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Microeconomics

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Updated 2009-02-26 16:16

Microeconomic Terminology

TermDefinition
Consumer's Budget constraintSet (or the equation that defines this set) of consumption bundles that cost just as much as the consumer has to spend.
CapitalAssets created by investment and usable in production.
Physical capitalConsists of equipment and structures.
Human capitalConsists of knowledge and skills.
Certainty effectInvolves choice of a certain prize over an alternative offering only uncertain prospects (an instance of Allais's paradox).
Comparative advantageA production unit has a comparative advantage in a good if it can produce the good at lower opportunity cost than other units.
ComplementsA pair of goods such that an increase in the price of one tends to reduce demand for the other.
Composite goodA basket or collection of goods whose prices are constant or changing proportionately to each other. If the prices are constant, the composite good can be conveniently measured in units costing $1.00.
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Business Plans

Question Answer
A business plan...- precisely defines your business
- identifies your goals
- serves as your firm's resume
The basic components include...- a current and pro forma balance sheet
- an income statement
- a cash flow analysis
Business plans help you...- allocate resources properly
- handle unforeseen complications
- make good business decisions -
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Misc

TermDefinition
Specifict-Unit Cost MethodBased on the specific cost of peticular units
FIFO Inventory Costing Methodthe first costs into inventory are the first cousts out to cost of goods sold
LIFO Inventory Costing Methodthe last costs into inventory are the first costs out to cost of goods sold
Average-Cost methodbased on the average cost of inventory during the period
Consistency PrincipleA business should use the same accounting methods and procedures from period to period.
Disclosure Principlefinancial statements must report enough information for outsiders to make knowledgeable decisions about the company.
Materiality ConceptA company must perform strictly proper accounting only for items that are significant to the business's financial statements.
ConservatismReporting the least favorable figures in the financial statements.
Lower-of-Cost-or-MarketRule that an asset should be reported in the financial statements at whichever is lower-its historical cost or its market value.
Gross Profit MethodA way to estimate inventory on the basis of the cost-of-goods-sold model:
Cost of goods sold formulaBeginning inv + purchases = cog available for sale - ending inv = cost of goods sold
Ending inventory formulaBeginning inv + purchases = cog available for sale - cost of goods sold (sales - gross profit = cogs) = ending inventory
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