The Fundamentals of Managerial Economics

Chapter 1: The Fundamentals of Managerial Economics

Accounting cost: the costs most often associated with the costs of producing. Costs that appear on the income statements of firms.

Accounting profits: the total amount of money taken in from sales (total revenue, or price times quantity sold) minus the dollar cost of producing goods or services. Accounting profits are what show up on the firm’s income statement and are typically reported to the manager by the firm’s accounting department.

Constraints: an artifact of scarcity.

Consumer-consumer rivalry: reduces the negotiating power of consumers in the marketplace. When limited quantities of goods are available, consumers will compete with one another for the right to purchase the available goods.

Consumer-Producer rivalry: occurs because of the competing interests of consumers and producers.

Economic profits: The difference between total revenue and total opportunity cost.

Economics: The science of making decisions in the presence of scarce resources.

Ex-dividend date: The value of the firm immediately after its current profits have been paid out as dividends.

Five force framework: Entry; Power of input suppliers; Power of Buyers; Industry Rivalry; Substitutes and Complements.

Incremental costs: The additional costs that stem from a yes-or-no decision.

Incremental revenues: The additional revenues that stem from a yes-or-no decision.

Manager: a person who directs resources to achieve a stated goal.

Managerial economics: the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

Marginal analysis: optimal managerial decisions involve comparing the marginal (or incremental) benefits of a decision with the marginal (or incremental) costs.

Marginal benefit: the change in total benefits arising from a change in the managerial control variable, Q.

Marginal cost: the change in total costs arising from a change in the managerial control variable, Q.

Marginal net benefits: the change in net benefits that arise from a one-unit change in Q.

Net present value: the present value of the income stream generated by a project minus the current cost of the project.

Opportunity cost: the cost of the explicit and implicit resources that are forgone when a decision is made.

Present value: the amount that would have to be invested today at the prevailing interest rate to generate the given future value.

Producer-producer rivalry: Given that customers are scarce, producers compete with one another for the right to service the customers available.

Resources: simply anything used to produce a good or service or, more generally, to achieve a goal.