ECO404 Final Term Subjective

ECO404 - Managerial Economics Glossary For

Midterm Exam Preparation Spring 2013

Glossary Accounting Profit : Accounting Profit or business profit is equal to total revenue minus the explicit or accounting costs of production. Adverse Selection : The situation in which low quality products or services drive high quality products or services out of the market as a result of asymmetric information between buyers and sellers. Alternative or Opportunity Costs : The cost to the firm of using a purchased or owned input which is equal to what the input could earn in its best alternative use. Analysis of Variance : A test of the overall explanatory power of the regression using the Fstatistic. Asymmetric Information : The situation in which one party to a transaction has more information than the other party on the quality of the product or service offered for sale. Autocorrelation : The problem that can arise in regression analysis with time series data, where consective errors have the sane sign or change sign frequently. It leads to exaggerated t statistics and to an unreliable R2 and F-statistic. Average Fixed Cost (AFC) : Total fixed cost divided by total output Average Product (AP) : Total product divided by quantity of variable input used Average Total Cost (ATC) : Total costs divided by total output Average Variable Cost (AVC) : Total variable costs divided by output. Barometric Firm : The oligopolistic firm that is recognized as the true interpreter or barometer of changes in demand and cost conditions warranting a price change in the industry. Barometric Forecasting : It is the method of forecasting turning points in business cycles by the use of leading economic indicators. Bertrand Model : The oligopoly model where each firm assumes that the other will keep its price constant. It leads to the perfectly competitive solution even with only two firms. Binding Constraint : A variable that is fully used a a particular point. Bundling : The form of tying in which the firm requires customers buying or leasing one of its products or services to also buy or lease another product or service when customers have different tastes but the firm cannot price discriminate (as in tying).

Business Ethics : The code or guidelines that prescribe acceptable behavior in business behavior and business transactions. Business Profit : The revenue of the firm minus its explicit or accounting costs. Certainty : The situation in which there is only one possible outcome to a decision and this outcome is known precisely; risk free. Change in demand : A shift in the demand curve of a commodity as a result of a change in the consumer’s income, change in the price of related commodities, tastes, or in any of the determinants of demand other than the price of the commodity. Change in quantity demanded : The movement along a particular demand curve resulting from a change in the price of the commodity, while holding everything else constant. Cobb-Douglas production function : A production function of the form Q = AKaLb where, Q, K and L are physical units of output, capital and labor and A, a and b are the parameters to be estimated empirically. Coefficient of correlation ‘r’ : The measure of the degree of co-variation between two variables; the positive or negative square root of the coefficient of determinant ion in simple regression analysis. Coefficient of determination ‘R2’ : The proportion of the explained to the total variation in the dependent variable in regression analysis. Collusion : A formal or informal agreement among oligopolists to adopt policies to restrict or eliminate competition and increase profits. Economic Profit : Economic Profit is equal to total revenue minus the explicit and implicit costs of production. Macroeconomics : Macroeconomics is the study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole. Marginal Revenue (MR) : Change in total revenue associated with a one unit change in output Microeconomics : Microeconomics is the study of the economic behavior of individual decision-making units.

ECO404 - Managerial Economics Faqs For Midterm

Exam Preparation Spring 2013

FAQs Question: Differentiate between explicit and implicit costs.

Answer: Explicit costs: Explicit costs are the actual out of pocket expenditures of the firm to purchase or hire the inputs it requires in production. Implicit costs: Implicit costs refer to the value of the inputs owned and used by the firm in its own production processes. Question: Differentiate between accounting profit and economic profit.

Answer: Business or Accounting Profit: Total revenue minus the explicit or accounting costs of production. Economic Profit: Total revenue minus the explicit and implicit costs of production. Question: Differentiate between direct demand and derived demand.

Answer: Direct Demand Individual’s demand for goods and services that directly satisfy consumer desires is known as direct demand. This is also known as consumer demand. Derived Demand Goods that are demanded not for direct consumption but rather for their use in providing other goods and services are known as derived demand. Their demand is derived from the demand for the products they are used to provide. Input demand is called derived demand. It is also called business demand. Question: Differentiate between the situation of surplus and shortage.

Answer: Surplus: A surplus is created when producers supply more of a product at a given price than buyers demand. Surplus describes a condition of excess supply. Shortage: A shortage is created when buyers demand more of a product at a given price than producers are willing to supply. Shortage describes a condition of excess demand. Question: Differentiate between short run and long run.

Answer: Short run: The short run is the period of time in which sellers already in the market respond to a change in equilibrium price by adjusting variable inputs. Buyers already in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service. Long run: The long run is the period of time in which new sellers may enter a market, existing sellers may exit from a market, existing sellers may adjust fixed factors of production, and buyers may react to a change in equilibrium price by changing their tastes and preferences. Question: Differentiate between microeconomics and macroeconomics.

Answer: Microeconomics is the study of the economic behavior of individual decision making units. Macroeconomics is the study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole.