Differences Between Debt and Equity Capital

Started to learn about financial management this month, it's my 7th MBA course. The following link is a useful resource to learn about the Differences Between Debt and Equity Capital:

http://www.sba.gov/smallbusinessplanner/start/financestartup/SBA_INVPROG.html

Posted at 01:46PM Jul 10, 2007 by byuan in Economics  |  Comments[1]

Specialization and win-win from trade

Specialization and trade increase the productivity of both sides'
resources and allow for greater total output than would otherwise be
possible, here is an example:

Assume company A can produce either
15 software products or 6000 servers per year, and
company B can produce either 30  software products or 9000 servers per year. If both of them produce both servers
and software products, then the following might be their productivities:

Company A's production possibilities table (resources for one software can introduce 6000/15=400 servers):

Software products	15	10	9	5	0
Servers	0	2000	24000	4000	6000

Company B's production possibilities table (resources for one software product can introduce 9000/30=300 servers):

Software products	30	20	19	10	0
Servers	0	3000	3300	6000	9000

Assume both companies need and produce both servers and software products themselves without trade, then the following might be their current
productivities:

 Company A:

Software products    9

Servers              2400

Company B: 

Software products    19

Servers              3300

However, if company A only produces software products while company B only
produces servers, and they trade servers and software products with one software product = 350 servers  (average of 300 and 400), then the following
would be the overall output:

Company A: 

Product	Quantity	Comments
Software products	10	Sell 3500 servers to company B to get 10 software products
Servers	2500	Produced 6000, sold 3500 to company B

Company B:

Product	Quantity	Comment
Software products	20	Produced 30, sold 10 to company A
Servers	3500	Sell 10 new features to company A to get 3500 servers

Now you can see it's very obvious that through specialization and
trade, comapny A gets 100 more servers and one more new software
feature, while company B gets one more software product and 200 more servers than they would get if both of them produce both servers and
software products. And this is a win-win!

Posted at 09:09PM Dec 08, 2006 by byuan in Economics  |  Comments[1]

Price Elasticity of Demand

Last time I talked about the law of demand, it tells us that consumers
will buy more of a product when its price declines and buy less when
its price increases. But how much more or less will they buy? In order
to increase revenue, whether you should increase or decrease the price
of a product? My answer was to increase price before I learned about
price elasticity, now my answer is it depends :-)



It depends on the responsiveness (or sensitivity) of consumers to a
price change, this is measured by a product's price elasticity of
demand:

For some products - for example, restaurant meals - consumers are
highly responsive to price changes, they may order other items or even
never come again if a restaurant increases the prices of some items.
The demand for such products is elastic.



For other products, for example, salt - consumers pay much less
attention to price changes, substantial price changes cause only small
changes in the amount purchased. The demand for such products is
inelastic.



So my answer would be to increase prices of the inelastic products to
increase revenue, but might think about to reduce the price of elastic
products to increase revenue by selling more products.

One example is manay stores have the buy one get one free on sale
during weekend or holiday season, you will see most of those iteams are
elastic products, the inelastic products won't be on sale most of the
time.



How to calculate the price elasticity of demand?

Ed = [(change in quantiy)/(sum of quantities)/2] / [(Change in price)/(sum of prices)/2]

For example, if  Q1 is 1, Q2 is 2, P1 is 8, P2 is 7, then Ed = [(2-1)/(1+2)/2] / [(8-7)/(8+7)/2] = 5

if Q1 is 7, Q 2 is 8, P1 is 2, P2 is 1, then Ed = 0.2



A product is elastic when its Ed is larger than 1, it's inelastic when
its Ed is less than 1, if Ed is 1, it means the price change won't
affect the demand.

Posted at 03:34PM Oct 31, 2006 by byuan in Economics  |  Comments[0]

What's Self-interest

Self-interest, in the market system, is the motivating force of all the
various econmic units as they express their free choices. Sel-interest
means that each economic unit tries to do what is best for itself:
Entrepreneurs try to maximize profit or minimize loss, property owners
try to get the highest price for the sale or rent of their resources,
workers try to maximize their utility (satisfaction) by finding jobs
that offer the best combination of wages, hours, fringe benefits, and
working conditions, consumers try to obtain the products they want at
the lowest possible price and apportion their expenditures to maximize
their utility.

The pursuit of self-interest is not the same as selfishness.
Self-interest involves maximizing some benefit, and it does not
preclude helping others: A stockholder may invest to receive maximum
corporate dividends and then donate a portion of them to the United Way
or give them to grandchildren, a worker may take a second job to help
pay college tuition for her or his children, an entrepreneur may make a
fortune and donate much of it to a charitable foundation.

Posted at 11:36AM Oct 29, 2006 by byuan in Economics  |  Comments[0]

What's the law of demand? And why it's true?

I was aware of the law of demand before learning Economics, but didn't know there are even some interesting explanations :-)



The law of demand: All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.



Why there is such an inverse relationship between price and quantity demanded? Three explanations:

1. It's consitent with common sense. Price is an obstacle that deters
consumers from buying, the fact that business have "sales" is evidence
of their belief in the law of demand.

2. In any specific time period, each buyer of a product will derive
less satisfaction (or benefit, or utility) from each successive unit of
the product consumed. The second ipod will yield less satisfaction to
the consumer than the first, and the thrid still less than the second.
That is, consumption is subject to diminishing marginal utility, so
consumers will buy additional units only if the price of those units is
progressively reduced.

3. The law of demand can also be explained in terms of income and
substitution effects: A lower price increases the purchasing power of a
buyer's money income, enabling the buyer to purchase more of the
product than she or he could buy before.  At a lower price buyers
have the incentive to substitute what is now a less expensive product
for similar products that are now relatively more expensive.

For example, a delcine in the price of chicken will increase the
purchasing power of consumer incomes, enabling people to buy more
chicken (the income effect). At a lower price, chicken is relatively
more attractive and consumers tend to substitute it for pork, lamb,
beef, and fish (the substitution effect).

Posted at 10:58AM Oct 29, 2006 by byuan in Economics  |  Comments[1]