ECON fuck Flashcards
Please give a definition of costs?
- Amount sacrificed to achieve a particular business objective
What are opportunity costs?
- the value in monetary terms of being deprived of the next best opportunity in order to pursue the particular objective
- Opportunity cost simply refers to the concept that if a person or company does X, the person or company necessarily cannot also do Y. There are only finite resources available in most cases (time, money, etc)
e.g: it is unwise for a company to invest $ 1 million in a project, earning $ 3 million if that same investment prevents it from investing the $ 1 million in another opportunity that would earn $ 10 million
thus opportunity cost can be defined as the loss of incremental profit of $ 7 million (10 -3 $ million)
What is the cost function? What does it include?
- The total cost function is the relationship between output and the lowest possible cost of producing a given output
- Total cost = Fixed cost + Variable cost
- Average cost = total cost / quantity
- Marginal cost = rate of change in total cost with respect to output
What are the total costs?
Total Cost = Fixed Cost + Variable cost
- If the firms is producing efficiently, the total cost will increase with output
- Costs can be classified into fixed and variable costs
- Some costs may be semi-fixed and they are constant over a range of output
- When a firm increases its cost, fixed cost will not remain constant
What´s the break even point and what does it tell you?
- How much should the revenue be to pay for the costs
- Break-even point = no profit & no loss
- When costs are too high
- When the company is economically sustainable
What are the weaknesses of BE analysis?
- there are non-linear relationships between costs, revenues and volume
- there may be stepped fixed costs. Most fixed costs are not fixed over all volume of activity
- multi-product business have problems in allocating fixed costs to particular activities
What are the average costs?
- Can vary with output. If it does not it has constant returns to scale
- when AC decreases (increases) with output there are economies (diseconomies) of scale
- A given process may have economies of scale over one range of output and diseconomies in another
How are the average costs related to the units of output?
- The average cost function AC (Q) shows the firm’s average, or per-unit cost for any level of output (Q)
- Average costs are not necessarily the same at each level of output
- Average costs decline initially as fixed costs are spread over additional units of output
- Average costs eventually rise as production runs up against capacity constraint
On what does the quantity of a product a firms is able to sell depend upon?
- The price of the product
- The prices of related products
- Income and taste of the consumers and so on
What´s the demand curve?
- When all other variables are held constant the price the firm changes and the quantity the firm cans sell is inversely related
The demand curve reports:
- The quantity bought of various prices and
- The highest price the market will bear for a given output
When don´t we have a downward sloping demand curve?
Downward sloping demand curve exist for most product
The exceptions are when:
- Price signals quality
- Price implies prestige
What´t the swot analysis?
- Strengths and weaknesses are often internal to your organization
- Opportunities and threats generally relate to external factors
Swot analysis: What does strength refer to?
- what advantages does you organization have
- what do you do better than anyone else?
- what do people in your market see as your strengths
- what product attributes “get you the sale”?
e.g: our lead consultant has strong reputation in the market or we have low costs, so we can offer good value to customers
Swot analysis: What does weakness refer to?
- what could you improve?
- what should you avoid?
- what are people in your market likely to see as weakness?
- what factors loose you sales?
e.g: our company has little market presence or reputation or we have a small staff, with a shallow skill base in many areas
Swot analysis: What do opprtunities refer to?
- what good opportunities can you spot?
- what interesting trends are you aware of?
- changes in government policy
- changes in social patterns, population profiles, lifestyle changes and so on
e.g: local government wants to encourage local business
Swot analysis: What do threats refer to?
- what obstacles do you face?
- what are your competitors doing
- is changing technology threating your position?
- do you have bad debt or cash flow problems?
e.g: developments in technology may change the market beyond our ability to adapt
What´s benchmarking and how does it help companies?
Process of measuring products, services and practices against those of the toughest competitions or renowned leaders
Helps companies in:
- Boosting product quality
- Developing more user-friendly products
- Improving customer order processing activities
- Shortening delivery load times
What´s the purpose of a performance measurement?
It´s to improve:
- Financial management: efficient and effective use of finance
- Business organisation: profit, ROI
- Motivation and control of the organisation
What are possible tools for financial management?
- Cash flow planning: availability of cash when needed
- Profitability: need to acquire resources at a greater rate than using them
- Assets and finance: balance sheet
What the cash flow?
- Cash is vital to long term trading
- Cash inflow from e.g: sales
- Cash outflow from e.g: costs of goods or labour
- More money spent than received = negative cash flow
- Cash is a ‘liquid asset’
- Available for investment
- Avoids having to seek credit or loans
What´s the The cash flow cycle?
- balances cash inflow against cash outflow
lack of cash can:
- lead to business failure
- affect the business reputation
How can a businesses improve it´s cash flow?
- pay as little interest as possible
- pay debts on time; consolidate at low interest
- negotiate payment terms with suppliers
- avoid offering discounts
- make better use of assets
- e.g. hire out warehouse space
What are operations management perspectives?
- Quality
- Flexibility
- Speed and dependability
- Cost
- Quantity
What the Price elasticity of demand?
- Elasticity is the sensitivity of the demand to changes in price
- Elasticity is the percentage change in quantity brought about by a percent change in price
Check formula
When can the demand be described as elastic?
- the product is undifferentiated
- expenditure on the product is a smaller fraction of the total expenditure
- the product is an input in the production of a final good
- there are readily available substitutes
When can the demand be described as unelastic?
- complexity of the product makes comparison difficult
- information about substitutes is scarce
- cost is not fully borne in market price
- switching to other products is costly
- product is used jointly with other products to which the customer is committed
Please explain the concept of game theory?
- in game theory, a game is a formal model of an interactive situation
- a model of optimally taking into consideration not only benefits less costs, but also the interaction between participants
- game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions
- when there are few firms in the industry, firms will have to consider the reaction of the rivals
- game theory is useful in these “small number” contexts
- in game theoretic models each player anticipates the actions and reactions of its competitors
How do pricing decisions influences the Demand and what are cosiderations before changing price?
- primarily concern the nature of the target market and expect reaction of consumers to a given price or change in price
primary considerations
- demographic factors
- physiological factors
- price elasticity
What are possible Demographic factors in the context of Pricing strategy?
- no. of potential buyers
- location of potential buyers
- position of potential buyers
- expected consumption rates of potential buyers
- economic strength of potential buyers
What are possible Types of psychological pricing strategies?
- prestige pricing: involves charging a high price to create a signal that the product is exceptionally fine
- odd pricing: prices are set at one or a few cents or dollars below a round number in order to create the perception that the price is low
- bundle pricing: involves selling several products together at a single price in order to suggest a good value
What are the pricing objectives?
- pricing objectives should be derived from overall marketing objectives which in turn should be derived from corporate objectives
Include
- achieving a target return on investment
- stabilization of price and margin
- achieving a target market share
- meeting or preventing competition
What are possible in pricing strategys and how they relate to the costs?
- price of a product must cover costs of production, promotion and distribution
- markup pricing: involves adding a percentage to the invoice price in order to determine the final selling price (retailing)
- cost-plus pricing: totalling of the costs of producing a product or completing a project and then adding on a percentage or fixed profit amount (manufacturing)
- rate-of-return pricing: involves adding a desired rate of return on investment to total costs (manufacturing)
What are advantages and disadvantages of the Break-even analysis when it comes to pricing decicions?
Advantages
- simplicity
- yields a good pricing decision
Disadvantages
- little or no consideration to demand factors
- fails to reflect competition adequately
What are Product considerations in the context of pricing decisions?
Life cycle
- skimming policy: seller charges a relatively high price on a new product initially and then lowers the price at a later date to make sales to met price – sensitive buyers
- penetration policy: seller charges a relatively low price on a new product initially in order to grow a market, gain market share, and discourage competitors from entering the market
How does the internet and a changed business enviroment affect pricing decisions?
Internet
- has made prices much easier for consumers and organizational buyers to compare
- has forced marketers to be much more transparent in their pricing strategies
When does the gouvernment regulate the pricing decisions?
- price fixing: competitors in a market collude to set the final price of a product
- deceptive pricing: involves price deals that mislead the consumer
- price discrimination: charges different prices to different buyer for goods of like grade and quality
- predatory pricing: involves charging a very low price for a product with the intent of driving competitors out of business
What are the main points to consider when setting up a general pricing model?
- set pricing objectives
- evaluate product-price relationships
- estimate cost and other price limitations
- analyse profit potential
- set initial price structure
- change price as needed
What do marketers need to consider when evaluating a product price and how can the product then be priced?
marketers need to consider:
- what value the product has for customers
- how price will influence product positioning
product could be priced
- relatively high for a product class: if it offers value in the form of high quality, special features, or prestige
- average for the product class: if it offers value in the form of good quality for a reasonable price
- relatively low for a product class: if it offers value in the form of acceptable quality at a low price
- value pricing: setting prices so that targeted customers will perceive products to offer greater value than competitive offering
How can costs and other price limitations be estimated?
Costs
- to produce and market products provide a lower bound or pricing decision and a baseline from which to compute profit potential
Other price limitations
- government regulations
- prices charged by competitors for similar and substitute products
How can the sales be increased?
- Quantity discounts: discounts for purchasing a large number of units
- Promotional allowances: price reduction offered to channel members in exchange for performing various promotional activities
- Slotting allowances: payments to retailers to get them to stock items on their shelves, a common tactic for getting new products into stores “listing fees”
What does the Balance sheet tell us?
- summarizes the financial condition of the business at a point in time
- estimates net worth of owner equity:
= assets – liabilities - most transactions affect the balance sheet, so it may change daily
- everything “owned” and “owed” by a business or individual at a given point in time
Asset: anything of value owned
Liability: any debt or other financial obligation owed to someone else
What´s an asset?
- an asset can be sold to generate cash
- used to produce other goods to be sold and create cash
- difference between liquid (grain, apples) and non-liquid assets (machinery, land, etc.)
- non-liquid because their selling would affect liquid assets creation
What are current and non current assets?
Current assets
- goods that have already been produced and can be sold quickly without disrupting future production activities
- goods that will be used up or sold within the next year
Non-current assets
- any asset that is not a current asset
- assets that are owned primarily to produce output, that will be sold to produce revenue
- selling non-current assets to generate revenue would affect the firm’s ability to produce future income
- more difficult to cell quickly and easily at their full market value
What are Liabilities?
- an obligation or debt owed to someone else
- an outsider’s gain against one or more assets of the business
What are Current liabilities and non Current liabilities?
Current liabilities
- financial obligation that will become due and payable within 1 year (require cash available within the next year)
Non-current liabilities
- all obligations that do not have to be paid in full within the next year
What the owner equity?
- the amount of money left for the owner if the assets were sold and all liabilities paid
- called Net Worth
- OE (Owner equity) is the owner’s current investment are equity in the business
- owner equity = total assets – total liabilities
What´s the Balance sheet anlysis?
- used to measure the financial condition of the business (management tool):
- compare to other, but similar business
- compare to the same business over time
- lenders use balance sheet analysis to make lending decisions and to monitor, the fincancial progress of their customers
- to deal with relative size issue, use what?
Please explain the concept of liquidity and how we can meassure it?
- ability of the business to generate cash
- short-term measure
- measure the ability to meet financial obligations
- as they come due
- without disturbing normal revenue generating activities
Current ratio: current assets ÷ current liabilities
Please explain the concept of slovency?
- measure the degree to which liabilities are backed up by assets
- measures liabilities relative to owner equity
- analyses the business debt, that is the ability to pay off all liabilities if all assets were sold
- relations among asset, liabilities, equity
What´s an income statement?
- a summary of revenue and expenses for a given accounting period otherwise called
- purpose is to measure the difference between revenue and expenses
- a positive difference indicates a profit
- a negative difference indicates a loss
What´s the reveue?
- includes all business revenue earned during the accounting period, before any costs or expenses are deducted
- called “top line” or “gross income”
- also called sales or turnover (UK)
What are expenses?
- expenses ocurre in producing the revenue
cash expenses
purchase of and payment for feed, fertilizers, seed, market livestock, fuel
non-cash expenses
- decrease in value of assets used to produce the revenue
- accounts payable, accrued interest, other accrued example: for e.g. property taxes
How is the income used?
Net farm income must end up in one of favour uses
- owner withdrawals for family living expenses
- payment of income and social security taxes
- increase in cash or other from assets
- reduction in liabilities through principal payments on loans or payment of other liabilities
What´s Profitability?
- measures efficiency in using resources to produce profit
- “profitability” is a relative measure and several factors influence whether acceptable or not:
- what you are trying to accomplish (goals ??)
- size of the business
- what is acceptable to other: investors, family members, other owners, etc.
How can profitability be analyzed?
- Net farm Income
- Rate of return-on farm assets (ROA, RO
- Rate of return-on farm equity (ROE)
- Operating profit margin ratio
