lundi 25 novembre 2013

The Firm and its Goals



The Firm and its Goals

The Firm
Ø  A firm is a collection of resources that is transformed into products demanded by consumers
Ø  Profit is the difference between revenue received and costs incurred
Ø   Transaction costs are incurred when entering into a contract
Types of transaction costs: investigation, negotiation, enforcing contracts.
Ø  Transaction costs are incurred when entering into a contract
Influences : Uncertainty , frequency of recurrence , asset specificity
Ø  Limits to firm size
-          tradeoff between external transactions and the cost of internal operations
-          company chooses to allocate resources so total cost is minimum
-          outsourcing of peripheral, non-core activities

Economic goal of the firm
Ø  Profit maximization hypothesis: the primary objective of the firm (to economists) is to maximize profits
   Other goals include market share, revenue growth, and shareholder value
Ø  Optimal decision is the one that brings the firm closest to its goal

Ø  Short-run versus Long-run
·         nothing to do directly with calendar time
·         short-run: firm can vary amount of some resources but not others
·         long-run: firm can vary amount of all resources
·         at times short-run profitability will be sacrificed for long-run purposes

Goals other than profit
Ø  Economic goals
·         market share, growth rate
·         profit margin
·         return on investment, Return on assets
·         technological advancement
·         customer satisfaction
·         shareholder value
Ø  Non-economic objectives
·         good work environment
·         quality products and services
·         corporate citizenship, social responsibility
Do companies maximize profit?
Ø  Criticism: companies do not maximize profits but instead merely aim to satisfice, which means to achieve a satisfactory goal, one that may not require the firm to ‘do its best’
Ø   Position and power of stockholders
Ø  Position and power of management
Ø   Counter-arguments which support the profit maximization hypothesis
Two major types of risk:
Ø  Business risk involves variation in returns due to the ups and downs of the economy, the industry, and the firm
   All firms face business risk to varying degrees
Ø  Financial risk concerns the variation in returns that is induced by ‘leverage’
   Leverage is the proportion of a company financed by debt
o   the higher the leverage, the greater the potential fluctuations in stockholder earnings
o   financial risk is directly related to the degree of leverage




 

  

lundi 18 novembre 2013

ECONOMICS FOR MANAGERS



ECONOMICS  FOR MANAGERS
Ø  Economics and managerial decision making
Economics : The study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources
Management : The science of organizing and allocating a firm’s scarce resources to achieve its desired objectives
Managerial economics : The use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources
Management science: linear programming, regression analysis, forecasting
Strategy: types of competition, structure-conduct-performance analysis
Managerial accounting: relevant cost, breakeven analysis, incremental cost analysis, opportunity cost

Ø  Questions that managers must answer:
o   What are the economic conditions in our particular market?
§   market structure?
§   supply and demand?
§   technology?
§  government regulations?
§   international dimensions?
§   future conditions?
§   macroeconomic factors?
o   How can we maintain a competitive advantage over other firms?
§   cost-leader?
§   product differentiation?
§   market niche?
§   outsourcing, alliances, mergers?
§   international perspective?

Ø  Economics of a business

The economics of a business refers to the key factors that affect the firm’s ability to earn an acceptable rate of return on its owners’ investment
The most important of these factors are
·         competition
·         technology
·         customers

Ø  Review of economic terms
Microeconomics is the study of individual consumers and producers in specific markets, especially: supply and demand, pricing of output, production process, cost structure ,distribution of income
 Macroeconomics is the study of the aggregate economy, especially: national output (GDP), unemployment, inflation, fiscal and monetary policies, trade and finance among nations
Resources are inputs (factors) of production, notably: land ,labor ,capital entrepreneurship
Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people
Opportunity cost is the amount (or subjective value) that must be sacrificed in choosing one activity over the next best alternative
Allocation decisions must be made because of scarcity. Three choices:
                 What should be produced?
                  How should it be produced?
                   For whom should be produced?
Entrepreneurship is the willingness to take certain risks in the pursuit of goals
Management is the ability to organize resources and administer tasks to achieve objectives