BA 1310 Week 16 Exam 3 Review & Summary PDF

BA 1310 Week 16 W RA P P IN G UP Course Grade and Scores ◦ You can now check out all the scores for simulations in eLearning ◦ Please let me know if you have any questions ◦ You can expect to see your final course grade later this week ◦ Debate essay is due tomorrow ◦ Debaters: ◦ If you get full...

BA 1310 Week 16 W RA P P IN G UP Course Grade and Scores ◦ You can now check out all the scores for simulations in eLearning ◦ Please let me know if you have any questions ◦ You can expect to see your final course grade later this week ◦ Debate essay is due tomorrow ◦ Debaters: ◦ If you get full credit with debator grade, do not attempt the debate essay ◦ you can drop an additional assignment/simulation item. ◦ Just email me which item you’d like me to drop Course Evaluation ◦ Course evaluation is now open!!! ◦ Please leave your review if you have time. It will help the course a lot. ◦ https://eval.utdallas.edu/ ◦ You can change your submitted evaluation anytime ◦ Even after checking out the final course grade Exam Format 40 Multiple Choice Questions, 70 minutes to do exam. Take exam at the UTD Testing Center as you should have scheduled. Scientific calculator is allowed. Content: ◦ Microeconomics Textbook: Chapter 11 (Time & Uncertainty) ◦ Two formulas to remember (PV/FV and Expected Value) ◦ Business Foundations Book: Chapters 2 (Ethics and Social Responsibility), 11, 12 (both Marketing), 14 (Financial Ratios/Accounting) ◦ Know the definitions and use common sense. Formula Sheet: PV and FV The only formula(s) you will need to remember is the relationship between present value and future value: ◦ FV is the future value. ◦ PV is the present value. ◦ r is the interest rate. ◦ n is the number of years in question. Formula Sheet: Expected Value The expected value of a risky gamble is: Here is the probability of outcome 1, is the probability of outcome 2 … And is the monetary value of outcome 1, is the monetary value of outcome 2 … What About The Financial Ratios? You should study them and be broadly familiar with them. However, there are not any questions of the form: ◦ “Look at the Income Statement and Balance Sheet and tell me what the inventory turnover ratio is.” Any questions are more like: ◦ “What can debt utilization ratios tell us about a firm’s financial position?” To answer a question like this, you must know the general idea behind the ratios, even if you don’t remember exactly how to calculate any given debt utilization ratio. Wrapping Up THE INGREDIENTS TO SOUND DECISION MAKING Understand Opportunity Cost At heart, opportunity cost is what must be given up in order to acquire or do something else. ◦ Direct costs are easy to understand. ◦ However, indirect/implicit costs are often just as important as direct costs to consider. ◦ Doing Activity A means NOT doing Activity B. How valuable is Activity B to you? ◦ One implicit cost that people tend to ignore is the value of their time. ◦ Is it worth your time to drive an extra 10 minutes to save 3 cents per gallon at the gas station? ◦ If you are running a business, are you “paying yourself” according to what you could earn elsewhere? Trade Can Make Us Better Off When we focus on the things that we are comparatively better at, and then trade for the things that we are comparatively worse at, the total pie expands. I don’t just mean international trade … I mean within your household, your business, your job, etc. This is intimately related to opportunity cost. ◦ It’s a better use of resources when we focus on things for which our opportunity cost is relatively low. ◦ This is why companies have organizational structures that delegate leadership and decision making across functional areas to those best-suited to the given tasks (CEO: leadership/vision, CFO: managing finances, COO: ensuring an efficient supply chain and operations, etc). ◦ Even if you specialize in certain tasks, don’t underestimate the importance of a shared vision and common goals. Specialization does not mean working in isolation. Think at the Margin This is the process of comparing additional benefits of an activity with the additional cost. ◦ What are the costs and benefits of ◦ Producing one more unit of output? ◦ Studying for one more hour for the exam? ◦ Opening one more store? When faced with a new decision, it doesn’t matter how we got to face the particular decision. It just matters how we evaluate marginal costs and benefits from the current decision. Focus on What Makes Something Different Things are very difficult when everything else is the same … all you can do is compete on price. Price competition is ruthless and demands sharp focus on efficiency/productivity, etc. When you or a product are different in some measurable and important way, then you can avoid ruthless price competition because the differences give you some degree of market/bargaining power that you can use to your advantage. ◦ This is why businesses try to differentiate their products. ◦ This is, presumably, why you are going to university. Time Matters $1 today is worth more than $1 next year. ◦ This is because you can invest that $1 today and turn it into more next year. When choosing between two options which involve money at different points in time, you need to make these options comparable by doing present value calculations. Compound Interest Can Be Your Friend If you invest $10,000 at 7% “interest” each year at age 25, then in 40 years this will be $149,744.58. To have the same amount of money at age 65 but starting to invest at age 35, you would need to invest $19,671.51 (nearly twice as much money). Compound interest can also be your enemy if you are taking on debt – particularly credit card debt with extremely high interest rates. Risk Matters Generally, a “risky” $1 is worth less than a “safe” $1. ◦ This is because most people are risk averse. When making risky decisions, you need to understand what is your tolerance for risk versus reward. ◦ Simulations can help you get a better sense of the possibilities. ◦ Simulations can also help you stress test your decisions by considering alternative scenarios. When we combine a large number of independent risks, then the overall riskiness decreases. ◦ This is the diversification aspect of risk and is at the base of insurance. ◦ This also explains why, even though the stock market is quite risky over any day/month, over long time horizons (e.g., 30+ years), the stock market is significantly less risky. Wrapping Up MARKETS ARE GREAT … EXCEPT WHEN THEY ARE NOT An Honest Appreciation of Markets I began the class with the goal of offering “a pragmatic approach to the market, against the quasi-religious views that it is always right or fundamentally evil. The market system is not an end in itself but an imperfect means to raise living standards. Markets are not magic, nor are they immoral. They have impressive achievements; they can also work badly. Whether any particular market works well or not depends on its design.” ◦ McMillan, John. Reinventing the Bazaar: A Natural History of Markets (p. 226). W. W. Norton & Company. Competitive Markets A competitive market is a market which satisfies four characteristics: 1. Participants are price-takers: Neither buyers nor sellers can affect the market price. 2. Standardized good: Any two units of the good are completely interchangeable. 3. Full information: Market participants know everything about the price and features of the good. 4. No transaction costs: There is no cost to participate in exchange in the market. Market Equilibrium 9 A competitive market leads to an 8 equilibrium in which supply and 7 demand are in balance. 6 5 Price This is also the point at which the 4 total surplus is maximized. That is, 3 all possible gains from trade are 2 1 realized. 0 0 1 2 3 4 5 6 7 8 Quantity Demand Linear (Demand) Supply Linear (Supply) Economic Growth With the rise in markets, starting in the mid-1700s with the industrial revolution, growth exploded, especially over the last 100 years. Issues With Markets: Market Power When agents have market power, they can distort prices away from the competitive equilibrium for their own profit. This, generally, leads to inefficiency. However, it is more complicated than that: ◦ Some markets have a natural tendency towards monopolization (e.g., utility companies, social networks, technology platforms). ◦ How to handle these issues is not easy. Issues With Markets: Externalities When agents’ actions impose costs on others (that the agents do not have to pay), this can lead to over-supply – because the costs to society exceed the costs to the firm. Classic examples: ◦ Traffic congestion ◦ Pollution ◦ CO2 emissions Making the agent responsible for the costs they impose on society (e.g., through a tax/congestion fee) can help alleviate the problem. ◦ BUT … how the system is designed matters a lot because it can create winners and losers, which matters politically and morally. Issues With Markets: Incomplete/Asymmetric Information If I know that I can get the same good or service from a different provider at a lower price, I will generally do so, all else equal. ◦ This strengthens competition and forces agents to be efficient. However, if you know more than I do about a particular transaction, then I have to guard against the possibility that you will use that information to take advantage of me. Both issues are at the heart of problems with the health care market and health insurance more generally. ◦ However, dealing with these problems is exceedingly difficult as big changes will create winners and losers. ◦ Again, politics and ethics/morality come into play. The Punchline About Markets When markets are well designed – but only then – we can rely on Adam Smith’s invisible hand to work, harnessing dispersed information, coordinating the economy, and creating gains from trade … The market system is like democracy. It is the worst form of economy, except for all the others that have been tried from time to time. It succeeds because … it admits variety and permits criticism. ◦ McMillan, John. Reinventing the Bazaar: A Natural History of Markets. W. W. Norton & Company. My Wish For You I hope that you will think about and debate these issues with your friends/acquaintances. It does society no good if we are afraid to talk about these complicated issues or if we stick our heads in the ground like ostriches and just say “No, I don’t want to listen.” But whatever side you are on, you should debate from a position of respect. These are all complicated issues and it is unlikely that one side has all the answers. It’s very hard – and I certainly can’t do it all the time – but remember that it is ok – even admirable – to change your mind when exposed to new facts/arguments. Vaguely Profound Quotes on Debate “Don't raise your voice, improve your argument.” ― Desmond Tutu “He who cannot put his thoughts on ice should not enter into the heat of dispute.” ― Friedrich Nietzsche “Time spent arguing is, oddly enough, almost never wasted.” ― Christopher Hitchens “In all debates, let truth be thy aim, not victory, or an unjust interest.” ― William Penn “It is better to debate a question without settling it than to settle a question without debating it.” ― Joseph Joubert “The most important tactic in an argument next to being right is to leave an escape hatch for your opponent so that he can gracefully swing over to your side without an embarrassing loss of face.” ― Stephen Jay Gould “In all intellectual debates, both sides tend to be correct in what they affirm, and wrong in what they deny.” ― John Stuart Mill