Key Terms and Concepts

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.

Macroeconomic policy Monetary and fiscal policy.Sometimes referred to as stabilization policy,macroeconomic policy is designed to moderate the negative effects of the business cycle. Macroeconomics The study of entire economies.Macroeconomics deals with broad economic aggregates,such as national product,employment, unemployment,inflation,interest rates,and international trade.Macroeconomics also examines the role of government in influencing these economic aggregates to achieve some socially desirable objective through the use of monetary and fiscal policies. Manager–worker/principal–agent problem Arises when workers do not have a vested interest in a firm’s success.Without a stake in the company’s performance,there will be an incentive for some workers not to put forth their best efforts. Managerial economics The synthesis of microeconomic theory and quantitative methods to find optimal solutions to managerial decision-making problems. Market economy An economic system characterized by private ownership of factors of production,private property rights,consumer sovereignty,risk taking,entrepreneurship,and a system of prices to allocate scarce goods,services,and factors of production. Microeconomic policy Government policies designed to promote production and consumption efficiency. Microeconomics The study of the behavior of individual economic agents, such as individual consumers and firms,and the interactions between them.Microeconomic theory deals with such topics as product pricing,input utilization,production technology,production costs,market structure,total revenue maximization,unit sales maximization,profit maximization,capital budgeting,environmental protection,and governmental regulation. Monetary policy The part of macroeconomic policy that deals with the regulation of the money supply and credit. Negative externalities Costs of a transaction borne by individuals not party to the transaction. Normal profit The level of profits required to keep a firm engaged in a particular activity.Normal profit represents the rate of return on the next best alternative investment of equivalent risk. Ockham’s razor The principle that,other things being equal,the simplest explanation tends to be the correct explanation. Opportunity cost The highest valued alternative forgone whenever a choice is made. Owner–manager/principal–agent problem Arises when managers do not share in the success of the day-to-day operations of the firm.When managers do not have a stake in company’s performance,some managers will have an incentive to substitute leisure for a diligent work effort.