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Cards In This Set
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Opportunity cost =
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The return that a firm's resources could have earned elsewhere in its next most valuable use. includes both explicit and implicit costs.
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Explicit costs =
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Observable, measurable expenses such as the dollar cost of production inputs and the interest cost of renting (borrowing) capital.
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Implicit costs =
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Not explicitly observable and fall into two categories:
(1) the opportunity cost to a firm of using its own capital
(2) the opportunity cost of the time and financial resources of the firm's owners
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Implicit rental rate =
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The term used to describe the opportunity cost to a firm for using its own capital. the implicit rental rate is the sum of economic depreciation and forgone interest.
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Economic profit =
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Considers both explicit and implicit costs. when the firm's revenues are just equal to its opportunity costs economic profits are zero.
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Constrained profit maximization =
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Firms face three primary constraints as they endeavor to maximize profits:
(1) technological
(2) information
(3) market constraints
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Technological efficiency =
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Refers to using the least amount of specific inputs to produce a given output.
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Economic efficiency =
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Refers to producing a given output at the lowest possible cost.
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Command system =
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Organize production according to a managerial chain of command. managers spend much of their time processing information about the performance of the people who report to them, about what steps to take, and the best way to implement those steps.
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Incentive system =
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Means of organizing production whereby senior management creates a system of rewards intended to motivate workers to perform in such a way as to maximize profits.
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Command systems are used when...
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It is easy to monitor the performance of employees, as in the case of production workers.
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Incentive systems are used when...
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Organizing the production of employees whose activities are difficult or costly to monitor, like those of the firm's CEO and senior officers or outside sales people.
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Principle-agent problem =
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Refers to the problems that arise when the incentives and motivations of managers and workers (agents) are not the same as the incentives and motivations of their firm's owners (principles).
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The three methods that are used to reduce the principle-agent problem are....
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(1) ownership
(2) incentive
(3) long-term contracts
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The three main forms of business organization are:
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(1) proprietorships
(2) partnerships
(3) corporations
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