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

MARKET VALUE PERFORMANCE MEASURES

MVA

Market Capitalization = (#shares * price per share) - Equity

MTBR

Measures how much value has been added for each dollar that shareholders have invested = MVOEQUITY / BVOEQUITY

MEASURING PROFITABILITY

EVA

Economic Value Add or Residual Income = The profit after deducting all costs including the cost of capital = After-tax operating income (after tax interest + NI) - (cost of capital * total capitalization at the start of the year) = ((1- tax rate)(interest expense) + NI) - (cost of capital)(long term debt + total equity beginning of year)

ROE

NI / Equity start

ROA

(1-tax rate) * interest expense + NI / Total Assets start

ROC

(1- tax rate) * interest expense + NI / LTD start + Equity start

MEASURING EFFICIENCY

How effectively... Continue reading "Financial Performance Measures and Analysis" »

Understanding Poverty

Defining Poverty

Relative poverty refers to economic inequality within a society. Individuals or groups experiencing relative poverty have less access to goods and services compared to others.

Absolute poverty signifies the lack of resources to meet basic human needs, such as water, food, sanitation, shelter, clothing, and education.

People Affected by Poverty

Individuals facing poverty often experience disadvantages, including limited access to quality education and increased health risks.

Causes of Poverty

1. Unemployment or Underemployment: Lack of sufficient work opportunities to earn a living wage.
2. Old Age: Insufficient income after retirement.
3. Ill Health: Mental and physical health issues can hinder employment and increase expenses.

Financial Analysis Techniques

Sensitivity Analysis

• Considers changes in variables, only one change in each simulation.
• Provides a tool to answer “what if” questions.
• By comparing changes in different variables, we can assess project risks and make decisions accordingly.

Scenario Analysis

• Considers changes in two or more variables simultaneously.
• Allows consideration of the best and worst-case scenarios.
• Requires a large number of simulations.
• By comparing different scenarios, we can assess project risks.

Break-Even Analysis

• The Break-Even point is the level of sales that offsets all costs.
• It can be calculated in terms of profit or cash flow.
• It must assume a certain sales mix if the product contributions are different.

Monte Carlo Simulation

• Statistical

High Hourly Wage Rate

High hourly wage rate: Workers are paid according to the amount of hours they work. A "high" hourly wage means being paid a significant amount of money per hour.

Piece Rate Element

Piece Rate Element:

• Employees: The amount they earn is directly associated with their effort, encouraging them to produce more efficiently. However, it may not be convenient for workers who prioritize quality over quantity.
• Employer: More production potentially leads to increased profits. However, workers who rush might compromise quality.

Responsibility and Motivation

Responsibility motivates workers: Giving employees responsibility can create a sense of importance, making them feel appreciated and valuable. However, some workers may find responsibility... Continue reading "Understanding Business Concepts and Strategies" »

ARO: It has an exiting legal obligation Associated with the retirement of a long lived asset and when it can reasonably Estimate liability

Liabilities are obligations arising from past transactions and payable in assets or services in the future.

Cr Liab:obligations whose liquidation is Reasonably expected to require use of existing resources properly classified

Op. Cycle: is the time It takes to convert cash into cash again

Contra: account with a balance that is the Opposite of the normal balance.

sinking: is set up to receive periodic Payments .. Provision to pay off a loan over its life rather than all at Maturity.

Notes Payable: written Promise to pay a sum of money on a specified date-interest component-May be Non-interest bearing.

Zero: is a... Continue reading "Legal monism" »

OLIGOPOLY

A market structure characterized by a small number of sellers, each offering products that are similar or identical to those of their competitors. Examples of oligopolistic industries include chocolate bars, brewing, banking, oil, and supermarkets.

CONCENTRATION RATIO

The proportion of the total market share held by the top firms in an industry. For instance, a five-firm concentration ratio of 80% indicates that five companies control 80% of the market share.

GAME THEORY

The study of how individuals make decisions in strategic situations, considering the potential responses of others to their actions. Game theory is crucial for understanding oligopolies, as firms in these markets must act strategically due to the limited number of competitors.... Continue reading "Understanding Oligopolies: Market Structure, Game Theory, and Cooperation" »

Central Banks and Shadow Banking

Competencies of Central Banks

• Monetary Policy (open market operations)
• Exchange Policy
• Lender of Last Resort
  • Bank of Banks
  • Bank of the State (In the US but not in Europe)
• Supervision of the Financial System

Banks create credit, money, and thus purchasing power. The ability to create credit and purchasing power, for good or ill purposes, is not unique to banks.

Shadow banking activities can create credit and money equivalents outside the normal banking sector. Central banks have not been able to counter the unsustainable shadow banking boom and have lost the capacity to control the quantity of money.

History of the Spanish Financial System

The modern history of Spanish banking begins in 1856. The Parliament approved two... Continue reading "Central Banks, Shadow Banking, and Spanish Financial History" »

Perfect Competition Properties

• P=MR
• Many Producers
• Homogeneous Product
• Many Buyers
• Price Taker
• Complete Knowledge of Input and Producer Prices
• Easy Entry and Exit

Monopoly Properties

• Heterogeneous Product
• One Producer
• Many Buyers
• Difficult Entry
• Producers Decide Price

Monopolistic Properties

• Many Buyers & Producers
• Slightly Differentiated Products
• Good Substitutes
• Easy Entry and Exit
• Producers Decide Prices

Oligopoly Properties

• Small Number of Firms
• Homogenous or Heterogeneous Product
• Price Decided by Firms
• Non-Price Competition

Optimum Output Conditions

TP= TR-TC, TP Slope = Derivative TP/ Derivative Q, if = 0 Profit is Maximum, MR=MC

1. MR=MC
2. Rising MC
3. P=Minimum AC
4. Zero Economic Profit

Slope MR is Horizontal, Per Unit Profit = P –AC, Total Profit = (P-AC)Q

Profit Situation=... Continue reading "Understanding Market Structures and Optimum Output Conditions" »

Special Pricing Strategies

1. For a New Product

Different stages in a product’s life cycle involve different goals, which require different pricing strategies.

A. Market-Skimming Price

Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price; the company makes fewer but more profitable sales. Example: Apple introduces new products with high prices, and then, when the new model is introduced, the older model decreases in price.

Conditions:

• Good quality and image
• Enough buyers
• Profitable → revenues can’t be offset by the costs of producing on a small scale
• Competitors can’t enter easily

B. Market Penetration Price

Setting a low price for a new product in order to attract a large number... Continue reading "Effective Pricing Strategies for Businesses" »