C211 Global Economics For Managers PDF

Key Terms and Definitions for C211 Global Economics For Managers Looking for a specific term? Simply press Ctrl+f and type in the word you are seeking. It will take you right there!! First Text: Peng, M. (2014). Global Business (3rd ed.). Mason, OH: Cengage Learning. ISBN-13:...

Key Terms and Definitions for C211 Global Economics For Managers Looking for a specific term? Simply press Ctrl+f and type in the word you are seeking. It will take you right there!! First Text: Peng, M. (2014). Global Business (3rd ed.). Mason, OH: Cengage Learning. ISBN-13: 9781133485933 Competency 3012.1.1: Business Decision Making in the Global Environment The graduate analyzes economic f orces and operations of global markets in order to improve decision making. Topics: Globalization & International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10) Chapter 1 Peng ❖ Base of the Pyramid: Economies where people make less than $2,000 per capita per year. ❖ BRIC: Brazil, Russia, India, and China. ❖ Emerging Economies: A term that has gradually replaced the term “developing countries” since the 1990s. ❖ Emerging Markets: A term that is often used interchangeably with “emerging economies.” ❖ Expatriate manager (expat): A manager who works abroad, or “expat” for short. ❖ Foreign Direct Investment (FDI): Investment in, controlling, and managing value- added activities in other countries. ❖ Global Business: Business around the globe. ❖ Globalization: The close integration of countries and peoples of the world. ❖ Gross Domestic Product (GDP): The sum of value added by resident firms, households, and governments operating in an economy. ❖ Gross National Income: GDP plus income from non-resident sources abroad. GNI is the term used by the World Bank and other international organizations to supersede the term GNP. ❖ Gross National Product (GNP): GDP plus income from non-resident sources abroad. ❖ Group of 20 (“The G-20”): The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems. ❖ International Business: (1) A business (or firm) that engages in international (crossborder) economic activities and/or (2) the action of doing business abroad. ❖ International Premium: A significant pay raise when working overseas. ❖ Liability of Foreignness: The inherent disadvantage that foreign firms experience in host countries because of their non-native status. ❖ Multinational Enterprise (MNE or MNC): A firm that engages in foreign direct investment (FDI).  ❖ Nongovernmental Organization (NGO): An organization that is not affiliated with governments. ❖ Purchasing Power Parity (PPP): A conversion that determines the equivalent amount of goods and services that different currencies can purchase. ❖ Reverse Innovation: An innovation that is adopted first in emerging economies and is then diffused around the world. ❖ Risk Management: The identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events. ❖ Scenario Planning: A technique to prepare and plan for multiple scenarios (either high or low risk). ❖ Semi-globalization: A perspective that suggests that barriers to market integration at borders are high, but not high enough to insulate countries from each other completely. ❖ Triad: North America, Western Europe, and Japan. Chapter 5 Peng ❖ Absolute Advantage: The economic advantage one nation enjoys that is absolutely superior to other nations. ❖ Administrative Policy: Bureaucratic rules that make it harder to import foreign goods. ❖ Antidumping Duty: Tariffs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business). ❖ Balance of Trade: The aggregation of importing and exporting that leads to the country-level trade surplus or deficit. ❖ Classical Trade Theories: The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage. ❖ Comparative Advantage: Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. ❖ Dead Wight Cost (also called Dead Weight Loss): Net losses that occur in an economy as a result of tariffs. ❖ Export (X): Selling abroad. ❖ Factor Endowment: The extent to which different countries possess various factors of production such as labor, land, and technology. ❖ Factor Endowment Theory (or Herchscher-Ohlin theory): A theory that suggests that nations will develop comparative advantages based on their locally abundant factors. ❖ First-mover advantage: Advantage that first movers enjoy and do not share with late entrants. ❖ Free Trade: The idea that free market forces should determine how much to trade with little or no government intervention. ❖ Import (M): Buying from abroad. ❖ Import Quota: Restriction on the quantity of imports (goods bought from abroad). ❖ Import Tariff: A tax imposed on imports. ❖ Infant Industry Argument: The argument that if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals. ❖ Local Content Requirement: A requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country. ❖ Merchandise: Tangible products being traded. ❖ Modern Trade Theories: The major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries. ❖ Nontariff Barrier (NTB): Trade barrier that relies on nontariff methods to discourage imports. ❖ Opportunity Cost: Cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities). ❖ Product Life Cycle Theory: A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles. ❖ Protectionism: The idea that governments should actively protect domestic industries from imports and vigorously promote exports. ❖ Resource Mobility: Assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry. ❖ Services: Intangible services being traded. ❖ Strategic Trade Policy: Government policy that provides companies a strategic advantage in international trade through subsidies and other supports. ❖ Strategic Trade Theory: A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success. ❖ Subsidy: Government payment to domestic firms. ❖ Tariff Barrier: Trade barrier that relies on tariffs to discourage imports. ❖ The Theory of Absolute Advantage: A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage. ❖ The Theory of Comparative Advantage: A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. ❖ The Theory of Mercantilism: A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer. ❖ Theory of National Competitive Advantage of Industries (“The Diamond Theory”): A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.” ❖ Trade Deficit: An economic condition in which a nation imports more than it exports. ❖ Trade Embargo: Politically motivated trade sanctions against foreign countries to signal displeasure. ❖ Trade Surplus: An economic condition in which a nation exports more than it imports. ❖ Voluntary Export Constraint (VER): An international agreement that shows that exporting countries voluntarily agree to restrict their exports. Chapter 6 Peng ❖ Agglomeration: Clustering of economic activities in certain locations. ❖ Bargaining Power: Ability to extract favorable outcome from negotiations due to one party’s strengths. ❖ Demonstration Effect: The reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation. ❖ Dissemination Risk: The risk associated with unauthorized diffusion of firm-specific know-how. ❖ Downstream Vertical FDI: A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country. ❖ Expropriation: Government’s confiscation of foreign assets. ❖ FDI Flow: The amount of FDI moving in a given period (usually a year) in a certain direction. ❖ FDI Inflow: Inbound FDI moving into a country in a year. ❖ FDI Outflow: Outbound FDI moving out of a country in a year. ❖ FDI Stock: Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years). ❖ Foreign Portfolio Investment (FPI): Investment in a portfolio of foreign securities such as stocks and bonds. ❖ Free Market View: A political view that suggests that FDI unrestricted by government intervention is the best. ❖ Horizontal FDI: A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country. ❖ Knowledge Spillover: Knowledge diffused from one firm to others among closely located firms. ❖ Internalization: The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries. ❖ Intrafirm Trade: International transactions between two subsidiaries in two countries controlled by the same MNE. ❖ Location: Advantages enjoyed by firms operating in a certain location. ❖ Management Control Rights: The rights to appoint key managers and establish control mechanisms. ❖ Market Imperfection (also called Market Failure): The imperfection of the market mechanisms that make transactions prohibitively costly and sometimes make transactions unable to take place. ❖ Obsolescing Bargain: The deal struck by MNEs and host governments, which change their requirements after the initial FDI entry. ❖ OLI Advantage: A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI. ❖ Oligopoly: Industry dominated by a small number of players selling similar products. Market best described by the Prisoner’s Dilemma. ❖ Ownership: An MNE’s possession and leveraging of certain valuable, rare, hard -to- imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI.  ❖ Pragmatic Nationalism: A political view that only approves FDI when its benefits outweigh its costs. ❖ Radical View: A political view that is hostile to FDI in recognition of labor and environmental issues that sometimes follow FDI. ❖ Sunk Cost: Cost that a firm has to endure even when its investment turns out to be unsatisfactory. Any cost which is in the past and which future decisions cannot change/recover. ❖ Technology Spillover: Technology diffused from foreign firms to domestic firms. ❖ Upstream Vertical FDI: A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country. ❖ Vertical FDI: A type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country. Chapter 7 Peng - ❖ Balance of payments: a country’s international transaction statement. ❖ Bandwagon effect: the result of investors moving as a herd in the same direction at the same time. ❖ Bid rate: the price offered to buy a currency. ❖ Bretton Woods system: a system in which all currencies were pegged at a fixed rate to the U.S. dollar. ❖ Capital flight: a phenomenon in which a large number of individuals and companies exchange domestic currencies for a foreign currency. ❖ Clean (or free) float: a pure market solution to determine exchange rates. ❖ Currency board: a monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate. ❖ Currency hedging: a transaction that protects traders and investors from exposure to the fluctuations of the spot rate. ❖ Currency risks: the fluctuations of the foreign exchange market. ❖ Currency swap: a foreign exchange transaction in which one currency is converted into another in Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future. ❖ Dirty (or managed) float: the common practice of determining exchange rates through selective government intervention. ❖ Fixed rate policy: fixing the exchange rate of a currency relative to other currencies. ❖ Floating (or flexible) exchange rate policy: the willingness of a government to let the demand and supply conditions determine exchange rates. ❖ Foreign exchange market: a market where individuals, firms, governments, and banks buy and sell foreign currencies. ❖ Foreign exchange rate: the price of one currency in terms of another. ❖ Forward discount: when the forward rate of one currency relative to another currency is higher than the spot rate. ❖ Forward premium: when the forward rate of one currency relative to another currency is lower than the spot rate.  ❖ Forward transaction: a foreign exchange transaction in which participants buy and sell currencies now for future delivery, typically in 30, 90, or 180 days, after the date of the transaction. ❖ Gold standard: a system in which the value of most major currencies was maintained by fixing their prices in terms of gold, which served as the Common denominator. ❖ International Monetary Fund (IMF): an international organization of 185 member countries that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. ❖ Moral hazard: refers to recklessness when people and organizations (including governments) do not have to face the full consequences of their actions. ❖ Offer rate: the price offered to sell a currency. ❖ Peg: a stabilizing policy of linking a developing country’s currency to a key currency. ❖ Post–Bretton Woods system: a system of flexible exchange rate regimes with no official common denominator. ❖ Purchasing power parity: a theory that suggests that in the absence of trade barriers (such as tariffs), the price for identical products sold in different countries must be the same. ❖ Quota: the financial contribution, capacity to borrow, and voting power of IMF member countries that is based broadly on its relative size in the global economy. ❖ Spot transaction: the classic single-shot exchange of one currency for another. ❖ Spread: the difference between the offered price and the bid price. ❖ Strategic hedging: spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions. ❖ Target exchange rates (or crawling band): a limited policy of intervention, occurring only when the exchange rate moves out of the specified upper or lower bounds. Chapter 10 Peng - ❖ Acquisition: a wholly owned subsidiary is created through direct foreign investment. ❖ Agglomeration: beyond geographic advantages, location-specific advantages also arise from the clustering of economic activities in certain locations. ❖ Build-operate-transfer (BOT) agreement: a nonequity mode of entry used to build a longer-term presence. ❖ Co-marketing: refers to efforts among a number of firms to jointly market their products and services. ❖ Country-of-origin effect: The positive or negative perception of firms and products from a certain country. ❖ Cultural distance: the difference between two cultures along some identifiable dimensions. ❖ Direct export: represents the most basic mode of entry, which capitalizes on economies of scale in production concentrated in the home country and affording better control over distribution.  ❖ Efficiency seeking: firms often single out the most efficient locations featuring a combination of scale economies and low-cost factors. ❖ Equity mode: a mode of entry (JVs and wholly owned subsidiaries) that is indicative of relatively larger, harder to reverse commitments. ❖ First-mover advantages: defined as the advantages that first movers obtain and that later movers do not enjoy. ❖ Greenfield operation: a wholly owned subsidiary is created by building new factories and offices from scratch. ❖ Indirect export: a strategy of exporting through domestically based export intermediaries. ❖ Innovation seeking: firms target countries and regions renowned for generating world- class innovations. ❖ Institutional distance: the extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries. ❖ Joint venture: a new corporate entity given birth and jointly owned by two or more parent companies. ❖ Late-mover advantages: include free ride on first mover investments, resolution of technical and market uncertainty, and exploit first mover difficulties. ❖ Licensing/franchising: an agreement in which the licensor/franchisor sells the rights to intellectual property such as patents and know-how to the licensee/franchisee for a royalty fee. ❖ LLL advantages: A firm’s quest of linkage (L) advantages, leverage (L) advantages, and learning (L) advantages. These advantages are typically associated with multinationals from emerging economies. ❖ Location-specific advantages: favorable locations in certain countries may give firms operating there an advantage. ❖ Market seeking: firms go after countries that offer strong demand for their products and services. ❖ Modes of entry: are the format of foreign market entries. Among numerous modes of entry, managers are unlikely to consider all of them at the same time. ❖ Natural resource seeking: certain resources are tied to particular foreign locations. ❖ Non-equity mode: a mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets. ❖ R&D contract: refers to outsourcing agreements in R&D between firms. ❖ Scale of entry: involves the decision as to whether it should be large or small scale. ❖ Stage models: a school of thought that believes that firms will enter culturally similar countries during their first stage of internationalization and that they may gain more confidence to enter culturally distant countries in later stages. ❖ Turnkey project: refers to projects in which clients pay contractors to design and construct new facilities and train personnel. ❖ Wholly owned subsidiaries (WOS): overseas business operations totally owned and obtained by either starting from scratch or acquiring a local company. Chapter 11 Peng ❖ Antidumping Law: Law that makes it illegal for an exporter to sell goods below cost abroad with the intent to raise prices after eliminating local rivals. ❖ Antitrust Law: Law that outlaws cartels (trusts). ❖ Antitrust Policy: Government policy designed to combat monopolies and cartels. ❖ Attack: An initial set of actions to gain competitive advantage. ❖ Blue Ocean Strategy: Strategy that focuses on developing new markets (“blue ocean”) and avoids attacking core markets defended by rivals, which is likely to result in a bloody price war or a “red ocean.” ❖ Capacity to Punish: Sufficient resources possessed by a price leader to deter and combat defection. ❖ Cartel (trust): An output- and price-fixing entity involving multiple competitors. ❖ Collusion: Collective attempts between competing firms to reduce competition. ❖ Collusive Price Setting: Price setting by monopolists or collusion parties at a level higher than the competitive level. ❖ Competition Policy: Government policy governing the rules of the game in competition. ❖ Competitive Dynamics: Actions and responses undertaken by competing firms. ❖ Competitor Analysis: The process of anticipating rivals’ actions in order to both revise a firm’s plan and prepare to deal with rivals’ response. ❖ Concentration Ratio: The percentage of total industry sales accounted for by the top four, eight, or twenty firms. ❖ Contender: Strategy that centers on a firm engaging in rapid learning and then expanding overseas. ❖ Counterattack: A set of actions in response to attack. ❖ Cross-market Retaliation: Retaliatory attacks on a competitor’s other markets if this competitor attacks a firm’s original market. ❖ Defender: Strategy that centers on local assets in areas in which MNEs are weak. ❖ Dodger: Strategy that centers on cooperating through joint ventures with MNEs and sell-offs to MNEs. ❖ Dumping: An exporter selling goods below cost. ❖ Explicit Collusion: Firms directly negotiate output and pricing and divide markets. ❖ Extender: Strategy that centers on leveraging homegrown competencies abroad. ❖ Game Theory: A theory that studies the interactions between two parties that compete and/or cooperate with each other. ❖ Market Commonality: The overlap between two rivals’ markets. ❖ Multimarket Competition: Firms engage the same rivals in multiple markets. ❖ Mutual Forbearance: Multimarket firms respect their rivals’ spheres of influence in certain markets, and their rivals reciprocate, leading to tacit collusion. ❖ Predatory Pricing: An attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals. ❖ Price Leader: A firm that has a dominant market share and sets “acceptable” prices and margins in the industry. ❖ Prisoner’s Dilemma: In game theory, a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect.  ❖ Resource Similarity: The extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm. ❖ Tacit Collusion: Firms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels. Competency 3012.1.2: Political and Economic Forces The graduate analyzes contemporary economic and political f orces; their interrelationship; and their impact on the global business environment. Topic: Political and Economic Forces (Peng Chapter 2) Chapter 2 Peng ❖ Beijing Consensus: A view that questions Washington Consensus’ belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government. ❖ Bounded Rationality: The necessity of making rational decisions in the absence of complete information. ❖ Civil Law: A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments. ❖ Cognitive Pillar: The internalized (or taken-for granted) values and beliefs that guide individual and firm behavior. ❖ Command Economy: An economy that is characterized by government ownership and control of factors of production. ❖ Common Law: A legal tradition that is shaped by precedents and traditions from previous judicial decisions. ❖ Copyright: Exclusive legal right of authors and publishers to publish and disseminate their work. ❖ Democracy: A political system in which citizens elect representatives to govern the country on their behalf. ❖ Economic System: Rules of the game on how a country is governed economically. ❖ Formal Institutions: Institutions represented by laws, regulations, and rules. ❖ Informal Institutions: Institutions represented by cultures, ethics, and norms. ❖ Institutional Framework: Formal and informal institutions governing individual and firm behavior. ❖ Institutional Transitions: Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players. ❖ Institutions: Formal and informal rules of the game. ❖ Institution-based View: A leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions. ❖ Intellectual Property: Intangible property that is the result of intellectual activity. ❖ Intellectual Property Rights: Rights associated with the ownership of intellectual property. ❖ Legal System: The rules of the game on how a country’s laws are enacted and enforced. ❖ Market Economy: An economy that is characterized by the “invisible hand” of market forces.  ❖ Mixed Economy: An economy that has elements of both a market economy and a command economy. ❖ Moral Hazard: Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions. ❖ Norms: Values, beliefs, and actions of relevant players that influence the focal individuals and firms. ❖ Normative Pillar: The mechanism through which norms influence individual and firm behavior. ❖ Opportunism: The act of seeking self -interest with guile. ❖ Patent: Exclusive legal right of inventors of new products or pro- cesses to derive income from such inventions. ❖ Piracy: Unauthorized use of intellectual property. ❖ Political Risk: Risk associated with political changes that may negatively impact domestic and foreign firms. ❖ Political System: The rules of the game on how a country is governed politically. ❖ Property Rights: The legal rights to use an economic property (resource) and to derive income and benefits from it. ❖ Regulatory Pillar: The coercive power of Governments. ❖ Sovereign Wealth Fund (SWF): A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. ❖ State-owned Enterprise (SOE): A firm owned and controlled by the state (government). ❖ Theocratic Law: A legal system based on religious teachings. ❖ Totalitarian (dictatorship): A political system in which one person or party exercises absolute political control over the population. ❖ Trademark: Exclusive legal right of firms to use specific names, brands, and designs to differentiate their products from others. ❖ Transaction Costs: The costs associated with economic transactions or, more broadly, the costs of doing business. ❖ Washington Consensus: A view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making, which is often spearheaded by two Washington-based international organizations: the International Monetary Fund and the World Bank. Second text: Mankiw, G. N. (2014). Principles of Economics (7th ed.). Stamf ord, CT: Cengage Learning. ISBN-13: 9781285165875 Competency 3012.1.3: Economic Decision Making by Firms and Consumers The graduate applies economic concepts to managerial decision making. Topics: Consumer Behavior (Mankiw Ch. 21) Chapter 21 Mankiw  ❖ Budget Constraint: the limit on the consumption bundles that a consumer can afford ❖ Indifference Curve: a curve that shows consumption bundles that give the consumer the same level of satisfaction ❖ Marginal Rate of Substitution: the rate at which a consumer is willing to trade one good for another ❖ Perfect Substitutes: two goods with straight-line indifference curves ❖ Perfect Complements: two goods with right-angle indifference curves ❖ Normal Good: a good for which an increase in income raises the quantity demanded ❖ Inferior Good: a good for which an increase in income reduces the quantity demanded ❖ Income Effect: the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve ❖ Substitution Effect: the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution ❖ Giffen Good: a good for which an increase in the price raises the quantity demanded Topics: Firm Behavior under Different Market Structures (Mankiw Ch. 13-17) Chapter 13 Mankiw ❖ Total Revenue: the amount a firm receives for the sale of its output ❖ Total Cost: the market value of the inputs a firm uses in production (fixed plus variable costs) ❖ Profit: total revenue minus total cost ❖ Explicit Costs: input costs that require an outlay of money by the firm ❖ Implicit Costs: input costs that do not require an outlay of money by the firm ❖ Economic Profit: total revenue minus total cost, including both explicit and implicit costs ❖ Accounting Profit: total revenue minus total explicit cost ❖ Production Function: the relationship between quantity of inputs used to make a good and the quantity of output of that good ❖ Marginal Product: the increase in output that arises from an additional unit of input ❖ Diminishing Marginal Product: the property whereby the marginal product of an input declines as the quantity of the input increases ❖ Fixed Costs: costs that do not vary with the quantity of output produced ❖ Variable Costs: costs that vary with the quantity of output produced ❖ Average Total Cost: total cost divided by the quantity of output ❖ Average Fixed Costs: fixed cost divided by the quantity of output ❖ Average Variable Costs: variable cost divided by the quantity of output ❖ Marginal Cost: the increase in total cost that arises from an extra unit of production ❖ Efficient Scale: the quantity of output that minimizes average total cost ❖ Economies of Scale: the property whereby long-run average total cost falls as the quantity of output increases  ❖ Diseconomies of Scale: the property whereby long-run average total cost rises as the quantity of output increases ❖ Constant Returns to Scale: the property whereby long-run average total cost stays the same as the quantity of output changes Term Definition Mathematical Description Accounting Profit Total revenue minus total explicit cost Average fixed cost Fixed cost divided by the quantity of output AFC = FC/Q Average total cost Total cost divided by the quantity of output ATC = TC/Q Average variable Variable cost divided by the quantity of output AVC = VC/Q cost Constant Returns The property whereby long-run average total cost to Scale stays the same as the quantity of output changes Diminishing The property whereby the marginal product of an Marginal Product input declines as the quantity of the input increases Diseconomies of The property whereby long-run average total cost rises Scale as the quantity of output increases Economic Profit Total revenue minus total cost, including both explicit and implicit costs Economies of Scale The property whereby long-run average total cost falls as the quantity of output increases Efficient Scale The quantity of output that minimizes average total cost Explicit Costs Input costs that require an outlay of money by the firm Fixed costs Costs that do not vary with the quantity of output FC produced Implicit Costs Input costs that do not require an outlay of money by the firm Marginal cost The increase in total cost that arises from an extra unit MC=𝛥TC / 𝛥Q of production Marginal Product The increase in output that arises from an additional unit of input Production Function The relationship between quantity of inputs used to make a good and the quantity of output of that good Profit Total revenue minus total cost Total cost The market value of all the inputs that a firm uses in TC= FC + VC production Total Revenue The amount a firm receives for the sale of its output Variable costs Costs that vary with the quantity of output produced VC Chapter 14 Mankiw ❖ Competitive Markets: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker ❖ Average Revenue: total revenue divided by the quantity sold ❖ Marginal Revenue: the change in total revenue from an additional unit sold ❖ Sunk Cost: a cost that has already been committed and cannot be recovered ❖ NOTE: I have no idea why the text does not list them in alphabetical order…sigh. Chapter 15 Mankiw ❖ Monopoly: a firm that is the sole seller of a product without close substitutes ❖ Natural Monopoly: a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms ❖ Price Discrimination: the business practice of selling the same good at different prices to different customers ❖ NOTE: I have no idea why the text does not list them in alphabetical order…sigh. Chapter 16 Mankiw ❖ Oligopoly: a market structure in which only a few sellers offer similar or identical products ❖ Monopolistic Competition: a market structure in which many firms sell products that are similar but not identical ❖ NOTE: I have no idea why the text does not list them in alphabetical order…sigh. Chapter 17 Mankiw ❖ Oligopoly: a market structure in which only a few sellers offer similar or identical products ❖ Game Theory: the study of how people behave in strategic situations ❖ Collusion: an agreement among firms in a market about quantities to produce or prices to charge ❖ Nash Equilibrium: a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen ❖ Prisoner’s Dilemma: a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial ❖ Dominant Strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players ❖ NOTE: I have no idea why the text does not list them in alphabetical order…sigh.  Competency 3012.1.4: Microeconomic and Macroeconomic Principles The graduate explains f undamental economic principles, including supply and demand, scarcity, opportunity cost, price, income and cross-price elasticities, role of government, inf lation, and monetary and f iscal policy. Topic: Macroeconomic Principles (Mankiw Chapters 29 & 34) Chapter 29 Mankiw ❖ Money: the set of assets in an economy that people regularly use to buy goods and services from other people ❖ Medium of Exchange: an item that buyers give to sellers when they want to purchase goods and services ❖ Unit of Account: the yardstick people use to post prices and record debts (I can easily tell when I have twice as much and half as much) ❖ Store of Value: an item that people can use to transfer purchasing power from the present to the future ❖ Liquidity: the ease with which an asset can be converted into the economy’s medium of exchange ❖ Commodity Wealth: money that takes the form of a commodity with intrinsic value ❖ Fiat Money: money without intrinsic value that is used as money because of government decree ❖ Currency: the paper bills and coins in the hands of the public ❖ Demand Deposits: balances in bank accounts that depositors can access on demand by writing a check ❖ The Federal Reserve 9The Fed): the central bank of the United States (Your banker’s bank) ❖ Central Bank: an institution designed to oversee the banking system and regulate the quantity of money in the economy ❖ Money Supply: the quantity of money available in the economy ❖ Monetary Policy: the setting of the money supply by policymakers in the central bank ❖ Reserve: deposits that banks have received but have not loaned out ❖ Fractional Reserve Banking: a banking system in which banks hold only a fraction of deposits as reserves ❖ Reserve Ratio: the fraction of deposits that banks hold as reserves ❖ Money Multiplier: the amount of money the banking system generates with each dollar of reserves ❖ Bank Capital: the resources a bank’s owners have put into the institution ❖ Leverage: the use of borrowed money to supplement existing funds for purposes of investment ❖ Capital Requirement: a government regulation specifying a minimum amount of bank capital ❖ Open-Market Operations: the purchase and sale of U.S. government bonds by the Fed ❖ Discount Rate: the interest rate on the loans that the Fed makes to banks  ❖ Reserve Requirements: regulations on the minimum amount of reserves that banks must hold against deposits ❖ Federal Funds Rate; the interest rate at which banks make overnight loans to one another Chapter 34 Mankiw ❖ Theory of Liquidity Preference: Keynes’s theory that the interest rate adjusts to bring money supply and money demand into balance ❖ Fiscal Policy: the setting of the level of government spending and taxation by government policymakers ❖ Multiplier Effect: the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending ❖ Crowding-Out Effect: the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending ❖ Automatic Stabilizers: changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action Competency 3012.1.5: Assessing Global Economic Performance and International Trade The graduate describes global economic f orces inf luencing production, consumption, investments, and related policy challenges. Topic: International Trade (Mankiw Chapter 9) Chapter 9 Mankiw ❖ World Price: the price of a good that prevails in the world market for that good ❖ Tariff: tax on goods produced abroad and sold domestically Topic: Measuring Economic Performance (Mankiw Chapters 7 & 23) Chapter 7 Mankiw ❖ Welfare Economics: the study of how the allocation of resources affects economic well-being ❖ Willingness to Pay: the maximum amount that a buyer will pay for a good ❖ Consumer Surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it ❖ Producer Surplus: the amount a seller is paid for a good minus the seller’s cost of providing it ❖ Cost: the value of everything a seller must give up to produce a good ❖ Efficiency: the property of a resource allocation of maximizing the total surplus received by all members of society  ❖ Equality: the property of distributing economic prosperity uniformly among the members of society Chapter 23 Mankiw ❖ Microeconomics: the study of how households and firms make decisions and how they interact in markets ❖ Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth ❖ Gross Domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time ❖ Consumption: spending by households on goods and services, with the exception of purchases of new housing ❖ Investment: spending on capital equipment, inventories, and structures, including household purchases of new housing ❖ Government Purchases: spending on goods and services by local, state, and federal governments ❖ Net Exports; spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports) ❖ Nominal GDP: the production of goods and services valued at current prices (current year production at current year prices). Nominal GDP = Real GDP + Inflation ❖ Real GDP: the production of goods and services valued at constant prices ❖ GDP Deflator; a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100