Exam 1 study guide Flashcards
What are industry supply/demand curves different from individual ones?
An individual business or consumer is not large enough to drive the industry price curve. An individual will buy however many units they want of something at their max price, and that’s it. An individual business will sell their goods at market price, or not at all.
What’s the difference between and commodity and a product?
Commodity - indistinguishable from any other similar product on the market. Who makes it or where it comes from does not matter. Ex: No. 1 red oak lumber dried to 6% M.C.
Product - who made it and where it comes from does matter. Ex: timber frame house
Commodities get sold at market price. Products are sold using the cost-plus pricing model, there really is no market price per se.
Explain these charts
Qd = quantity demand
Qs = quantity supply
P1/P2 = set price in example
Pe = market price
Suppliers must price their goods at market price if they wish to sell them. Price it too low, and the supply will not keep up with the demand (shortage). Price it too high, and you will end up with a surplus of goods that will remain unsold until the price is adjust to match the market. Prices will always adjust to balance the demand.
Define residual
What is left over after other things have been subtracted and allowed for
In calculating the flow of money for forest products, who gets paid last in the calculation? Why?
The landowner
The value of lumber is fixed by the market. The upper limit of stumpage (what the landowner is paid for standing trees) is the upper limit of the log price (what the sawmill pays the logger) minus logging costs (what it costs to get the tree out of the woods and to the market). The stumpage is the residual (what is leftover) in this calculation.
Forest stands that are fully stocked, well managed for high quality trees, and easier to access with closer proximity to the sawmill will result in higher stumpage fees.
What is this formula used for? What do the variables mean?
To find the net present value (NPV or NPW) of a single sum
V0 = value now or at year 0
Vn = value n years in future
n = years of project
i = interest rate, discount rate
What is this formula for and what are the variables?
Future value of a single sum
Vn = value after n years
V0 = value now or in year 0
n = years of project
i = interest rate, discount rate
What is this formula for? How does it work and what are the variables?
Find the present value of an annual series of payments
Payments (A) occur every year for “n” years
Formula discounts to one year before the first payment
V0 = value 1 year prior to first payment
A = annual payment
n = years of project
i = interest rate, discount rate
What is this formula called? What does it do? What are the variables?
earnings rate equation
Tells you at what rate (“i”) V0 compounds to Vn after “n” years
How do you calculate the value of an investment at the end of the year with interest?
principle x (1 + i)
How do you calculate compound interest on an investment over n years?
Vn = V0(1 + i)n
Vn - value “n” years in the future
V0 - value today
n - years compounded
i - interest rate
Explain how you’d build an “i” value, and why you would do this
We could use this to figure out how much we need our investment to grow in order to cover our costs, risk, and inflation.
Basically find your values for inflation, risk, and opportunity cost (in .00x format)
add 1 to each, multiply those results by each other (1.00x)(1.00x)(1.00x)
subtract 1 from total [(1.00x)(1.00x)(1.00x)]-1
multiply by 100 {[(1.00x)(1.00x)(1.00x)]-1} x 100
Explain how to change between currencies
For example, if the exchange rate for British pounds is £1 = $1.30, how would you figure out what a $15,000 load of lumber costs in £?
For example, if the exchange rate for British pounds is £1 = $1.30, how would you figure out what a $15,000 load of lumber costs in £?
Take the original currency ($ in this example) and multiply it by the exchange rate, using the original currency ($) in the denominator so that the original currency units cancel out:
$15000(£1/$1.30)
