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

Monopoly

A monopoly exists when a firm is the sole seller of a product without close substitutes.

How Monopolies Arise

1. Natural Monopoly: Economies of scale allow only one firm to produce the entire output at the lowest average cost.
2. Control of Resources: Ownership or control of essential raw materials or unique production techniques.
3. Legal Protection: Patents, copyrights, and trademarks grant exclusive production rights.

Public Policies Against Monopoly

1. Competitive Legalisation: Banning anti-competitive pricing strategies like price fixing, predatory pricing, or price gouging.
2. Public Ownership: Government operation of a private monopoly.

Price Discrimination

Price discrimination occurs when a firm charges different prices for the same product to different... Continue reading "Monopoly, Monopolistic Competition, and Price Discrimination in Economics" »

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" »

The organizational structure is the framework of hierarchy, relationships, responsibilities, and information flow within a firm. It is shaped by several factors, including company size, international orientation, the number and consistency of product lines, and expansion plans.

Defining Organizational Structure

Dimensions of Activity and Responsibility

• Horizontal: Focuses on the division of *activities*.
• Vertical: Pertains to *authority* and *hierarchical relations*.

Key Organizational Structures for International Operations

Functional Structure

A functional structure groups each portion of the organization according to its purpose, such as a marketing department, a sales department, or a production department.

Export Department

Companies typically... Continue reading "Global Business Organizational Structures" »

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.

Functions of Financial Markets

Price Determination

• When a company has assets listed in a financial market, it can determine their worth.
• Investors can ascertain the value of their investments.
• Markets offer liquidity for investors' assets.

Financial Assets Characteristics

Liquidity

Ease with which an asset can be converted into cash.

Return and Liquidity Relationship

• If an asset is very liquid, the return asked by investors is very low.
• When assets are less liquid, investors demand higher returns.

Risk

The probability of not recovering the principal or the coupons.

Rating agencies analyze the risk associated with issuers.

Types of Financial Markets

Primary Markets

These markets facilitate the issuance of new securities. Investors pay for the assets to the... Continue reading "Financial Markets: Functions, Assets, and Indexes Explained" »

Business Plan vs. Business Model

A Business Plan is a detailed document (typically 50-100 pages) containing extensive financial projections and loan projections. In contrast, a Business Model is a much less detailed, single concept that describes the specific way a business expects to make money. It illustrates the capabilities and resources required to create, market, and deliver value while generating profitable, sustainable revenue streams.

Common Business Archetypes

Key business archetypes include:

• Entrepreneur
• Manufacturer
• Wholesaler
• Inventor
• Contractor
• Financial Trader

Four Key Aspects of a Business Model

The four pillars of a business model are:

1. Offer
2. Customer
3. Infrastructure
4. Finance (including revenue streams and cost structure)

Scalability in Modern

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

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" »

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" »