ECON EXAM II- Chapter 5

  1. sole proprietorship
    a firm owned by a single individual and not a corporation.
  2. partnership
    firm owned jointly by two or more people (not organized as a corporation)
  3. corporation
    legal form of business that provides owners with protection from losing more than their investment should the business fail
  4. asset
    anything of value owned by a person or firm
  5. limited liability
    legal provision that shields owners of a corporation from losing more than they have invested in the firm
  6. corporate governance
    the way in which a corporation is structured and the effect a corporation;s structure has on the firms behavior
  7. separation of ownership from control
    where top mgmt rather than shareholders control day to day operations
  8. principal agent problem
    caused by an agent pursuing his own interest rather than the interests of principal who hired him
  9. indirect finance
    flow of funds from savers to BORROWERS through financial intermediaries (banks)
  10. intermediaries ____
    raise funds from savers to lend to firms (& other borrowers)
  11. direct finance
    flow of funds from savers to firms through financial markets (NYSE)
  12. bond
    financial security that represents a promise to repay a fixed amt of funds
  13. coupon payment
    interest on a bond
  14. interest rate
    cost of borrowing funds (percentage of amt borrowed)
  15. stock
    financial security that represents partial ownership of a firm
  16. dividends
    payments by a corporation to its shareholders
  17. liability
    anything owned by a person or firm
  18. income statement
    financial statement that sums up a firms revenues, costs,& profit over a period of time
  19. accounting profit
    firms net income, measured by (revenue-operating exp & taxes paid)
  20. explicit cost
    involves spending money
  21. implicit costs
    nonmonetary opportunity cost
  22. economic profit
    firms revenue-all implicit/explicit cost
  23. balance sheet
    financial statement that sums up a firms financial position on a particular (usually end of a quarter or year)
  24. in the ideal-market framework, the profit maximizing foal of the fime is simply a(n)
    extension of the notion of self-interest of individual decision makers
  25. _______ are viewed as the ultimate owners of firms. it is assumed that profit maximization will maximize the _________
    • private-sector households
    • returns to these shareholders
  26. choosing the profit maximizing level of output is
    NOT guaranteed to lead to efficient allocation of resources
  27. situation could be made worse by
    self-interested decisions made directly by households
  28. _______ is illustrated by the discussion of the principle-agent problem
    may be a strong coordination failure between owners and the managers of a firm
  29. the potential for disregard of the interests of shareholders can be _________
  30. ________ exist between higher-level and lower-level mgmt
  31. while high-level mgmt might epouse a range of lofty goals for the firm, lower-level managers might
    be pressured to meet black&white targets (cut corners of lofty goals set my upper mgmt)
  32. more generally, manager are operating with
    someone else's money in the main
  33. how do companies fund lavish parties
    CEO/board use shareholder money (english premier league & in large financial companies)
  34. it is common for ppl to complain of gvmt spending other ppl's money, its less recognized that a similar threat for
    shareholders can come from CEOs
  35. intuition from from tax theory
    when taxes are imposed on a market, the most inelastic (most price unresponsive) parts of the market bear very little of the burden
  36. benefits of the market subsidies tend to accure to the most
    inelastic portion of the market, with the most elastic getting little benefits
  37. the move to lower marginal tax rates on the rich and capital reflect
    not only a view that these individuals are "job creators" for the economy but also that capital is the most elastic component of the factor markets
  38. another side of the tax issue is that
    permanent subsidies tend to get capitalized in asset values
  39. ex- mortgage interest payments for houses is to raise the
    value of houses, and the land the house is on, by approx. the capitalized value of the subsidies. in order to remove the tax code, its necessary for homeowners to experience a capital loss on their land--unpopular
  40. biggest effect of subsidies may be to
    increase the capital value of land, thus encouraging higher rent payments
  41. we see an extreme case of capitalization problems in terms of water usage in agricultural parts of CA
  42. the land that historically has a right to cheap and abundant water for irrigation is
    very expensive and the land is very productive
  43. problem is that major cities in CA are
    very short for water for their production and household activities
  44. both the capibility to be highly productive in terms of agricultural crops would be lost and the price of agricultural land in that area would collapse if one
    removed the right the subsidized agricultural to cheap & abundant water
  45. Karl Marx
    (hammer and rail) claimed that the entire value of output should be attributed to labor
  46. in terms of perception, historical emphasis of economics has
    changed over time (18th century focused on the contributions to labor)
  47. in the mid 20th century there was a switch to
    emphasis ton consumer sovereignty (productions was dictated)
  48. the recent emphasis on economic growth has shifted the focus to
    capital allocation
  49. there is growing evidence that markets, individuals, & society are far more
    complex that the ideal-market suggests
  50. though the ideal market can be validated by the scientific method, there are still
    blind sports and salience basis
  51. positive normative dichotomy that allows discussion of missing elements, blind spots, and salience biases to be treated as
    issues of "false assumptions"
  52. those you shout the loudest
    are sensing the tide moving against them
  53. how do we deal with situations
    careful examination of our ways of thinking, strengths & weaknesses
  54. 2010 UN reports estimated that if the 3000 firms in the world paid for all the ecological costs of their activities their profits would
    be reduced by about 1/3rd & would have to face an annual bill of over $2 trillion
  55. methodology may be influenced by
    an anti-business bias
  56. textbook emphasizes the way that firms can raise funds is by
    borrowing or floating new stock
  57. economist tend to believe that small firms are good engines for
    creating new jobs
  58. smalls firms tend to be more reliant on
    bank loans to finance payroll investment and innovation
  59. one of the biggest problems of the great recession was how
    as asset prices slumped and the asset side of the bank's balance sheet fell, banks became reluctant to lend
  60. banks didnt want to lend to private sector because
    • 1. they wanted to hoard safe assets to build up their capital base
    • 2. they saw private sector lending as very risky in an environment of falling demands
  61. ________ played an important role in the failure of credit markets and in turbulence in the market for loanable funds
    presence of financial intermediaries
  62. its important, as we look for ways to recover, while avoiding long term setbacks, to be aware that
    persistent credit market barriers could restrict the ability of small businesses to contribute more to employment growth
Card Set
ECON EXAM II- Chapter 5