Notes, summaries, assignments, exams, and problems for Economics

Financial Goals: Profit vs. Wealth Maximization

The basic dictum of financial planning is “the earlier, the better.” According to this principle, Project ‘B’ is often preferable in investment scenarios.

Profit Maximization: Limitations

The profit maximization goal often overlooks critical factors, including the time value of money and the quality of benefits. If predicted earnings are more assured, the quality is high because the range of fluctuation is small. Profit maximization ignores the true value of benefits and does not consider the risks associated with profits.

The following table demonstrates the concept of Quality of Benefits based on Profit per Annum:

5) Family Business Survival Strategies

A study indicates that family businesses often struggle to survive across multiple generations. However, there are four key strategies that can increase their chances of longevity:

Establish Strong Governance

Creating a solid governance framework is essential. This includes attracting and retaining top talent while maintaining a clear separation between the family and the business itself.

Preserve "Family Gravity"

Identify and empower key family members who can align everyone's interests and drive the pursuit of common goals. These individuals serve as motivators and role models within the family and the business.

Early Talent Identification and Development

Invest in developing the skills and potential of family...

Financial Terms

Basic Concepts

• Mortgage: A loan to buy real estate.
• Deposits: Money you put in the bank.
• Pension: Money paid to a retired person.
• Stock/Shares: Securities representing part-ownership of a company.
• Capital: Money invested in a business.
• Bonds: Interest-paying securities issued by companies that need to borrow.

Company Actions

• Takeover: When a company gains control of another by buying its stock.
• Merger: When two formerly separate companies join together.

Financial Institutions

1. Retail Banks: Making loans, receiving deposits.
2. Building Societies: Arranging mortgages.
3. Insurance Companies: Providing pensions, offering life insurance.
4. Investment Banks: Issuing shares or bonds, arranging mortgages, arranging or fighting takeover bids.

Vocabulary

Key

CHAPTER 14

1. Which of the following factors exacerbates the volatility in demand in industrial markets?

Professional buyers tend to act in concert.

2. Why are Japanese and German firms generally better at managing market volatility than American firms?

They value employees and stability very highly.

3. If a country has reached an economic development level where there is a focus on manufacturing of both semi durable and nondurable consumer goods and goods demanded relate to equipment and supplies to support manufacturing, which stage of Rostow's five-stage model of economic growth is the country in?

Takeoff.

4. The perception of quality rests solely with the:

customer.

5. Business-to-business marketers frequently misinterpret the concept of quality.

Cost-Volume-Profit (CVP) Analysis Formulas

Contribution Margin Calculations

• Contribution Margin (CM) per Unit: $P - VC$ (Price minus Variable Cost)
• Total Contribution Margin (TCM): $(P \times Q) - (VC \times Q)$
• CM Ratio: Unit CM / Unit Selling Price
• Variable Expense (VE) Ratio: Unit VE / Unit Selling Price

Break-Even Point (BEP) Determination

1. BEP Equation Method

• Profits: (Sales - Variable Expenses) - Fixed Expenses
• Sales at BEP: Variable Expenses + Fixed Expenses + Profits (where Profits = 0)

2. Contribution Margin Method

• BEP in Units: Fixed Expenses / Unit CM
• BEP in Total Sales Dollars: Fixed Expenses / CM Ratio

Target Profit Calculations (Contribution Margin Approach)

• Unit Sales to Attain Target Profit: (Fixed Expenses + Target Income) / Unit CM
• Dollar

Key Economic Terms

Externalities

Positive or negative effects on third parties not included in the costs of a company without compensation.

Macroeconomics

The study of the economy as a whole for all economic agents in the country. Key variables include CPI, GDP, GNP, aggregate spending, consumption, investment, and unemployment.

Gross Domestic Product (GDP)

The monetary value of the production of final goods and services produced within an economy of a country in a specific time period, usually one year.

Gross National Product (GNP)

Value of final production of goods and services made by firms and production factors for a year.

Economic Policy Instruments

Fiscal Policy

Uses the state budget.

Monetary Policy

Concerns the amount and price of money (interest...

Monopolistic Competition Characteristics

This type of market structure is characterized by:

1. When goods are close substitutes, each firm faces a demand curve that slopes downward.
2. Each of the companies acts as if its own decisions on price and quantity do not affect the behavior of other firms in the industry.

The result of this approach is that the company actually faces two demand curves: one describing the situation when it is the only one to alter the price (the dd curve) and the other describing the situation when all prices change at the same time (the DD curve). In the initial situation where all firms charge p', each selling Q'. If one company lowers its price to P'', it will sell Q''. But if others also lower their prices, each firm will...

The nature and scope of a business refer to the core characteristics and breadth of activities that define it. Here's how they are generally categorized:

Nature of the Business

1. Type of Business:

   • Goods: Involves the production, manufacturing, or distribution of physical products.
   • Services: Offers intangible products like consulting, healthcare, or banking.
   • Hybrid: Combination of goods and services (e.g., retail stores offering products and after-sales services).

2. Industry:

   • The sector in which the business operates, such as technology, healthcare, education, manufacturing, etc.

3. Ownership Structure:

   • Could be a sole proprietorship, partnership, corporation, or limited liability company (LLC), each with distinct legal and financial implications.

4. Business Objectives:

Incoterms: FAS, FOB, CIP, and CPT

What kind of cargo is used for FAS? Why?

Containers are used for FAS because the goods are carried on board a ship.

Which are the two possible cases of delivery for FCA?

• When the goods have been loaded on the transport designated by the buyer or by a person acting on its behalf.
• When the goods are made available to the seller's carrier transport, without being discharged.

Allocation of Costs and Risk for FAS and FOB

The seller is required to deliver the goods alongside the actual ship on the pier. From that point forward, the buyer bears all costs (loading cost, freight, insurance) and risks. Under FAS terms, the buyer is required to clear the goods for export and pay the cost of loading the goods.

Why is it so important

STAKEHOLDERS: groups or people who depend on an organization to achieve their own goals and on whom, in its turn, an organization depends. They can be affected by the goals, actions or behaviours of the firm. Types: Internal (shareholders, directors, managers, employees), External: clients, suppliers, financial institutions, competitors, government..). Some external stakeholders may try to influence the strategy through their relationship with internal stakeholders. POWER/INTEREST: Goals: describe and analyze the stakeholders that can affect firm's strategy, analyze the game of power, manage the power and behavior of stakeholders. Stages: describe stakeholders, asses the power of each stks and potential coalitions, describe the interest of...