AppEcon M3-4 PDF

APPECON M3-4 Economic Analysis of Profit Maximization > In the economic analysis of decisions and actions of individuals, including business firms, the ideal choice is set when the marginal revenue is equal to the marginal cost. The objective is to earn a profit, reaping maximum profit. 1. MR < MC:...

APPECON M3-4 Economic Analysis of Profit Maximization > In the economic analysis of decisions and actions of individuals, including business firms, the ideal choice is set when the marginal revenue is equal to the marginal cost. The objective is to earn a profit, reaping maximum profit. 1. MR < MC: The firm should reduce production because it costs more to make each additional unit than it can sell it for. 2. MR > MC: The firm should increase production because it’s making money from each additional unit, and there’s high demand. 3. MR = MC: This is the point of profit maximization where the firm balances costs and revenue. It’s not necessarily about the product losing “hype,” but about the firm reaching the optimal production level for the current market conditions. Definition of terms > What is Market concentration? > Market concentration refers to the number of sellers and buyers in the market. > The more concentrated a market is, the fewer producers are in the industry. > Fewer suppliers means a huge market power in determining prices in the industry > A monopolistic market is the most concentrated, followed by an oligopoly. > Most diluted is the competitive market (perfect competition) > What are the Barriers to entry? > Refers to the inherent features of the industry and various means devised in the market to prevent the entry of potential players and competitors that want to take advantage of the enormous profit in the industry. > As these barriers restrict the number of sellers, it can reinforce the degree of concentration of the industry and, in turn, enhance the market power of existing players in the industry. > Two main categories of market barriers: > Scale Barriers - Large production plants for feasible operation in the industry > Legal Barriers - Proprietary rights (patents, copyrights, trademarks, and intellectual property rights) > What is Product differentiation? > Refers to the ability of a business firm to create a market niche through several means of varying its products and services. > In a monopolistically competitive industry with similar products but various styles of packaging and marketing, buyers are convinced that these products and services are different; they have an elastic demand curve. > In a monopolistic market- inelastic demand. %changeQd < %changeP. > In a competitive market- selling similar or undifferentiated products is faced with a horizontal demand curve with changes in Od very responsive to P changes > No market power- deviating from market price will result to huge costs or loss of its market. > What is Limited Information? > Limited information refers to the unevenness in the distribution of information among the actors in the market. > Monopolistic and oligopolistic industries existing market players can have information like new technologies, sources of raw materials, innovative products and processes that are not available to other potential sellers. Information edge can provide market power. > Competitive market sufficient information is available to all not only to existing players in the market Factors leading to profit maximization > Minimal Profit (e.g., Perfect Competition): > Market Concentration: Many sellers, so each firm has limited control over the price and can only earn minimal profit. > Market Entry: There are no barriers to entry, which means new firms can easily enter the market and drive profits down. > Product Differentiation: The products are homogeneous, meaning consumers have no preference for one firm's product over another's. > Information: Perfect information allows consumers and producers to make fully informed decisions, leading to equal pricing and little room for profit. > Market Power: Firms have no market power; prices are determined by the market. > Market Structure: This reflects perfect competition, where no firm can influence prices. > Medium Profit (e.g., Oligopoly, Monopolistic Competition): > Market Concentration: Few sellers mean each firm has some control over the price but faces competition from others. > Market Entry: There are some scale barriers or the market is contestable, meaning new entrants can challenge incumbents, but it's harder than in perfect competition. > Product Differentiation: Products are differentiated to some degree, which gives firms the ability to charge slightly different prices and earn moderate profits. > Information: There is limited information; consumers and producers might not have complete knowledge, but it's not as restricted as in a monopoly. > Market Power: Firms have limited market power, so they can influence prices but not control them completely. > Market Structure: This refers to oligopoly or monopolistic competition, where a few firms dominate or there is competition with differentiated products. > High Profit (e.g., Monopoly): > Market Concentration: There is only one seller with complete control over the market, leading to the highest potential profits. > Market Entry: Scale and legal barriers (e.g., patents, regulations, or high startup costs) prevent competitors from entering, protecting the monopoly’s profits. > Product Differentiation: The product is highly differentiated with no close substitutes, giving the monopolist pricing power. > Information: There is very limited information available to consumers or competitors, allowing the monopoly to control the market and keep prices high. > Market Power: The firm has high market power, meaning it can set prices and maximize profits. > Market Structure: This represents a monopoly, where a single firm controls the entire market. Porter’s Five Forces (Macro-Level) > PORTER’S FIVE FORCES model encourages organizations to look beyond direct competitors when assessing strategy and, instead, consider broader environmental forces. > Force 1: COMPETITION AMONG EXISTING FIRMS IN THE INDUSTRY > In a monopolistic market – it is absent/low because the firm is a single producer of highly differentiated products. > In a competitive market – aggressive forces coming from rival companies are so intense that a business enterprise is weak in mitigating these strong forces because there are too many players in the market selling similar products. > In an oligopolistic market, the forces of competition will depend on the behavior and interactions of the few firms in the industry. Cooperate or pursue independent actions. > Force 2: BARGAINING POWER OF CUSTOMERS > Conflicting interest of buyers and sellers: > In monopsony, - the sole buyer can have a huge bargaining power over the sellers in the industry. > Organized customers can exercise and exert bargaining power by demanding the lowest price possible (cooperative). > Buying in bulk so that the buyers can exert bargaining power over their suppliers. > To mitigate the bargaining power of buyers and enhance the profitability of the industry: > Diversify the buyers of the product. > Sell a variety of differentiated products instead of a single product. > Force 3: BARGAINING POWER OF SUPPLIERS > To weaken the bargaining power of suppliers: > Diversify the sources of raw materials > Integrate vertically (San Miguel Corp.) > To counter factor market (labor), subcontracting of labor > To counter factor market (capital), integrate banks or financial institutions in the conglomerate > Force 4: THREATS OF POTENTIAL ENTRANTS > Potential entrants must overcome scale and legal barriers. > Potential entrants can produce a differentiated product or can produce the product at a lower cost. > To counter potential entrants, segment the market to neutralize whatever competitive force the potential competitors. > For existing companies to lower their prices so that new entrants. > Force 5: THREATS OF SUBSTITUTE GOODS > Industries that exhibit a high rate of profitability are the ones challenged by the emergence of substitute goods. As the differentiation from the substitute goods widens and the cross-price elasticity of demand declines, the competitive force of substitute goods is mitigated Business Opportunities Identification > Industry also interacts and responds to various factors and forces that affect not only the industry but other industries and other economies. > National and global economies > Profitable business venture thrives in a favorable business climate which in turn is set in a vibrant economy. > Rapid growth experienced in one industry will have favorable ripple effects on other industries that supply raw materials. > A lethargic economy is characterized by very slow economic growth, huge unemployment, and depressed demand. > Government policies and regulations > Regulate business ventures > Taxes (sin taxes) / tax incentives > In addressing inflationary pressures, the government, through Monetary Board of BSP, may pursue a tight monetary policy that may increase interest rates > Government subsidies > Government can promote economic growth and employment > Technological developments > Companies that are slow to adapt or fail to adapt to these rapid developments of technology are bound to exit from the industry. (E.g., ICT, Smart phones with Apps, Cloud computing) > Demographic changes > Economic expansion have PRESSURED developed countries to open up their economies to foreign workers. (E.g., Lower birth rates in developed countries. Aging population in developed countries.) > Social changes > Modifications in family structure and other social changes have impact on consumer behavior and tastes. > Temporary shifts in residence cause more business to restaurants, laundry, and cleaning services. > Changes in the natural environment > Variations in weather, temperature, seasons. > Effects of monsoon rains and strong typhoons – flooding. > Effects of earthquakes. SWOT Analysis > SWOT ANALYSIS is a tool that can help you to analyze what your company does best now and to devise a successful strategy for the future. > Strengths (What are you doing well? What sets you apart? What are your good qualities?) >Internal characteristics of firms or industry that can contribute directly to the profitability of firms and the industry (e.g., Availability of skilled laborers, highly qualified management team, adequate equipment, sufficient financial resources, state-of-the-art technology, good distribution network.) > Weakness (Where do you need to improve? Are resources adequate? What do others do better than you?) > Internal characteristics of firms or industries that mitigate the profitability of firms and industry (e.g., Unskilled workforce, low morale of the employees, high rate of labor turnover, lack of managerial talents, insufficient financial resources.) > Opportunities (What are your goals? Are demands shifting? How can it be improved?) > Positive impacts of various external environments in the profitability of an industry. (e.g., Growing domestic economy, economic dynamism in the global markets, reliable suppliers of raw materials, various means of transportation, and telecommunication facilities.) > Threats (What are the blockers you're facing? What are factors outside of your control?) > Undesirable impacts of external factors because they can potentially impair the profitability of firms in an industry (e.g., High cost of electricity, inadequate transportation system, absence of supporting industries that will supply the raw materials, recession or financial crisis.) > SWOT ANALYSIS AND BUSINESS CLIMATE > Macroeconomics policies – money supply, taxation, government expenditures, human resources development, employment, trade and industrial development > Government regulations – a set of rules meant to address market distortions brought by several reasons. > Institutional support – refers to a host of assistance from the government that can make a favorable business climate (transportation, communication, rule of law) > TOWS ANALYSIS > If SWOT analysis puts the emphasis on the internal environment (your strengths and weaknesses), TOWS forces you to look at your external environment first, your threats and opportunities. Threats and Opportunities become Internal, and Weakness and Strengths External Analysis. > Doing this allows you to gain a better understanding of the strategic choices that you face. Special Topics: Social Entrepreneurship and its Opportunity for inclusive Growth through Job Creation > Fiscal Policies > Government decisions on taxation and spending to influence the economy. > How Fiscal Policies Impact Social Entrepreneurship: > Tax Incentives: Reduced taxes for businesses that engage in social entrepreneurship, promoting investments in social projects. > Government Spending: Funding for social programs that can include support for social enterprises (e.g., grants, subsidies) > Examples: > Tax Breaks: Some countries offer tax deductions for businesses that contribute to social causes or operate in underserved areas. > Subsidies: Governments may provide financial assistance to social enterprises to support job creation and community development. > Monetary Policies > Central bank actions to control the money supply and interest rates, affecting economic activity. > Impact on Social Enterprises: > Low Interest Rates: Encourage borrowing and investment by reducing the cost of loans, which can help social enterprises expand and hire more employees. > Credit Availability: Easier access to credit allows social enterprises to fund operations and scale up their impact. > Examples: > Microfinance: Small loans provided to social entrepreneurs at low interest rates, often targeting underserved communities. > Central Bank Policies: Decisions that lower interest rates can stimulate growth in the social sector by making funding more accessible. > GNP, GDP > GNP (Gross National Product): The total value of goods and services produced by a country's residents, regardless of location. > GDP (Gross Domestic Product): The total value of goods and services produced within a country’s borders. > GDP Equation: C+I+G+(X-M) wherein C is Consumption, I is Investments, G is Government spending, X is Exports, and M is Imports > Relevance to Social Enterprises: > Contribution to Economic Growth: Social enterprises contribute to GDP and GNP by creating jobs, producing goods and services, and stimulating local economies. > Sustainable Development: By addressing social issues, these enterprises can promote sustainable economic growth and improve quality of life. > Inflation > The rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. > Challenges for Social Enterprises: > Increased Costs: Higher costs for materials and services can reduce profitability and hinder expansion. > Pricing Pressure: Social enterprises may struggle to raise prices due to their commitment to affordability and social impact. > Adaptation Strategies: > Cost Control: Implementing efficient operations to reduce waste and lower costs. > Diversification: Developing multiple revenue streams to protect against inflationary pressures. > Exchange Rate > Understanding Exchange Rates: The value of one currency in relation to another, affecting the cost of importing goods and the value of exports. > Impact on Social Enterprises: > Currency Fluctuations: Changes in exchange rates can impact the cost of imported supplies and the competitiveness of exports. > Global Opportunities: Favorable exchange rates can make it easier for social enterprises to expand into new markets. > Examples: > Import Costs: A social enterprise importing fair trade materials might face higher costs if the domestic currency weakens. > Export Benefits: If a social enterprise exports its products, a weaker domestic currency could make its goods cheaper and more competitive abroad > Overall Key Takeaways >Fiscal Policies: Tax incentives and government spending can support social enterprises. >Monetary Policies: Interest rates and credit availability influence funding and growth opportunities. >GNP and GDP: Social enterprises contribute to economic growth through job creation and production. >Inflation: Rising costs challenge social enterprises but can be managed with strategic planning. >Exchange Rates: Currency fluctuations affect costs and opportunities in global markets. SOCIOECONOMIC IMPACT ANALYSIS > Overview > Socioeconomic Impact Analysis is a process used to evaluate the effects of economic activities, policies, or projects on the social and economic conditions of a community or region. This analysis examines how changes in various factors, such as employment, income, public services, and overall quality of life, influence both individuals and society at large. Assessing how projects or policies affect consumption, investment, government spending, and net exports (the components of GDP), analysts can gauge their impact on economic growth and social welfare. > Focus of Analysis > The focus of the Socioeconomic Impact Analysis is the impact of business operations on various sectors that interact with its production and distribution activities. > Firms' influence effects are not only economic and commercial but can be social, cultural, and environmental. > Inputs > Intermediate Input > Materials, components, or services that businesses use to produce finished products. They are not necessarily final goods themselves but are essential for making the final product. (Ex. Steel for manufacturing, Electronic chips for smartphones, Software for design and production) > Factor Input > Key resources needed to process products and services. They include land, labor, capital, and entrepreneurship. These elements work together to create goods and services. (Ex. Physical Location where store or warehouse is Employees working on the Production Line Equipment used in the production process) > Tracing Impacts (inputs) > The impact of the production operation of the firm on the suppliers of its inputs will depend on the various possible sources it. > Intermediate inputs > Internal (local) vs External (international) Suppliers > Independent Suppliers vs Subsidiary of Conglomerate > Raw vs Semi-Processed Inputs Market Power of the Firm > FACTOR INPUTS (LAND) > Land Intensity of Business > Location of Business Opportunity > Opportunity Cost of Land of Use > FACTOR INPUTS (CAPITAL) > Own Savings vs Capital Market > Foreign Borrowing vs Foreign Direct Investment > Market Determined vs Regulated Rates of Return > FACTOR INPUTS (LABOR) > Sourcing Labor Within vs Outside the Community > Direct Labor vs Subcontracting > Minimum Wage vs Market Rate > Organized vs. Non-Organized Human Resource Development Temporal Spatial Working Conditions > FACTOR INPUTS (ENTREPRENEURSHIP) > In-House vs Outsourced Training Insiders vs Outsiders > Tracing Impacts (Outputs) > Output is sold domestically to local consumers, investors and government agencies. Other portion of the output is sold in the global market as exports > Outputs of a Firm can either be Final Outputs or as Intermediate Inputs once again. > Contributions on Industrial Integration >If other industries use the output of the firm as intermediate inputs, the selling firm is contributing to the integration of the economic sectors. Backward and forward integration. > Contributions to the Productivity of Other Industries > Quality of services provided by various services industries, including transportation, storage, and trading, can enhance the competitiveness of the other economic sectors buying the services of these industries. > Externalities > Externalities are a specific type of spillover effect that occurs when a third party (who did not choose to incur that cost or benefit) is affected by the economic activities of others. Externalities can be either positive (Benefits) or negative (Costs). Economic analysis recognized the spillover effect in evaluating the impact of a firm or industry on the economy and society at large. Maximizing Impact Improve the productivity of the firm’s workers Source their raw materials, labor, and capital inputs from the community where they operate Environment-friendly alternatives in the production process and distribution procedures Be socially responsible as commercial enterprises Participate in the production of intermediate goods within the country Enhance the productivity of the services sector Carry out measures to protect consumers. industries that exhibit high rate of pritability are the ones challenged by the emergence of substitute goods. as the differentiation from the subsititute goods widens and the croos price elasticity of demand declinesthe compettitve forces of substitute goods is mitigated