP)

A

The change in the total product resulting from a change in the use of one input

33
Q

Marginal Product of Labour equation

A

Change in quantity / Change in Labour

34
Q

The Law of diminishing marginal returns

A

the more of a variable input added to a production process, resulting increase in quantity will begin to diminish

35
Q

Accounting Costs

A

includes actual expenditures and depreciation expenses for capital equipment
(accounting costs are explicit costs)

36
Q

Economic Costs =

A

Accounting Costs + Opportunity Costs

37
Q

What are more, accounting or economic costs?

A

economic costs are more than accounting costs.

38
Q

Costs in the short run:

A

there are fixed/variable costs

39
Q

Fixed costs

A

costs do not change as the quantity of output changes

40
Q

Variable costs

A

Costs change as the quantity of output changes (increase as quantity of output changes??????)e

41
Q

In the short run, at least one cost is _______

A

fixed

42
Q

Total Cost Equation

A

FC (Fixed Costs) + VC (Variable Costs)

43
Q

Average Costs Equation (AC or ATC)

A

Total Costs (C) / Q (Output)

44
Q

Average Variable Costs Equation (AVC)

A

VC (Variable costs) / Q (Output)

45
Q

Average Fixed Costs Equation
(AFC)

A

AFC = FC (Fixed Costs) / Q (Output)

46
Q

In the long run, all costs are ________

A

Variable

47
Q

AC/ATC = _________

A

AFC (Average Fixed Costs) + AVC (Average Variable Costs)

48
Q

Marginal Cost (MC)

A

the change in total cost resulting from an incremental change in output

49
Q

MC (Marginal Cost Equation)

A

Change in total cost/ Change in output

50
Q

Fixed Cost curve

A

Y axis is cost
X axis is output
FC curve is straight flat

51
Q

Look at the graphs for FC, VC, AFC, AVC, C, AC/ATC

A
52
Q

Special Case: Labour is the only variable input

A

VC = Wage Rate * Labour

MC = VC / Q = WL/ Q = W * 1/MPL

53
Q

Look at graphs for MPL and MC

A
54
Q

Marginal Average Rule

A

if MC > AC, average cost is rising
if MC < AC, average cost is falling
if MC = AC, average cost is at minimum

55
Q

Costs in Long Run All Costs (LRAC) are __________

A

variable

56
Q

Look at graphs for MC, ATC, AVC, SRATC, LRAC

A
57
Q

Region 1 of LRAC

A

Economies of Scale: As outputs double, costs less than double

-LRAC is decreasing

58
Q

Region 2 of LRAC

A

LRAC is horizontal, as outputs doubles, costs double

59
Q

Region 3 of LRAC

A

Diseconomies of scale: as outputs doubles, costs more than double

-LRAC is increasing

60
Q

Economies of scope exists if:

A

C (Q1, Q2) < C (Q1, 0) + C (0, Q2)

for C(Q1, Q2) both goods are made in the same factory

ECON 101 (9 decks)

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