Friday, April 4, 2014

MRF0013: Basic Economics.

1. a)   What is a multinational corporation? State three examples of multinational corporation in Malaysia.
b) Why do these businesses (your examples in question 1a) go multinational ?
c) Assess the advantages and disadvantages facing Malaysia, as a host state, when receiving multinational corporations investment.
(25 marks)

a) Explanation of multinational corporation (2 marks )

A multinational corporation (MNC) or multinational enterprise (MNE) are organizations that own or control production or services facilities in one or more countries other than the home country.

For example, when a corporation that is registered in more than one country or that has operations in more than one country may be attributed as MNC. Usually, it is a large corporation which both produces and sells goods or services in various countries.It can also be referred to as an international corporation.

3 examples ( 3 marks)
1. DHL
2. Royal Dutch Shell
3. Petronas

b) Business go multinational because :  ( 5 factors x 2 marks = 10 marks)
Cut cost
Seek new market and new expansion opportunities
Ownership of superior technology
R&D capacity
Product differentiation
Entrepreneurial and managerial skills
Availability of raw materials
Relative cost of inputs
The quality of inputs
Avoiding transport and tariff costs
Government policy towards FDI
Economic climate in host nations

c) The advantages facing Malaysia, as a host state, when receiving multinational corporations investment : ( 2 factors x 2 marks = 4 marks)
Balance of payment
Technology transfer

The disadvantages :    ( 2 factors x 2 marks = 4 marks)
The environment
Transfer pricing

Organization of points and presentation = 2 marks.

2. a)   Externalities can be in the form of external benefits and external costs. Distinguish between these two types of externalities.
b) Analyze the external benefits and external costs resulting from the operations of manufacturing firms in Malaysia.
c) Discuss the possible government interventions in the market to rectify the problems of externalities ?
(25 marks)

a) Definition of external benefits (1 mark)

Definition - An external benefit occurs when producing or consuming a good causes a benefit to a third party.
The existence of external benefits (positive externalities) means that social benefit will be greater than private benefit.

Definition of external costs  (1 mark)

-  An external costs occurs when producing or consuming a good or service imposes a cost upon a third party.
-  If there are external costs in consuming a good (negative externalities), the social cost will be greater than the private cost.
-  The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs.

b) External benefits : ( 3 x 2  marks = 6 marks)
industrial training by a firm has positive effects on labor productivity and can reduce the cost of other firms 
The opportunity of firms to access the R & D results of other firms might reduce the costs of production and can be transferred to the consumers in terms of lower prices 
Health provision by a firm will reduce absenteeism and creates a better quality of life and higher living standards.
Job creation by small firms who deals with manufacturing firms

External costs : ( 3 x 2  marks = 6 marks)
water pollution
air pollution
traffic congestion in industrial area
higher consumer products’ prices
social problems 

c) Government intervention : ( 4 x 2 ½  marks = 10 marks)
Property rights
Laws prohibiting or regulating undesirable behaviors
Price controls
Provision of goods and services  (health care and education)

Organization of points and presentation = 1 mark.

3. a)  Country’s economy is growing and demands for most consumer products are increasing. Discuss the factors that might cause the increase in demand for these products.
b) Assume that in good economic condition government allows taxi drivers to increase taxi fares by 5 %. This situation leads to a fall in demand for taxi services in the city from 10 000 trips to 9 600 trips daily.

i)   Calculate the price elasticity of demand for taxi services.
ii) What might happen to total income of the taxi drivers when they raise their taxi fares? Justify you answer.
iii) Analyze the factors that might influence the degree of elasticity of demand for taxi services.
(25 marks)

a) Factors that might cause the increase in demand for consumer products are :
i. Higher income
ii. Advertisement
iii. Change in tastes and preferences
iv. Government policy of income redistribution 
v. Change in price of related goods   
( 4 factors x 2 marks = 8 marks)

b) i)     E =   % change in quantity demanded / % change in price
=  [ (9600 -10000) / 10 000  x 100% ] divided 5 %
=  4 %   / 5 % = 0.8  (2 m)

ii) Demand for taxi services is inelastic. (1 m)
Thus increase in price will lead to an increase in income  ( 1 m) 
Total income = P x Q  (1 m)
Assume price increase from RM 10.00 to RM 10.50 (5% increament), total income will change from :
Total income before price change  :
=  RM 10 x 10 000 trips
=  RM 100 000

Total income after 5 % increase in fares :
= RM 10.50 x 9600 trips
= RM 100,800   ( 3 m)           
( Total 6 marks) 
iii) Factors that influence the degree of elasticity of demand for taxi services :
Necessity good
Time period
No close substitute available
Taxi fare constitutes only small portion of total income
( 4 factors x 2 marks = 8 marks)

Organization of points and presentation = 1 mark.

4. Dr. Munif, a medical doctor, resigned from government hospital and started his own clinic. He employs three assistants and one locum doctor.
a) What form of business structure is Dr.Munif’s clinic classified as? What are the advantages and disadvantages of this form of business structure ?
b) If Dr.Munif wants to expand his business in the future, advise him on the suitable internal and external growth strategies. What economies of scale would his business gain from that expansion ? 
(25 marks)

a) Sole proprietorship ( 1 mark)
Because : own by single owner, small business, has few employees (2 marks)
Advantages :  easy to set up, require small initial capital investment, flexible to changing market condition, success depends very much on the commitment of owner  (2 marks)

Disadvantages :  
i)  Limited scope for expansion (financial source & size of firm that the owner can manage effectively)
ii) Unlimited liability  (2 marks)
b) Definition of internal and external growth strategies (2 marks)
Suggestion of internal growth  -   horizontal integration / vertical integration / conglomerate
      Suggestion of external growth   -  merger & acquisition / strategic alliance
(2 x 4 marks = 8 marks)

Economies of scale :
Economies of bulk buying
Managerial economies
Marketing economies
Specialization & division of labor
By product
Spreading overhead
Financial economies
  ( 3 x 2 marks = 6 marks)

Organization of points and presentation = 2 marks.                

Thursday, April 3, 2014

MRF0013: Basic Economics: Chap 9, 10, 11 & 12.

Chapter 9: Cost of Productions.

Opportunity cost: Cost measured in terms of the next best alternative forgone.

Explicit costs:  The payments to outside suppliers of inputs.

Implicit costs:  Costs which do not involve a direct payment of money to a third party, but which nevertheless involve a sacrifice of some alternative.

Historic costs:  The original amount the firm paid for factors it now owns.

Sunk costs:  Cost that cannot be recouped (eg: by transferring assets to other uses)

Replacement costs:  What the firm would have to pay to replace factors it currently owns.

Total physical product:  The total output of a product per period of time that is obtained from a given amount of inputs.

Production function:  The mathematical relationship between the output of a good and the inputs used to produce it.   It shows how output will be affected by changes in the quantity of one or more of the inputs.

Fixed costs:  Total costs that do not vary with the amount of output produced.

Variable costs:  Total costs that do vary with the amount of output produced.

Total Cost (TC):  The sum of total fixed costs (TFC) and total variable costs (TVC)

Average total cost (AC):  Total cost (fixed plus variable) per unit of output

Average fixed cost (AFC):  Total fixed cost per unit of output.

Average variable cost (AVC):  Total variable cost per unit of output

Marginal cost (MC):  The cost of producing one or more unit of output.
MC = <>TC / <>Q

Economies of scale:  When increasing the scale of production leads to a lower cost per unit of output.

Specialization and division of labour:  Where production is broken down with a number of simpler, more specialized tasks, this allowing workers to acquire a high degree of efficiency.

Indivisibilities:  The impossibility of dividing a factor of production into smaller units.

Plant economies of scale:  Economies of scale that arise because of the large size of the factory.

Retionalisation:  The reorganising of production (often after a merger) so as to cut waste and duplication and generally to reduce costs.

Overheads:  Costs arising from the general running of an organisation, and only indirectly related to the level of output.

Economies of scope:  When increasing the range of products produced by a firm reduces the cost of producing each one.

Diseconomies  of scale:  Where costs per unit of output increase as the scale of production increases.

External economies of scale:  Where a firm's costs per unit of output decrease as the size of the whole industry grows.

Industry's infrastructure:  The network of supply agents, communications, skills, training facilities, distribution channels, specialised financial services, etc that support a particular industry.

External diseconomies of scale:  Where a firm's costs per unit of output increase as the size of the whole industry increases.

Technical or productive efficiency:  The lease-cost combination of factors for a given output.

Long-run average cost (LRAC) curve:  A curve that shows how average cost varies with output on the assumption that all factors are available.  (It is assumes that the least-cost method of production will be chosen for each output).

Long run equilibrium: LARC = AC = MC = MR = AR

Envelope curve:  A long-run average cost curve drawn as a tangency points of a series of short-run average cost curves.

Chapter 10: Revenue and profit.

Total Revenue: A firm's total earnings from a specified level of sales within a specified period
TR = P X Q

Average revenue:  Total revenue per unit of output.  When all output is sold at the same price, average revenue will be the same as price.
AR = TR/Q = P

Marginal revenue:  The extra revenue gained by selling one or more unit per time period
MR = <>TR / <>Q

Price taker: A firm that is too small to be able to influence the market price.

Price maker (price chooser):  A firm that has the ability to influence the price charged for its good or service.

Profit-maximizing rule:  Profit is maximized where marginal revenue equals marginal cost.

Normal profit:  The opportunity cost of being in business.  It consists of the interest that could be earned on a risk-less asset, plus a return for risk-taking in this particular industry.  It is counted as a cost of production.

Supernormal profit (also known as pure profit, economic profit, abnormal profit or simply profit):  The excess of total profit above normal profit.

Short-run shut-down point:  This is where the AR curve is tangential to the AVC curve.  The firm can only just cover its variable costs.  Any fall in revenue below this level will cause a profit-maximizing firm to shut down immediately.

Long-run shut-down point:  This is where the AR curve is tangential to the LRAC curve.  The firm can just make normal profits.  Any fall in revenue below this level will cause a profit-maximizing firm to shut down once all costs have become variable.

Chapter 11: Profit maximization under perfect competition and monopoly.

Perfect competition:  A market structure in which there are many firms, where the is freedom of entry to the industry; where all firms produce an identical product; and where all firms are price taker.

Monopoly:  A market structure where there is only one firm in the industry.

Monopolistic competition:  A market structure where like perfect competition, there are many firms and freedom of entry into the industry, but where each firm produces a differentiated product and thus has some control over its price.

Oligopoly:  A market structure where there are few enough firms to enable barriers to be erected against the entry of new firms.

Imperfect competition:  The collective name for monopolistic competition and oligopoly.

The short run under perfect competition:  The period which there is too little time for new firms to enter the industry.

The long run under perfect competition:  The period of time which is long enough for new firms to enter the industry.

Natural monopoly:  A situation where long-run average costs would be lower if an industry were under monopoly than if it were shared between two or more competitors.

Competition for corporate control:  The competition for the control of companies through takeovers.

Perfectly contestable market:   A market where there is free and cost-less entry and exit.

Sunk costs:  Costs that cannot be recouped (eg:  by transferring assets to other uses).

Chapter 12: Profit maximization under imperfect competition.

Independence (of firms in a market):  When the decisions of one firm in a market will not have any significant effect on the demand curves of its rivals.

Product differentiation:  When one firm's product is sufficiently different from its rivals' to allow it to raise the price of the product without customers all switching to the rivals' products.  A situation where a firm faces a downward-sloping demand curve.

Collusive oligopoly:  When oligopolists agree, formally or informally, to limit competition between themselves.  They may set output quotas, fix prices, limit product promotion or development, or agree not to 'poach' each other's market.

Non-collusive oligopoly:  When oligopolists have no agreement between themselves - formal, informal or tacit.

Cartel:  A formal collusive agreement.

Quota (set by a cartel):  The output that is given member of a cartel is allowed to produce (production quota) or sell (sales quota).

Tacit collusion:  A situation where firms have an unspoken agreement to engage in a joint strategy.  For example, oligopolists take care not to engage in price cutting, excessive advertising or other forms of competition.  There may be unwritten 'rules of collusive behaviour such as price leadership.

Dominant firm price leadership:  When firms (the followers) choose the same price as that set by a dominant firm in the industry (the leader).

Barometric firm price leadership:  Where the price leader is the one whose prices are believed to reflect market conditions in the most satisfactory way.

Average cost pricing:  Where a firm set its price by adding a certain percentage for (average) profit on top of average cost.

Price benchmark:  This is a price which is typically used.  Firms, when raising prices, will usually raise them from one benchmark to another.

Cournot model:  A model of duopoly where each firm makes its price and output decisions on the assumption that its rival will produce a particular quantity.

Duopoly:  An oligopoly where there are just two firms in the market.

Nash equilibrium:  The position resulting from everyone making their optional decision base on their assumptions about their rivals' decisions.

Takeover bid:  Where one firm attempts to purchase another by offering to buy the shares of that company from its shareholders.

Kinked demand theory:  The theory that oligopolists face a demand curve that is kinked at the current price:  demand being significantly more elastic above the current price than below.  The effect of this is to create a situation of price stability.

Countervailing power:  When the power of a monopolistic / oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up.

Game theory (or the theory of the games):  The study if alternative strategies that oligopolists may choose to adopt, depending on their assumptions about their rivals' behaviour.

Maximin:  The strategy of choosing the policy whose worst possible outcome is the least bad.

Maximax:  The strategy of choosing the policy which has the best possible outcome.

Dominant strategy game:  Where different assumptions about rivals' behaviour lead to the adoption of the same strategy.

Prisoners' dilemma:  Where two or more firms (or people), by attempting independently to choose the best strategy, based upon what other(s) are likely to do, end up in a worse position than if they had cooperated from the start.

Tit-for-tat:  Where a firm will cut prices, or make some other aggressive move, only if the rival does so first.  If the rival knows this, it will be less likely to make an initial aggressive move.

Credible threat (or promise):  One that is believable to rivals because it is in the threatener's interests to carry it out.

Decision tree (or game tree):  A diagram showing the sequence of possible decisions by competitors firms and the outcome of each combination of decisions.

First-mover advantage:   When a firm gains from being the first one to take action.

Wednesday, April 2, 2014

MRF0013: Basic Economics: Chap 4, 5 & 6.

Chapter 4: The working of competitive markets.

Price taker:  A person for firm with no power to be able to influence the market price.

Perfectly competitive market (preliminary definition):  A market in which all producers and consumers of the product are price takers.  There are other features of a perfectly competitive market.

Free market:  One in which there is an absence of government intervention.  Individual producers and consumers are free to make their own economic decisions.

The price mechanism:  The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply.

Equilibrium price:  The price where the quantity demanded equals the quantity supplied; the price where there is no shortage or surplus.

Equilibrium:  A position of balance.  A position from which there is no inherent tendency to move away from current prices and quantities.

The law of demand:  The quantity of a good demanded per period of time will fall as the price rises and rise as the price falls, other things being equal (ceteris paribus).

Income effect:  The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as result of the price change.

Substitution effect:  The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products.

Quantity demanded:  The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.

Demand schedule for and individual:  A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time.

Market demand schedule:  A table showing the different total quantities of a good that consumers are willing and able to buy at various prices over a given period of time.

Demand curve:  A graph showing the relationship between the price of a good and the quantity of good demanded over a given time period.  Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis.  A demand curve can be for an individual consumer or a group pf consumers, or more usually for the whole market.

Substitute goods:  A pair of goods which are considered by consumer to be alternatives to each other.  As the price of one goes up, the demand for other rises.

Complementary goods:  A pair of goods consumed together.  As a price of one goes up, the demand for both goods will fall.

Normal goods:  Goods whose demand rises as people's incomes rise.

Inferior goods:  Goods whose demand falls as people's incomes rise.

Change in demand:  The term used for a shift in the demand curve.  It occurs when a determinant of demand other than price changes.

Change in the quantity demanded:  The term used for a movement along the demand curve to a new point.  It occurs when there is a change in price.

Supply schedule:  A table showing the different quantities of a goods that producers are willing and able to supply at various prices over a given time period.   A supply schedule can be for an individual producer or group of producers or for all producers (the market supply schedule).

Supply curve:  A graph showing the relationship between the price of a good and quantity of the good supplied over a given period of time.

Substitutes in supply:  These are two goods where an increased production of one means diverting resources away from producing the other.

Goods in joint supply:  These are two goods where the production of more of one leads to the production of more of the other.

Change in the quantity supplied:  The term used for a movement along the supply curve to a new point.  It occurs when there is a change in price.

Change in supply:  The term used for a shift in the supply curve.  It occurs when a determinant other than price changes.

Market clearing:  A market clears when supply matches demand, leaving no shortage or surplus.

Chapter 5: Business in a market environment.

Price elasticity of demand:  A measure of the responsiveness of quantity demanded to a change in price.

Elastic:  If demand is (price) elastic, then any change in price will cause the quantity demanded to change proportionately more.  (Ignoring the negative sign) it will have a value greater then 1.

Inelastic:  If demand is (price) inelastic, then any change will cause the quantity demanded to change by a proportionately smaller amount.  (Ignoring the negative sign) it will have a value less than 1.

Unit elasticity:  When the price elasticity of demand is unity, this is where quantity demanded changes by the same proportion as a price.  Price elasticity is equal to 1.

Total (sales) revenue (TR):  The amount a firm earns from its sales of a product at a particular price.
TR = P X Q.  Note that we are referring to gross revenue:  that is, revenue before the deduction of taxes or any other costs.

Income elasticity of demand:  The responsiveness of demand to a change in consumer incomes:  the proportionate change in demand divided by the proportionate change in income.

Cross-price elasticity of demand:  The responsiveness of demand for one good to a change in the price of another:  the proportionate change in demand for one good divided by the proportionate change in price of other.

Price elasticity of supply:  The responsiveness of quantity supplied to a change in price:  the proportionate change in quantity supplied divided by the proportionate change in price.

Speculation:  This is where people make buying or selling decisions based on their anticipations of future prices.

Self-fulfilling speculation:  The actions of speculators tend to cause the very effect that they has anticipated.

Stabilizing speculation:  This is where the actions of speculators tend to reduce price fluctuations.

Destabilizing speculation:  This is where the actions of speculators tend to make price movements larger.

Risk:  This is when an outcome may or may not occur, but where its probability of occurring is known.

Uncertainty:  This is when an outcome may or may not occur and where its probability of occurring is not known.

Futures or forward market:  A market in which contracts are made to buy or sell at some future date at a price agreed today.

Future price:  A price agreed today at which an item (eg commodities) will be exchanged at some set date in the future.

Spot price:  The current market price.

Chapter 6: Demand and the consumer.

Total utility:  The total satisfaction a consumer gets from the consumption of all the units of a good consumed within a given period.

Marginal utility:  The extra satisfaction gained from consuming one extra unit of a good within a given time period.

Principle of diminishing marginal utility:  As more units of good are consumed, additional units will provide less additional satisfaction then previous units.

Consumer surplus:  The excess of what a person would have prepared to pay for a good (ie the utility) over what that person actually pays.

Marginal consumer surplus:  The excess of utility from the consumption of one more unit of a good (MU) over the price paid
MCS = MU - P

Total consumer surplus:  The excess of a person's total utility from a consumption of a goos (TU) over the amount that person spends on it (TE).

Relational consumer behavior:  The attempt to maximize total consumer surplus.

Consumer durable:  A consumer good that lasts a period of time, during which consumer can continue gaining utility from it.

Diminishing marginal utility of income:  Where each additional pound earned yields less additional utility.

Spreading risks (for an insurance company):  The more policies an insurance company issues and the more independent the risks of claims from these policies are, the more predictable will be a number of claims.

Law of large numbers:  The larger the number of events of a particular type, the more predictable will be their average outcome.

Independent risks:  Where two risky events are unconnected.  The occurrence of one will not affect the likelihood of the occurrence of the other.

Diversification:  Where a firm expands into new types of business.

Adverse selection:  Where information is imperfect, high-risk groups will be attracted to profitable market opportunities to the disadvantage of the average buyer (or seller).

Moral hazard:  Following a deal, there is an increased likelihood that one party will engage in problematic (immoral and hazardous) behavior to the detriment of another.

Characteristics (or attributes) theory:  The theory that demonstrates how consumer choice between different varieties of a product depends on the characteristics of these varieties, along with prices of the different varieties, the consumer's budget and consumer's tastes.

Efficiency frontier:  A line showing the maximum attainable combinations of two characteristics for a given budget.  These characteristics can be obtained by consuming one or a mixture of two brands or varieties of a products.

Indifference curve:  A line showing all those combinations of two characteristics of a good between which a consumer is indifferent: ie those combination that give a particular level of utility.

Indifference map:  A diagram showing a whole set of indifference curves.  The further away a particular curve is from the origin, the higher the level of utility it represents.

Diminishing marginal rate of substitution of characteristics:  The more a consumer gets of characteristic A the less of characteristic B, the less and less of B the consumer will be willing to give up an extra unit of A.

Market segment:  A part of a market for a product where the demand is for a particular variety of that product.

Tuesday, April 1, 2014

MRF0013: Basic Economics: Chap 1, 2 & 3.

Chapter 1: The business environment and business economics

PEST analysis: Where a Political, Economic, Social and Technology factors shaping a business environment are assessed y a business so as to devise future business strategies.

Primary production:  The production and extraction of natural resources, plus agriculture.

Secondary production:  The production from manufacturing and construction sectors of the economy.

Tertiary production:  The production from from service sector of the economy.

Gross domestic product (GDP):  the value of output produced within the country over a twelve-month period.

Deindustrialisation:  The decline in the contribution to production of the manufacturing sector of the economy.

Industry: A group of firms producing a particular product or service.

Industrial sector:  A grouping of industries producing similar products or services.

Standard Industrial Classification (SIC):  The name given to the formal classification of firms into industries used by the government in order to collect data on business and industry trends.

Industrial concentration:  The degree to which an industry is dominated by large business enterprises.

Chapter 2: Economics and the world of business.

Scarcity:  The excess of human wants over what can actually be produced to fulfill these wants.

Consumption:  The act of using goods and services to satisfy wants.  This will normally involve purchasing the goods and services.

Production:  The transformation of inputs into outputs by firms in order to earn profit (or meet some other objective).

Factors of production (or resources):  The inputs into the production of goods and services: labour, land and raw materials, and capital.

Labour:  All forms of human input, both physical and mental into current production.

Land (and raw materials):  Input into production that are provided by nature: eg unimproved land and mineral deposits in the ground.

Capital:  All inputs into production that have themselves been produced: eg factories, machines and tools.

Macroeconomics:  The branch of economics that studies economic aggregates (grand total): eg the overall level of price, output and employment in the economy.

Aggregate demand:  The total level if spending in the economy.

Aggregate supply:  The total amount of output in the economy.

Microeconomics:  The branch of economics that studies individual units: eg households, firms and industries.  It studies the interrelationships between these units in determining the pattern of production and distribution of goods and services.

Rate of inflation:  The percentage increase in the level of prices over a twelve-month period.

Balance of trade:  Exports of goods and services minus imports of goods and services.  If exports exceeds imports, there is a 'balance of trade surplus' (a positive figure).  If import exceeds exports, there is 'balance if trade deficit' (a negative figure).

Recession:  A period where national output falls.  The official definition is where output declines for two or more quarters.

Unemployment:  A number of people who are actively looking for work but are currently without a job.  (Note that there is much debate as to who should officially be counted of unemployed).

Demand-side policy:  Government policy designed to alter level of aggregate demand, and thereby the level of output, employment and prices.

Supply-side policy:  Government policy that attempts to alter the level of aggregate supply directly.

Barter economy:  An economy where people exchange goods and services directly with one another without any payment of money.  Workers would be paid with bundles of goods.

Market:  The interaction between buyers and sellers.

Opportunity cost:  The cost of any activity measured in terms of the best alternative forgone.

Relational choices:  Choices that involve weighing up the benefit of any activity against its opportunity cost.

Marginal costs:  The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.

Marginal benefits:  The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.

Time-series data:  Information depicting how a variable (eg the price of eggs) changes over time.

Cross-section data:  Information showing how a variable (eg the consumption of eggs) differs between different groups or different individuals at a given time.

Index number:  The value of a variable expressed as 100 plus or minus its percentage deviation from a base year.

Base year (for index numbers):  The year whose index number is set at 100.

Consumer prices index (CPI):  An index of the prices of goods bought by a typical household.

Weighted average:  The average of several items where each item is ascribed a weight according to its importance.  The weights must add up to 1.

Functional relationships:  The mathematical relationship showing how one variable is affected by one or more others.

Chapter 3: Business Organisations.

The firm: An economic organization that coordinates the process of production and contribution.

Transaction costs:  Those costs incurred when making economic contracts in the marketplace.

Joint-stock company:  A company where ownership is distributed between a large number of shareholders.

Principal-agent problem:  One where people (principals), as a result of lack of knowledge, cannot ensure that their best interests are being served by their agents.

Asymmetric information:  A situation in which one party in an economic relationship knows more than another.

U-form business organization:  One in which the central organization of the firm (the chief executive or a managerial team) is responsible both for firm's day-to-day administration and for formulating its business strategy.

Bounded rationality:  Individuals are limited in their ability to absorb and process information.  People think in a ways conditioned by their experiences (family, education, peer groups, etc)

M-form business organization:  One in which the business is organised into separate departments, such that responsibility for the day-to-day management enterprise is separated from the formulation of the business's strategic plan.

Flat organization:  One in which technology enables senior managers to communicate directly with those lower in the organizational structure.  Middle managers are bypassed.

Holding company:  A business organization in which the present company holds interests in a number of other companies or subsidiaries.

Integrated international enterprise:  One in which an international company pursues a single business strategy.  It coordinates across different countries.

Transnational association:  A form of business organization in which the subsidiaries of a company in different countries are contractually bound to the parent company to provide output to or receive inputs from other subsidiaries.