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ECON 420 Final Exam Review

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ECON 420 Final Exam Review
INTRODUCTION & CHAPTER 1
1. What is the main point of marketing myopia?
a. Railroads only saw themselves in the railroad business – not the transportation business; they became product oriented instead of being customer oriented.
b. There was not a lack of demand, as they claimed; transportation customers just chose cars, planes, etc.
2. There is no such thing as a commodity. Define yourself broadly and in terms of your customer
3. Working Assumption – managers work to maximize the value of the firm
a. Interests of shareholders and managers are not always aligned
b. Contractual & other legal means for incentivizing managers to work for shareholders
4. Value for TR & TC
a. Marketing [Revenue]
b. Production [Max Output @ Given cost]
c. Finance [Minimize Cost of Capital]
d. R&D [Revenue & Cost efficiencies]
e. “The General’s Seat” [CEO – NOT MYOPIC]
5. Profit = Revenue – Cost (including opportunity costs)
a. Accounting Profit vs. Economic Profit
b. Competitive markets drive profit to 0; Innovation, risk & market power lead to positive economic profit
6. Market – A social institution allocating scarce resources (provides a means for exchange; barter or money based)
a. Demand – Pool of consumers potentially buying a product or service
b. Supply – Pool of suppliers potentially selling a product or service
7. Market Demand
a. Do your best to find out how customers value your product & how sensitive they are to price
b. Total Revenue (TR) = Price (P) * Quantity Demanded (Q) [TR = P*Q]
8. Demand Curve – Almost always slopes down, Pertains to a point/period in time, May be linear or nonlinear
9. Market Supply (Supply curve)
a. Almost always slopes up, Pertains to a point/period in time, May be linear or nonlinear
b. Consumer Surplus – Customer Happiness / Utility
c. Producer Surplus – Supplier Happiness / Utility
10. Equilibrium Price – Tends to maximize happiness
a. 2008: Lumber prices drop sharply (glut of unsold homes)
a.i. Demand shift

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