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

What is a Firm?

Let us now try to understand the meaning of a 'firm'. A firm is a focal point of the production system of any country. A firm produces goods with the help of its own resources. Sometimes these resources are borrowed from outside, and they are paid remuneration (price) for using them, for example, land, labor, capital, etc. A firm is an organizational unit, while a plant is a 'technical unit'. The objective of a firm in organizing such factors of production is to maximize profit. In other words, profit is the main objective of a firm. Any decision of a firm is taken in accordance with this objective.

Two Views of a Firm in Business Economics

In business economics, a firm is considered in two ways:

1. From the theoretical point of view.

Characteristics of Entrepreneurship

• Economic and Dynamic Activity
• Related to Innovation
• Profit Potential
• It is a Continuous Process
• Risk Bearing
• Entrepreneurship is a Philosophy
• Discipline

Need and Importance

• Development of Managerial Capabilities
• Creation of Organization
• Improve Standards of Living
• Means of Economic Development

Types of Entrepreneurs

• Innovative Entrepreneur
• Imitating Entrepreneur
• Fabian Entrepreneur
• Drone Entrepreneur

Qualities of an Entrepreneur

• Innovativity
• Extremely Energetic
• Self-Confidence
• Risk Taker
• Future-Oriented
• Responsible
• Decision Taker
• Collective Analysis of Facts
• Flexibility

Functions of Entrepreneurship

• Risk Bearing
• Organizational
• Innovative
• Managerial
• Decision Making

Role of Entrepreneur in Small Business

• Wealth Creation
• Create Jobs
• Balanced Regional

Theme II: The Development of the Global Economy

5. Japan's Post-War Economic Growth

I. Role of Government

• Growth-driven policies and focused leadership
  • The Liberal Democratic Party (LDP) mostly ruled after 1955.
  • A cohesive unity of bureaucrats and politicians made up competent policymakers focused on achieving economic development and self-reliance.
  • Tight policy coordination was known as the "Iron Triangle."
  • The Yoshida Doctrine was implemented in the early 1950s.
  • Ikeda's Income Doubling Plan was introduced in the early 1960s.
  • Sato's Three Non-Nuclear Principles were established in the early 1970s.
• Heavy government involvement in the free market
  • The Ministry of International Trade and Industry (MITI) decided, charted, and planned Japan's industrial and

Forward Exchange (EUR/SEK):

x = Exchange rate * (1 + SEK interest rate) / (1 + EUR interest rate).

CAP: Establishes an upper limit on interest rates. Floor: Establishes a lower limit on interest rates. EBITDA: Higher than net income. ROE: Return on Equity. For the equity the company provides, it generates an operating income of X annually.

Theoretical Semiannual Euribor:

(1 + First-half rate) * (1 + Second-half rate) = (1 + Annual rate).

Nominal Exchange Rate: (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level.

Spot Market: Notional amount * (1 / Current exchange rate - 1 / Initial exchange rate). Positive value means that in 9 months the spot market will be more expensive.

FXA (Foreign Exchange Agreement): Notional amount * (1... Continue reading "Understanding Forex, Financial Ratios, and Country Competitiveness" »

Competitiveness and Trade

Nominal Exchange Rates

When our currency's value increases, our competitiveness decreases, and importations increase in relative terms.

Price Levels

• Our Country: If prices in our country increase, our exports decrease, and imports increase.
• Foreign Country: If prices in foreign countries increase, our competitiveness increases, benefiting our exports, and our imports decrease.

Foreign Exchange Market

• Price Determination: The exchange rate between countries is established based on supply and demand.
• Hedging: Protection against currency fluctuations, safeguarding investors and businesses from losses due to currency appreciation or depreciation.
• International Finance: Countries can lend and borrow money by converting currencies.

Equity and Financial Concepts

Free Cash Flow (FCF)

FCF_t = EBIT + DEP - CAPEX - ΔWC - TAX

ΔWC = Δreceivables + Δinventories - Δpayables + Δother items

TAX = (EBIT-Y_t)*T = EBIT*T - Y_tT

FCFE = FCF_t - Y_t - PRINC_t

FCF_t^u = FCF_t - Y_tT

Y = k_dD₀ (interest paid is cost of debt*value of debt)

Standard WACC

k_s=(1-L)k_e + Lk_d(1-T) | Use Standard WACC with FCF_u | ITS is not included in both FCF_u & k_s | Need Constant Target Leverage Ratio (L)

k_e = reflects operating and financial risk faced by investors | k_u = unlevered cost of equity (if firm had no debt), reflects operating risk

V₀ = U₀ + I₀ (Enterprise Value = value of operations + value of ITS) | Leave space for Standard WACC equation if k_its = k_d OR k_its = k_u

Standard WACC model implicitly assumes k_its... Continue reading "Understanding Equity, WACC, and Discount Rates in Finance" »

Representation of Preferences by Indifference Curves

An indifference curve shows the consumption baskets that yield the same level of satisfaction to the consumer. The consumer is indifferent between various combinations within the indifference curve. The slope at any point on an indifference curve is equal to the rate at which consumers are willing to substitute one good for another. This relationship is called the marginal rate of substitution (MRS). The rate at which a consumer is willing to trade Pepsi for pizza depends on who has more hunger or thirst, which depends in turn on how much pizza and Pepsi they have.

As a consumer prefers a larger quantity of goods, they prefer higher indifference curves to lower ones.

Four Properties of Indifference

Direct and Indirect Exporting

• Exporting
  • Exporting can be direct or indirect.
  • In direct exporting, the company sells to a customer in another country.
  • The Internet is becoming increasingly important.

Exporting may be done passively or actively. Passive exporting occurs when a business receives orders from abroad without actively looking for them. Active exporting involves developing policies for setting up systems for organizing the export function and for dealing with export logistics, documentation, and finance.

With indirect exporting, intermediaries handle most aspects of export deals. Returns are obviously lower. You lose control over final selling prices.

• Indirect Exporting: Products are sold to a third party who then sells them within the

Main Goals of Central Banks

Primary Objectives

• Promote steady growth in national output.
• Maintain low unemployment rates.
• Ensure stable and orderly financial markets.

Monetary Policy Actions

Inflation Rising

• Central Bank raises interest rates to reduce price pressures and slow down the economy.

Sluggish Economy

• Central Bank lowers interest rates to boost aggregate demand, output, and reduce unemployment.

Creation of the Federal Reserve System (1907)

• Comprises 12 regional Federal Reserve Banks.
• Key roles include:
  • Conducting monetary policy.
  • Supervising and regulating banks.
  • Ensuring financial stability.
  • Providing financial services to government and public.

Monetary Policy Instruments

Interest Rate

Primary tool for adjusting economic activity.

Open Market Operations

Buying/... Continue reading "Central Bank Functions and Monetary Policy" »

Multiple Choice Questions

Choose the correct option:

1. Concepts studied under Microeconomics.

   (a) National Income (b) General Price Level (c) Factor Pricing (d) Product Pricing

   Options: (i) a & b (ii) b & c (iii) c & d (iv) only b

   Ans: Option (iii) c & d

2. The law of DMU is important to

   (a) Producer (b) Consumer (c) Government (d) None of the above

   Option: (i) a & b (ii) b & c (iii) d (iv) a, b & c

   Ans: Option (iv) a, b and c

3. When price falls demand

   (a) Rises (b) Contracts (c) Remains constant (d) Becomes Negative

   Option: (i) a (ii) b (iii) c (iv) d

   Ans: Option (i) a

4. Product differentiation is possible in the following market

   a) Perfect competition. b) Monopoly c) Monopolistic competition. d) All of the above

   Option: (1) a &