Business Decisions and Economics

Eco Insights

• Economics deals with the allocation of resources to solve economic problems and understand opportunity costs.

Business Decision Questions:

• Key questions in business decision-making involve identifying consumers and competitors.
• It's also essential to understand the market structure and what's needed to produce goods/services, as well as the impact of business activity on stakeholders.
• Businesses must decide what goods to make, how much to produce, and what price to charge.

The Role of Law in Business

• Laws and regulations provide a framework for business decisions, offering guidance but also imposing restrictions
• Laws cover competition, human rights, contracts, intellectual property, consumer protection, employment, and tax.
• Legal compliance builds trust but can also limit potential actions.
• Control involves regulations that dictate permissible and prohibited activities.
• Supply chain management includes investigating risks of modern slavery, especially in regions with lax labor regulations.
• Liability refers to the law of torts, protecting individual rights and offering remedies for infringements.
• Negligence involves duty of care, breach of that duty, causation, and remoteness of damage.

Ownership and Agreements

• Property law protects intellectual property and organizational shares.
• New products/services developed by a firm are considered intellectual property (IP)
• Trademarks protect logos, words, colors, and shapes.
• Patents protect inventions and new processes.
• Agreements may or may not be legally binding contracts.

Law vs Corporate Responsibility

• Law is a collective set of norms for conduct.
• Corporate responsibility requires managers to make normative judgments on behalf of a business.

Stakeholders

• Stakeholders are individuals or groups affected by corporate decisions.
• A stakeholder-centric view broadens the scope of corporate social responsibility.
• Analyzing stakeholders involves identifying those with power, the ethically impacted, and their rights, interests, and motivations.

Shareholder vs Stakeholder Views

• The shareholder-centric view posits that managers are agents working on behalf of the shareholders.
• The stakeholder-centric view requires managers to consider the rights and interests of all stakeholders.

Evolving Management Responsibilities

• Management responsibilities now extend to past employees, current generations (addressing diversity, equality, and labor issues), and future generations (environmental responsibilities).

Types of Stakeholders

• Primary stakeholders have a formal and direct relationship with the firm.
• Secondary stakeholders do not have a formal or direct relationship with the firm.
• Stakeholders can be categorized as organizational, market-related, or societal.

Decision Making Approaches

• Normative decision-making is guided by ethical rights based on accepted standards like human rights, justice, and fairness.
• Instrumental decision-making focuses on achieving specific business objectives like financial performance and regulatory compliance.
• Integrating both approaches achieves ethical and practical goals.

Corporate Responsibility

• Corporate responsibility spans environmental, social, and governance aspects.
• Environmental considerations include renewable fuels, emissions, energy efficiency, climate risk, water management, and recycling.
• Social factors cover health and safety, working conditions, employee benefits, diversity, human rights, and community impact.
• Governance involves ethical standards, board diversity, stakeholder engagement, and shareholder rights.

The Importance of Corporate Responsibility

• Consumers prefer products/services from companies that align with their values.
• A large percentage of consumers consider advocacy of specific social matters when making purchases.
• Products with ESG claims have shown significant growth.
• Rising consumer expectations show that a large portion of consumers would switch loyalty to purpose-driven firms.
• Employee engagement increases with strong CSR practices, which reduces turnover
• Strong CSR practices can reduce costs and increase social capital, allowing for cross-sector partnerships.

Business Decision Making

Four Aspects of Business Decision Making

• Agency
• Options
• Outcome
• Context

Week 2: Business Decision Making in Markets

• Models simplify reality but can be based on unrealistic assumptions.
• Economic models can omit the complexity and details of reality.
• Absolute advantage means producing the same output with less input or more output with the same input.
• Opportunity cost is the value of the next best alternative.
• Comparative advantage exists when one can perform a task with a lower opportunity cost than another agent.
• Why Trade results in Specialization so that Comparative adv can be exploited
• Costs include all opportunity costs, not just money spent.
• In a competitive market, no single buyer or seller can manipulate prices; all are price-takers.
• Individual demand and supply are determined by reservation prices and opportunity costs.
• Consumers compare their reservation price (marginal benefit) with the price charged (marginal cost).
• Suppliers compare their reservation price (cost) with the price charged (benefit).
• The cost-benefit principle is weighed against marginal costs.
• Marginal analysis helps turn questions about quantity into either/or decisions

Factors influencing Demand

• Income
• Preferences.
• Prices of related goods
• Expectations
• Number of Buyers
• Congestions and network effects
• Price

Factors that influence supply

• Input prices
• The type and number of sellers
• Expectations
• Productivity and technology
• Prices of related output
• Price

Market Equlibrium

• Firms enter a market if the market price is greater than the average cost.
• Firms exit if the market price is less than the average cost
• Above the equilibrium price, there is excess supply, which puts downward pressure on price.
• Below the equilibrium price, there is excess demand, which puts upward pressure on price.

Price Elasticity of Demand

• Elasticity reflects the availability of substitutes.
• It is higher when there are more competing products, for specific brands, for non-necessities, and when consumers can easily search for better prices or have more time to adjust.

The Formula for Elasticity

• Time horizon
• Availability of raw materials
• Inventory
• Excess capacity
• Definition of a good (did the price affect only one good or broad category) e.g. oatmilk affects coffee and cocoa
• Income share (noticeability/ care about this price increase) (E.g 10% price change in gum vs rent)

Price Elasticity of Supply

• Elasticity is higher when firms can store inventories, inputs are easily available, there is extra capacity, and low barriers to entry or exit.

Components of Average Cost

• Average Cost = Total Cost / Quantity
• Total Cost = Fixed Cost + Variable Cost

Key Conditions

• In perfect competition, buyers and sellers are price takers.
• Firms supply homogenous goods, with free entry and exit in the long run.
• In imperfect competition, suppliers or consumers have market power, and firms may supply heterogeneous goods, with possible barriers to entry.
• In perfect competition Price = Marginal Revenue, but not in a monopoly
• At the point of maximal profit Marginal Revenue is equal to Marginal Cost.

Economic Suplus + Cost of Production

• Above ATC, supply = MC.
• Economic surplus consists of consumer surplus (price willing to pay vs. what is actually paid).
• Producer surplus is the difference between the price a seller receives and the marginal cost of production.

Economic Efficiency/Losses

• Total economic surplus is the sum of producer and consumer surplus.
• Economic efficiency is assessed by how good markets are (larger = better)
• Deadweight loss indicates missed consumer+producer surplus because the quantity of a good it not where supply meets demand

Understanding Market Benefits

• Markets facilitate the efficient allocation of resources.
• In Imperfect competition: Firms with market power charge a price greater than their marginal cost
• They produce less than the efficient quantity, leaving unrealized gains from trade.
• Markets are inexpensive to run

Accounting for Markets

• Efficient allocations may not be equitable.
• Willingness to pay reflects the ability to pay.
• Economic surplus measures outcomes, not the process.
• Markets require rule of law and supervisory institutions.

Introduction to Financial Management

• Financial management is planning, organizing, controlling, and monitoring financial resources to achieve company goals.
• The goal of financial management is to maximize shareholder value and sustain profitability.
• Financial management involves managing and controlling profitability, cash, investments, debt, and expenses (salaries, insurance, rent, taxes).
• Finance involves decisions by firms that allow them to source funding and allocate resources.

Accounting Roles

• Accounting reports financial information (profitability, cash flow, sustainability, value, debt, financial security, integrity).
• Accounting provides insights for effective management.
• There are internal and external users of accounting information

Accounting

• Deals with laws and regulations about how much money a business or individual needs to contribute to the government
• Ensures compliance, minimizes tax liabilities, and leverages possible deductions.

Types of accounting

• Financial accounting provides information to external users and is presented in financial statements.
• Management accounting provides information to users within the enterprise for operational planning and control.
• Audits ensure financial statement accuracy.
• Internal control safeguard assets and ensure reliable financial information.
• Social/environmental accounting provides non-financial information to external users.

Expenses in Accounting

• Decreases company wealth.
• Must be incurred to earn revenue.
• Payments of returns to owners (e.g. dividends) are not considered expenses.

Revenue

• Increase in company wealth
• Higher when customers pay or promise to pay for G/S (accounts receivable)

Types of Revenue

• Sales from selling G/s
• Interest income on bank accounts/ investments
• Dividends from investments in firms

Cash Accounting

• Records revenues and expenses when cash changes hands
• Reasonably precise and easily determined
• ve
• Business complexity (financial health affected by cash flow transactions in the past or will happen in the future.)

Accrual accounting

• Recording revenues and expenses when they occur (independent on time of cash exchange)
• Most businesses (greater accuracy/ view of fin health)
• Key test of revenue recognition is whether G/s has been rendered (product delivered/service performed) Expenses when incurred (resource is consumed) (cash receipt not required)

Financial information

• Presented in an annual report.
• Communicates to external stakeholders
• Fin position of a firm at a particular time
• Set of fin resources and obligations
• Resources (asset) and how they were financed
• Shows assets and claims on those resources

Financial Structure

• Liquidity (s.ft. Focus)
• Solvency (L.T. Focus) Shareholder's equity
• What belongs to shareholder + owners
• SE = Net assets = A - L
• Share capital = Amount inverted by company owners Retained profit
• Total profit retained in business

Income Statement

• Fin performance of a firm over a period of time Effectiveness of generating profit
• Revenues earned and expenses incurred Calculates the profit that may be available to shareholders
• Outcomes
• Uses accrual accounting

Cash flow statement

• Measures cash inflows and cash outflows, i.e Cash movements in cash balance - operating activities, min revenue, producing activities
• Asset: Resources used in the year or future years
• Convertible to cash or used.
• Non Current: generate revenue for over 12 months

Liabilities

• Current (Paid off within one years) Non current (remains liabilities for at least the next year)
• Debt and other financial obligations
• What the company owes
• Financial Position of a firm at perticular time
• Set of fin resources and obligations

Balance Sheet

• Fixed Cost
• Variable Cost
• High Inventory + Low sales mean High loss, and High inventory cost and cost of sales
• High inventory level-cash is invested in Goods, if goods and services not sold quickly then that will decrease cash reserves, same results
• Example:
• A liability (source) has increased +
• An asset (resource) has increased + Loan
• Cash After, this transaction, accounting equation is in Balance
• Assets* = liabilities+ equity Accural accounting : Unearned Revenues,

Unearned Revenue

• You'er a seller- receiver of cash, Receives cash in advance for earning revenue .

Liability account

Liability can becomes revenue when Good and services are provided

Prepaid expenses

Customer can pay for what it costs to be made and the value to extend in the future- in a asset account when u use a asset you pay in expense Accrual Revenue

Sell acc

Revenue has been earned but cash not received, for eg Credit sales Commission , interest earned and not recieved

Depreciation

Allocating cost of a non current asset over the useful life - to acknowledge that is valuable as an expansive Accumulated depreciation - balance accounts Income Statement : Last day of financial year - 30 june - Aus fairms contra asset

• net book value*- original - depreciation