Managerial Economics 3e by Froeb, McCann, Ward, Shor

Managerial Economics 3e by Froeb, McCann, Ward, Shor is the 3rd edition of the Managerial Economics: A Problem Solving Approach textbook authored by Luke M. Froeb, Vanderbilt University, Brian T. McCann, Vanderbilt University, Mikhael Shor, University of Connecticut, and Michael R. Ward, University of Texas, Arlington, and published in 2013 and 2014 by South-Western, Cengage Learning.

• Accounting costs. Costs that appear on the financial statements of a company.
• Accounting profit. Profits as shown on a company's financial statements. Accounting profit does not necessarily correspond to real or economic profit.
• Adverse selection. Refers to the fact that "bad types" are likely to be selected in transactions where one party is better informed than the other. Examples include higher-risk individuals being more likely to purchase insurance, more lowquality cars (lemons) being offered for sale, or lazy workers being more likely to accept job offers. Adverse selection is a pre-contractual problem that arises from hidden information about risks, quality, or character.
• Agency costs. Costs associated with moral hazard and adverse selection problems.
• Agent. A person who acts on behalf of another individual (a principal). Principal–agent problems are created by the incentive conflict between principals and agents.
• Aggregate demand curve. Describes the buying behavior of a group of consumers. We add up all the individual demand curves to get an aggregate demand curve (the relationship between the price and the number of purchases made by a group of consumers).
• Arbitrage. A means to defeat a price discrimination scheme; it occurs when low-value individuals are able to resell their lower-priced goods to the highervalue group.
• Average cost. The total cost of production divided by the number of units produced.
• Avoidable costs. Costs that you get back if you shut down operations.
• Breakeven price. The price that you must charge to at least break even (make zero profit). It is equal to average avoidable cost per unit.
• Breakeven quantity. The amount you need to sell to at least break even (make zero profit). The formula (assuming that you can sell all you want at price and with constant marginal cost) is Q = F/(P – MC), where F is fixed costs, P is price, and MC is marginal cost.
• Bundling. The practice of offering multiple goods for sale as one combined product.
• Buyer surplus. The difference between the buyer's value (what he is willing to pay) and the price (what he has to pay).
• Common-value auction. In a commonvalue auction, the value is the same for each bidder, but no one knows what it is. Each bidder has only an estimate of the unknown value, and the value is the same for everyone. In common-value auctions, bidders have to bid below their values in order to avoid the winner's curse.
• Compensating wage differentials. In equilibrium, differences in wages that reflect differences in the inherent attractiveness of various professions or jobs.
• Competitive industry. Competitive industries are characterized by three factors: (1) firms produce a product or service with very close substitutes so they have very elastic demand, (2) firms have many rivals and no cost advantage over those rivals, and (3) the industry has no barriers to entry or exit.
• Complement. A good whose demand increases when the price of another good decreases. Examples include a parking lot and shopping mall or a hamburger and a hamburger bun.
• Constant returns to scale. When average costs are constant with respect to output level.
• Consumer surplus. See Buyer surplus.
• Contribution margin. The amount that one unit contributes to profit. It is defined as Price–Marginal Cost.
• Controllable factor. Something that affects demand that a company can change. Examples include price, advertising, warranties, and product quality.
• Cost center. A division whose parent company rewards it for reducing the cost of producing a specified output.
• Cross-price elasticity of demand. The cross-price elasticity of demand for Good A with respect to the price of Good B measures the percentage change in demand of Good A caused by a percentage change in the price of Good B.
• Decreasing. Returns to scale see Diseconomies of scale.
• Demand curves. Describe buyer behavior and tell you how much consumers will buy at a given price.
• Direct price discrimination scheme. A price discrimination scheme in which we can identify members of the lowvalue group, charge them a lower price, and prevent them from reselling their lower-priced goods to the higher-value group.
• Diseconomies of scale. Diseconomies of scale exist when average costs rise with output.
• Diseconomies of scope. Diseconomies of scope exist when the cost of producing two products jointly is more than the cost of producing those two products separately.
• Economic profit. A measure of profit that includes recognition of implicit costs (like the cost of equity capital). Economic profit measures the true profitability of decisions.
• Economies of scale. Economies of scale exist when average costs fall as output increases.
• Economies of scope. Economies of scope exist when the cost of producing two products jointly is less than the cost of producing those two products separately.
• Efficient. An economy is efficient if all assets are employed in their highestvalued uses.
• Elastic. A demand curve on which percentage quantity changes more than percentage price is said to be elastic, or sensitive to price. If |e| > 1, demand is elastic, where e is the price elasticity of demand.
• English auction. See Oral auction.
• Exclusion. The practice of blocking competitors from participating in a market.
• Extent decision. A decision regarding how much or how many of a product to produce.
• First Law of Demand. Consumers demand (purchase) more as price falls (i.e., demand curves slope downward), assuming other factors are held constant.
• Fixed cost. Costs that do not vary with output.
• Fixed-cost fallacy. Consideration of costs that do not vary with the consequences of your decision (also known as the sunk-cost fallacy).
• Functionally organized firm. A firm in which various divisions perform separate tasks, such as production and sales.
• Hidden-cost fallacy. Occurs when you ignore relevant costs, those costs that do vary with the consequences of your decision.
• Implicit costs. Additional costs that do not appear on the financial statements of a company. These costs include items like the opportunity cost of capital.
• Incentive conflict. The fact that principals and agents often have different goals.
• Income elasticity of demand. Income elasticity of demand measures the percentage change in demand arising from a percentage change in income.
• Increasing returns to scale. See Economies of scale.
• Indifference principle. If an asset is mobile, then in long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes.
• Indirect price discrimination scheme. A price discrimination scheme in which a seller cannot directly identify low- and high-value consumers or cannot prevent arbitrage between two groups. The seller can still practice indirect price discrimination by designing products or services that appeal to groups with different price elasticities of demand.
• Inelastic. A demand curve on which percentage change in quantity is smaller than percentage change in price is said to be inelastic, or insensitive to price. If |e| < 1, demand is price-inelastic.
• Inferior goods. For inferior goods, demand decreases as income increases.
• Law of diminishing marginal returns. As you try to expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines.
• Learning curves. When current production lowers future costs.
• Long-run equilibrium. When firms are in long-run equilibrium, economic profit is zero (including the opportunity cost of capital), firms break even, and price equals average cost (i.e., no one wants to enter or leave the industry).
• Marginal cost. The additional cost incurred by producing and selling one more unit.
• Marginal profit. The extra profit from producing and selling one more unit (MR – MC).
• Marginal revenue. The additional revenue gained from selling one more unit.
• Market equilibrium. The price at which quantity supplied equals quantity demanded.
• Mean reversion. Suggests that performance eventually moves back toward the mean or average.
• M-form firm. A company whose divisions perform all the tasks necessary to serve customers of a particular product or in a particular geographic area (also known as a multidivisional company).
• Monopoly. A firm that is the single seller in its market. Monopolies have market power because they produce a product or service without close substitutes, they have no rivals, and barriers to entry prevent other firms from entering the industry.
• Moral hazard. Post-contractual increases in risky or negative behavior. Examples include reduced incentive to exercise care once you purchase insurance and reduced incentives to work hard once you have been hired. Moral hazard is similar to adverse selection in that it is caused by information asymmetry; it differs in that it is caused by hidden actions rather than hidden types.
• Movement along the demand curve. Change in quantity demanded in response to change in price.
• Nash equilibrium. A pair of strategies, one for each player, in which each strategy is a best response against the other.
• Non-strategic view of bargaining. A view that does not focus on the explicit rules of the game to understand the likely outcome of the bargaining. This view says that the likely outcome of bargaining is determined by each player's gains to agreement relative to alternatives to agreement.
• Normal goods. For normal goods, demand increases as income increases.
• NPV rule. If the present value of the net cash flows is larger than zero, the project is profitable (i.e., earns more than the opportunity cost of capital).
• Opportunity cost. The opportunity cost of an alternative is the profit you give up to pursue it.
• Oral auction. In this auction type, bidders submit increasing bids until only one bidder remains. The item is awarded to the last remaining bidder.
• Post-investment hold-up. An attempt by a trading partner to renegotiate the terms of trade after one party has made a sunk cost investment or investment specific to the relationship.
• Price ceilings. A type of price control that outlaws trade at prices above the ceiling.
• Price control. A regulation that allows trade only at certain prices.
• Price discrimination. The practice of charging different people or groups of people different prices that are not costjustified.
• Price elasticity of demand (e). A measure of how responsive quantity demanded is to changes in price. Formula: (% change in quantity demanded) ÷ (% change in price).
• Price floors. A type of price control that outlaws trade at prices below the floor.
• Principal. An individual who hires another (an agent) to act on his or her behalf.
• Prisoners' dilemma. A game in which conflict and cooperation are in tension; self-interest leads the players to outcomes that no one likes. It is in each player's individual interest to not cooperate regardless of what the other does. Thus, both players end up not cooperating. Their joint interest would be better served, however, if they could find a way to cooperate.
• Profit center. A division whose parent company evaluates it on the basis of the profit it earns.
• Random variables. A variable whose values (outcomes) are random and therefore unknown. The distribution of possible outcomes, however, is known or estimated. Random variables are used to explicitly take account of uncertainty.
• Rational–actor paradigm. This paradigm says that people act rationally, optimally, and in their self interests.
• Relationship-specific investments. See Specific investments.
• Relevant benefits. All benefits that vary with the consequence of a decision.
• Relevant costs. All costs that vary with the consequence of a decision.
• Risk premium. Higher expected rates of return that compensate investors in risky assets. In equilibrium, differences in the rate of return reflect differences in the riskiness of an investment.
• Risk-averse. A risk-averse individual values a lottery at less than its expected value.
• Risk-neutral. A risk-neutral individual values a lottery at its expected value.
• Robinson-Patman Act. Part of a group of laws collectively called the antitrust laws governing competition in the United States. Under the Robinson– Patman Act, it's illegal to give or receive a price discount on a good sold to another business. This law does not cover services and sales to final consumers.
• Screening. A solution to the problem of adverse selection that describes the efforts of a less informed party to gather information about the more informed party. Information may be gathered indirectly by offering consumers a menu of choices, and consumers reveal information about their type by the choices they make. A successful screen means that it is unprofitable for bad types to mimic the behavior of good types. Any successful screen can also be used as a signal.
• Sealed-bid first-price auction. A sealedbid auction in which the highest bidder gets the item at a price equal to his bid.
• Second-price auction. See Vickrey auction
• Seller surplus. The difference between price (what the seller is able to sell for) and the seller's value (what she is willing to sell for).
• Sequential-move games. In these games, players take turns, and each player observes what his or her rival did before having to move.
• Sharing contracts. A type of franchising agreement under which the franchisee pays the franchisor a percentage of revenue rather than a fixed fee.
• Shift of the demand curve. A change in demand caused by any variable except price. If demand increases (shifts up and to the right), consumers demand larger quantities of the good at the same price. If demand decreases (shifts down and to the left), consumers demand lower quantities of the good at the same price. Shifts are caused by factors like advertising, changes in consumer tastes, and product quality changes.
• Signaling. A solution to the problem of adverse selection that describes an informed party's effort to communicate her type, risk, or value to less informed parties by her actions. A successful signal is one that bad types won't mimic. Any successful signal can also be used as a screen.
• Simultaneous-move games. In these games, players move at the same time. Neither player knows prior to moving what the other has done.
• Specific investment. Investments that are less valuable outside of a particular relationship. They are similar to sunk costs in that the costs are "sunk" in the relationship.
• Stay-even analysis. Analysis that allows you to determine the volume required to offset a change in cost, price, or other revenue factor.
• Strategic view of bargaining. A view that focuses on how the outcome of bargaining games depends on the specific rules of the game, such as who moves first, who can commit to a bargaining position, or whether the other player can make a counteroffer.
• Substitute. A good whose demand increases when price of another good increases. Two brands of cola soft drinks are substitutes.
• Sunk cost. Costs that cannot be recovered. They are unavoidable even in the long run.
• Sunk-cost fallacy. See Fixed-cost fallacy.
• Supply curves. Describe the behavior of sellers and tell you how much will be offered for sale at a given price.
• Tying. The practice of making the sale of one good conditional on the purchase of an additional, separate good.
• Uncontrollable factor. Something that affects demand that a company cannot control. Examples include consumer income, weather, and interest rates.
• Value. An individual's value for a good or service is the amount of money he or she is willing to pay for it.
• Variable cost. Costs that change as output levels change.
• Vertical integration. Refers to the common ownership of two firms in separate stages of the vertical supply chain that connects raw materials to finished goods.
• Vickrey auction. A sealed-bid auction in which the item is awarded to the highest bidder, but the winner pays only the second-highest bid.
• Winner's curse. The winner's curse arises in common value auctions and refers to the fact that the "winner" of the auction is usually the bidder with the highest estimate of the item's value. To avoid bidding too aggressively, bidders should bid as if their estimate is the most optimistic and reduce their estimate accordingly.