Key Terms and Concepts
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associated with running a large corporation. Finally, maximization of shareholder wealth involves maximizing the value of a company’s stock by maximizing the present value of the firm’s net cash inflows at the appropriate discount rate. In summary, managerial economics might best be described as applied microeconomics. As an applied discipline, managerial economics integrates economic theory with the techniques of quantitative analysis, including mathematical economics, optimization analysis, regression analysis, forecasting, linear programming, and risk analysis. Managerial economics attempts to demonstrate how the optimality conditions postulated in economic theory can be applied to real-world business situations to optimize firms’ organizational objectives.
KEY TERMS AND CONCEPTS Above-normal profit A positive level of economic profits (i.e., operating profits are greater than normal profits). Accounting profit The difference between total revenue and total explicit costs. Business cycle Recurrent expansions and contractions in overall macroeconomic activity. Ceteris paribus The assertion in economic theory that when analyzing the relationship between two variables, all other variables are assumed to remain unchanged. Consumption efficiency The state in which consumers derive the greatest level of happiness, satisfaction, or utility from the purchase of goods and services subject to limited income. Economic efficiency Also referred to as Pareto efficiency. An economic outcome in which it not possible to make one person in society better off without making some other person in society worse off. Two related concepts are production efficiency and consumption efficiency. Economic good A good or service not available in sufficient quantity to satisfy everyone’s desire for that good or service at a zero price. Factors of production Inputs that are used to product goods and services. Also called productive resources, factors of production fall into one of four broad categories: land, labor, capital, and entrepreneurial ability. Financial intermediaries Institutions that act as a link between those who have money to lend and those who want to borrow money, such as commercial banks, savings banks, and insurance companies. Fiscal policy Government spending and taxing policies. Incentive contract A contract between owner and manager in which the manager is provided with incentives to perform in the best interest of the owner.
