Tag Archives: Business English

#Business and #Economics ~ Consumer Surplus Explained

30 Oct

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in an introductory Economics and Finance class. Posted here for their use or for helping other students. 

This is not intended to be an advanced, in-depth economic analysis of consumer surplus. However, in teaching the concept to my students, I discovered that most websites and teaching materials did not explain the material very well.  They all wanted to start with Consumer Surplus is X – Y .  . . and oh, by the way, it’s also the area of a triangle! 😀 

Which sucks, because it does not explain why it is the area of the triangle.  

So for all the beginning 101 ESL students, I hope this helps explain it!

Part #1 ~ Vocabulary

  • Buyer (n.) ~ A person who exchanges their money in return for a product. Someone who purchases the product. 买方 – Mǎifāng
  • Competition (n.) ~ A situation where two or more people are struggling to claim the same resource.  In economics and business, sellers of substitutes are competing for the same buyers. 竞争 – Jìngzhēng
  • Consumer Surplus (n.) ~ The difference between the price the buyer would have paid for a product and the price the buyer did pay for the product.   消费者过剩 – Xiāofèi zhě guòshèng
  • Demand Curve (n.) ~ A line showing the relationship between the number of products people want to buy and the price. The demand curve shows how many products are demanded at each price. 需求曲线 – Xūqiú qūxiàn
  • Discount (n.) ~ How much the seller has decreased the price from its original amount. Tommy changed the price of his bicycles from $400 to $300. This is a 25% discount. 折扣 – Zhékòu
  • Discount (v.) ~ To lower the price. When the seller lowers the price of a product in order to increase demand, they discount the price. 贱卖 – jiàn mài
  • Economic Value (n.) ~ The maximum price that a buyer would have paid for a product. The demand curve shows the economic value for each quantity. 经济价值 – Jīngjì jiàzhí
  • Law of Demand (n.) ~ The rule in economics that says when the price of a product goes up, the quantity demanded will go down. When the price of a product goes down, the quantity demanded will go up.  需求法则 -Xūqiú fǎzé
  • Market Demand (n.) ~ The total number of products that all buyers require.  Usually shown on a Market Demand Curve demonstrating the relationship between the total quantity demanded and the price.  市场需求- Shìchǎng xūqiú
  • Market Price (n.) ~ The price of a product when it is sold / The price a buyer pays for a product and a seller gets for a product. 市场价格 – Shìchǎng jiàgé
  • Perfect Competition Market (n) ~ A market or industry where there are many buyers and many sellers. All are competing with each other for the best price in a market where there are many substitutes and the products are pretty similar. Companies in these markets have low market power and are usually price-taking. 完美的竞争 – Wánměi de jìngzhēng
  • Seller (n.) ~ Someone who offers a product in exchange for money. The person or company presenting a produce on the market for purchase.  卖家 – Màijiā
  • Total Consumer Surplus (n.) ~ Draw a triangle using the Demand Curve and the Market Price.  Total Consumer Surplus is the area of that triangle.  It is the total savings of all the buyers on the market. See Consumer Surplus.    消费者剩余总额 – Xiāofèi zhě shèngyú zǒng’é

Part #2 ~ What is Consumer Surplus?

The perfect competition 完美的竞争market is a beautiful creature full of amazing trends 趋势and patterns!  In a perfect competition market, buyers and sellers can sometimes trade a product at a better price than they expected (预期). 

Example #1: Timmy is interested in buying a soda (Coca Cola).  Because Timmy is really thirsty, he takes 3¥ and goes to the store to look for a soda.  Although Timmy is willing to pay 3¥ for the soda, he is very happy! He finds a discount 贱卖 where sodas are only 2.80¥ at Walmart.   This means Timmy saved 0.20¥ for his drink! 😊

We call that 0.20¥ a Consumer Surplus (消费者过剩)!  If a buyer pays a price lower than the maximum he was willing to pay, he has a consumer surplus.  By definition: Consumer Surplus is the difference between what the buyer would have paid and what the buyer did pay.

Example #2:  Tara wants to buy a bicycle. She goes to the store and sees that a bicycle is 400¥.  That seems like a good price. She goes home and works and works and works and works. One month later, she has 400¥. She goes to the store again, but now the bicycle is on sale! Discount! The new price is 350¥! 😊 Yay!  She has a Consumer Surplus of 50¥!

Notice: Both the buyer and the seller think the Consumer Surplus is important. For the buyer, the more money they save, the happier they are. The more they save, the more they are willing to buy.  Remember, this market has competition竞争 because there are many buyers and many sellers.  So, if Company A offers the buyer a bigger consumer surplus than Company B—the buyer will shop at Company A.  This is good for the buyer, but bad for Company B.  So Company B will be watching—if Company A has a sale and gives the buyer big savings, Company B will also probably offer a sale in the future also.  We see this all the time—the same product is on sale at 5 different stores. 

Part #3 ~ How to Find Consumer Surplus for One Product?

Consumer Surplus = Economic Value – Market Price

Oh dear. . . . new words.

Let’s start at the beginning.  Economic Value (. 经济价值) is the maximum price the buyer would have paid.  For Timmy, that price for one soda was 3¥.  For Tara, that price for one bicycle was 400¥. 

But in economics 经济学, where do we find this number?  How can you know what the maximum price is that a buyer would have paid?  How do you know how much the buyer was willing to give to the seller?

THE DEMAND CURVE!

The demand curve 需求曲线 is a line that tells us how many products a buyer is willing to buy at a certain price.  It is the price per product

Example: In the picture below:

dEMAND.jpg

If the price is $3.00, Timmy will buy one soda (that is the maximum price Timmy is willing to pay for Soda #1).  Economic Value for Soda #1 = $3.00

If the price is $2.50, Timmy will buy two sodas (that is the maximum price Timmy is willing to pay for Soda #2). Economic Value for Soda #2 = $2.50

If the price is $1.00, Timmy will buy 5 sodas (that is the maximum price Timmy is willing to pay for Soda #5).  Economic Value for Soda #5 = $1.00

This line shows us an important economic 经济学 rule called the Law of Demand.  This rule says that if the Quantity Demanded is going up, then the price must go down. Each extra soda that Timmy buys is worth a little bit less to him. ☹

So, what is Market Price  (价格)? Market Price is the actual price for the product that the buyer paid.  For Timmy, this price was 2.80¥ for one soda. For Tara, the Market Price was 350¥.  

Demand 2

In the graph above:

            Economic Value for Soda #1 = $3.00

            Market Price for Soda #1 = $1.00

            Consumer Surplus for Soda #1 = $3.00 – $1.00 = $2.00

           

            Economic Value for Soda #2 = $2.50

            Market Price for Soda #2 = $1.00

            Consumer Surplus for Soda #2 = $2.50 – $1.00 = $1.50

Notice! Important! It is true that if Timmy buys more soda, will save a larger total amount of money.  If he buys only one soda, he just saved $2.00. But if he bought 2 sodas, he would have saved ($2.00 +$1.50 = $3.50). This is why your parents always buy more if something is on sale at the store.  But the savings for each extra soda goes down, down, down. He saves a little bit less for each extra soda he buys.

Here’s the problem — most companies do not just have one buyer (Timmy).  Most companies sell thousands of products to thousands of buyers. Some sell millions of products a day!  

 This is why we don’t always use Economic Value – Market Price. If you only had two products, that might be pretty easy.  But if you have 500,000 products it gets harder and harder to do EV – MP for every single one.

So we have something special called Total Consumer Surplus (消费者剩余总额).  The total consumer surplus is the TOTAL savings for all the buyers. 

To find Total Consumer Surplus, we need to start with a new line called the Market Demand Curve (市场需求). 

Let’s say that we have 3 airplane companies: United Airlines, China Eastern Airlines, and Korean Air. They all want to buy Soda for their airplanes.

  United Airlines China Eastern Korean Air
$0.00 500 550 425
$0.50 400 450 325
$1.00 300 350 225
$1.50 200 250 125
$2.00 100 150 25
$2.50 0 50 0
$3.00 0 0 0

Now we could try to write three demand curves and do a lot of math. 

But much easier is making a new demand curve based on the total number of products all three companies are willing to buy.

$0.00 1475
$0.50 1175
$1.00 875
$1.50 575
$2.00 275
$2.50 50
$3.00 0

The Market Demand Curve would look like this:

Market Demand 1

Now, we have a “Demand Curve” to work with for Total Consumer Surplus. So let’s start!

Step 1: Market Price.

I say that Market Price was $1.00!  Draw a line showing how many products were purchased at one dollar on our graph.  

Market Demand 2

From the purple line, we know that when the price was $1.00 the demand for sodas was 875 bottles for all three companies.

Step 2: Let’s cover up everything after 875 bottles with Yellow Marker . . . . nobody bought those so we won’t count bottles 876 through 1475.  For Consumer Surplus, you can forget about those bottles.

Market Demand 3

Step 3: Now, the Market Price was $1.00 per bottle.  This means they paid $875 to the company.  Let’s fill in everything below the purple line with Purple Marker to show how much money the buyers lost.

Demand.png

Step 4:    Okay. . . . now we can do Consumer Surplus the very, very, very long way.  This means drawing a line from the Economic Value to to the Market Price for every single one of the 875 bottles of soda that we sold.

Market Demand 4

Soda #1 = Economic Value1 – Market Price1
Soda #2 = Economic Value1 – Market Price1
Soda #3 = Economic Value1 – Market Price1
Soda #4 = Economic Value1 – Market Price1
Soda #5 = Economic Value1 – Market Price1

Notice how we just keep coloring in that triangle more and more? If we did all 875 lines, the entire triangle would be colored!

Market Demand 5.jpg

This is why, when we do Total Consumer Surplus, we say you should find the AREA OF A TRIANGLE (一个三角形的区域) instead of adding together all the Economic Value – Market Price that you would have to do.

Demand 33

 The total amount of money that the airlines saved was about $875.   So Total Consumer Surplus for the market was $875!

#Business and #Economics ~ What is Short Selling

25 Oct

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in an introductory Economics and Finance class. Posted here for their use or for helping other students. 

Part #1 ~ Vocabulary

  • Short Sell (v.) ~ X borrows stock from a stock broker, sells the stock, buys it back, and then returns the stock to the stock broker. 卖空 – Mài kōng
  • Stockbroker (n.) ~ Someone who buys and sells stocks (a middleman – 中间人). 证券经纪人 – Zhèngquàn jīngjì rén
  • Shares (n.) When part of a company’s ownership is divided into equal portions, each portion is called a share. Each share gives the owner part of the ownership, profits, and a vote. A piece of the Stock.  – Gǔ
  • Loan (n.) ~ Money that A borrows from B and must eventually pay back. Often includes an extra “interest”息 fee.  – Dài
  • Stock price (n.) ~ The cost of purchasing one share (股of a company. 股价 – Gǔjià
  • Stock Market (n.) ~ A place (either a physical market or an online market) where buyers and sellers trade in company shares. 股市 – gǔ shì

Part #2 ~ What is Short Selling

Short selling is where:

  1. Step 1: You borrow 借 some shares 股份 of Company A from your broker (证券经纪人). Notice that you did NOT buy, so it is similar to a loan. You must pay the broker back the money for the stock later. 
  2. Step 2: You sell the stock to someone else. 
  3. Step 3: You buy the stock back again and give it back to the broker. 

Part #3 ~ Why or Why Not Short Sell?

If you short sell correctly and are successful, you can make a lot of money doing this. 

But if you want to make money, then the stock price 股价 must go down between Step 2 and Step 3. 

If the stock price 股价 goes up between Step 2 and Step 3, you will lose money.

If you buy long, you just use your own money to buy the stock. 

Part #4 ~ Examples 

Marilyn’s Flowers (ABCD) is selling their shares at $25 for one share. 

Michael believes that the price of ABCD’s shares is inflated (充气) and is too high right now. The shares are not worth that much money. He also believes the price is going todecrease in the future (usually very soon). 

Samuel believes that the price of ABCD’s shares is not going to decrease in the future. Instead, he believes that the price will increase.

EXAMPLE #1 (Buying Long)

Samuel goes to the Stock Market (股市) and uses his own money to buy one share for $25.

Situation A: Michael is right. Two days later, the stock price goes down to $10. 

  • Samuel’s Revenue: $10
  • Samuel’s Cost: $25
  • Samuel’s Profit: (-$15) Samuel lost his money.

*Notice that in this situation, the maximum amount of money Samuel can lost is $25. Even if the stock price 股价 falls to $0, Samuel will only lose $25. 

Situation B: Samuel is right. Two days later, the stock price goes up to $45.

  • Samuel’s Revenue: $45
  • Samuel’s Cost: $25
  • Samuel’s Profit $20

*Notice that in this situation, Samuel’s profit could go very high as long as the price keeps going up. It is better for Samuel if the price goes up and bad if the price goes down. But his only risk is $25.

EXAMPLE #2 (Short Selling)

Instead of using his own money, Michael goes to Thomas & Sons (his stockbroker) and borrows a share from them. He goes to the Stock Market (股市) and sells that share for $25. 

Situation A: Michael is right. Two days later, the stock price goes down to $10. Michael buys one share for $10 and gives it to Thomas & Sons to pay them back for what he borrowed. 

  • Michael’s Cost: $10. 
  • Michael’s Revenue: $25
  • Michael’s Profit: $15

Situation B: Samuel is right. Two days later, the stock price goes up to $45. Michael has to buy one share at $45 to give to Thomas & Sons to pay them back for what he borrowed.

  • Michael’s Cost: $45
  • Michael’s Revenue: $25
  • Michael’s Profit: (-$20) ~ Michael actually lost $20. 

*Notice that in this situation, Michael could lose a lot of money (far more than the $25 he earned. If the price keeps going up, he would lose more and more. For example, if the price goes up to $100, Michael will lose $75. The risk for Michael is more than the risk for Samuel. 

#Business Vocabulary ~ #Economies of Scope and Scale

27 May

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in Business, Economics, and Finance classes. Posted here for their use or for helping other students.

Unlike Short-Term (短期) Planning, Long-Term (长期) operates on different goals (目标), strategies (战略), and analyses (分析).  

Business.jpg

Two common goals are very important: Economies of Scale and Economies of Scope. Continue reading

Important #Business Symbols ~ Asian #Currencies

15 May

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in Business, Economics, and Finance classes. Posted here for their use or for helping other students.

Here are some helpful Business Symbols (标志) you should be familiar with for Business English! Although there are some more common than these, you should memorize these symbols because they are the currencies for Asia.

Currencies

Bangladesh (孟加拉国) Taka (BDT)
Nu Bhutan (不丹) Ngultrum (BTN)
Cambodia (柬埔寨) Riel (KHR)
¥ China (中国) Yuan or Renminbi (CNY)
¥ Japan (日本) Yen (JPY)
India (印度) Rupee (INR)
Rp Indonesia (印度尼西亚) Rupiah (IDR)
Laos (老挝) Kip (LAK)
RM Malaysia (马来西亚) Ringgit (RM)
Rf Maldives (马尔代夫) Rufiyaa (MVR)
Mongolia (蒙古) Tögrög (MNT)
K Myanmar (缅甸) Kyat (BMK)
रू Nepal (尼泊尔) Rupee (NPR)
Philippines (菲律宾) Peso (PHP)
Russia (俄国) Ruble (RUB)
South Korea (韩国) Won (KRW)
 රු Sri Lanka (斯里兰卡) Rupee (LKR)
NT$ Taiwan (台湾) New Dollar (TWD)
฿ Thailand (泰国) Baht (THB)
Vietnam (越南) Dong (VND)

Managerial #Economics ~ The Five #Market Structures

8 May

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in Business, Economics, and Finance classes. Posted here for their use or for helping other students.

DEFINITION

Image result for Street market

market (市场) is a situation where two or more groups of people come together to trade resources (资源) as part of business.  You can be trading money, goods, services – it doesn’t matter. Some examples would be:

  • The Mall (购物中心)
  • The Stock Exchange (股票交易)
  • Online Market (Taobao, JD.com)
  • Supermarket (Carrefour, Walmart) – 沃尔玛购物广场
  • Street Food Market (街头食品)

WHY DO WE HAVE MARKETS?

There are many reasons why we have markets!

First of all, think about the Buyer (买方).  For them, maybe it is easier to buy all their things in one place. For example, isn’t it better to buy all your food, toilet paper, and cleaning supplies at the same store? It is faster, saves you bus money, and is less trouble

Now think about the company. Why would an economist (经济学家) or finance officer or CEO think this is a really good idea? Remember, as a finance person, you should obey the wealth maximization rule (最大化利润) of business. This rule says you should do your very best to legally (法律上) and ethically (道德) make the most profit (收益) for the owners.  So they join a market because it helps them make more MONEY!.  

How? Just like the buyer, the seller wants to decrease costs (降低成本).  Things like time, labor, work — they all cost the company a lot of money.  If you can sell your product using less time or employees or effort, it saves you money!  In a market, a lot more buyers come to shop than at other places. Maybe they want to find you, or maybe they wanted something else. For example, they came to the store to buy water but then saw you and also buy your pencils! Amazing! You did not have to pay for advertising, but you still got a surprise customer!

Some markets just save you time and money from advertising (like malls).  You get a lot of customers without having to go find them.  Others, like Taobao, create a place where it is easier to shop and pay and work together, so customers like it more and buy more products. There are a lot of good things about markets. 

Industry Market

An industry (行业) is a special kind of market.  This is not a building or place.  It is used to name all the people buying and selling a specific product.  For example, there is the Phone Market (all the people buying and selling phones). This market includes Huawei, Samsung, Apple, Oppo, Xiaomi, Meizu, and more. It also includes all the people who want to buy a phone (young people, older people, Chinese people, American people, etc).

There is also the Car Market 汽车行业 (all the people buying and selling phones). The Job Market 人才市场 (all the people looking for a job and offering a job).  The Fashion 时尚  Industry (all the people buying and selling clothes and fashion). 

These markets can be big or small, with lots of companies or just one company, with lots of buyers or just one buyer.  They are international with buyers and sellers all over the world who meet each other and do business. 

The Five Ways an Industry Market can be Structured (市场结构)

Market Structure (市场结构) is how an industry market is organized or arranged.  There are actually FIVE different ways a market can be structured, so you must be careful about which one is for your product. 

Why are they different? Maybe the number of companies is different. For example, there area lot of companies who sell pencils, but only a few companies who sell electricity (电力) for your house.  Maybe there are many companies, but only ONE company is actually really big (Size).  For example, for a long time only Microsoft Windows was available for computers.  Some products are very special (独特) and there is no substitute (替代).  (Kind of Product). 

Here is the list of Market Structures:

1) Monopoly (垄断)

In a Monopoly, one company is the only real company and has lots of power.  Usually, in this situation there is only ONE company in the whole market.  Their product is VERY SPECIAL so there are no substitutes (替代) available. Maybe their product is really difficult to copy, or maybe the government made a law (法) that no one can sell a product like them. For some reason, there is no competition. 

These companies are called PRICE-SETTING (价格制定者 | 决定价格) companies because it is easy for them to change their price and still keep their customers. If they want to raise the price $100, great! There is no competition, so the customers still have to buy the product from them. Even if the cost is very expensive!

One example in the US is Gilead, a medicine (医学) company.  In 2016, the US government approved (合法) their new medicine for all people who have Hepatitis C (丙型肝炎) – a very dangerous disease. Gilead was the only company who had so much approval from the US government. It looked awesome!  So many people with the disease want to use this cure. But Gilead was the only company. . . MONOPOLY! So the price was $74,760 (¥51,6083)! That’s a lot of money! (Source)

A monopoly does not always mean there is only one company.  Sometimes there are a few other companies. But only one of them is big, famous, and sells the product. The rest cannot compete with that big company.  So the big company has a lot of power no one else has. 

2) Oligopoly (寡头垄断)

Image result for china eastern

In an Oligopoly, there are a small number of businesses. More than one, but still not a lot of companies.  Usually their products are very similar, so they must compete a lot. If one company has a higher price, maybe the customer will just go to someone else.   These companies are called PRICE-TAKERS 价格的接受者 (this means that if they change the price even a little from the average, maybe the customers will go to someone else. So it is very difficult to change the price.)

For example, airplane companies. In China, there is China Eastern, China Southern, Hainan Airlines, Air China, Shanghai Airlines, etc.  Although there is more than one company, in the whole country there are actually not a lot of companies.  And if you want to fly from Wuhan to Shanghai, maybe their services are very similar.  So if you see that one company’s price is ¥1080 and another company is ¥1380 then you want to buy the ¥1080 ticket.  They can change their prices a little if their service is more special (for example, their time is faster). But usually their prices are very similar. 

3) Monopsony (买方垄断)

The Monopsony market is not very common. 

In this market, there are a many sellers, but only a few people who want to buy.  Today, we see this in the job market. Think about it. Right now, there are a lot of people who want to sell their labor — they want to work for a company and make a good salary.  But there are only a few company’s who want to buy your work.   So there are a lot of “work sellers” (employees), but only a few buyers (companies). 

Another example is people selling Old Televisions or Computers.  In this situation, maybe a lot of people want to sell, but only a few people want to buy.  So the buyer has the power and can decide what the price should be. 

In this situation, the companies have a lot of power and are PRICE-SETTING.  It is difficult for most employees to decide their salary, the company will choose your salary (the price for work). 

4) Monopolistic Competition (垄断性竞争)

Image result for ten miles of peach blossoms

There are many companies in this market, and their products are similarbut different.  Think about Movie or Music companies.  For example, the two TV shows “Three Lives Three Worlds, Ten Miles of Peach Blossoms” (三生三世十里桃花) and “The Journey of Flower” (花千骨).   These shows were a little similar. They are fantasy (幻想) shows with magic, romantic stories about cold men who fall in love with brave women, etc.  The shows are similar, but they are also different.  So maybe you like one show, but you did not want to see the other show. 

For Western readers, compare Vampire Diaries and True Blood.  Both TV Shows were directed towards young viewers and focused on Vampires. They had very similar audiences and competed for the viewers attention. But at the same time, they were very different so some people who liked True Blood maybe didn’t like Vampire Diaries and vice versa. Or maybe one was at a better time or something.  

In this situation, the companies are competitors, but not always substitutes.   So they are both PRICE-SETTING and PRICE-TAKING companies.  They are Price-Taking, because if they are too expensive compared to the rest, people who go to a different company even if the product is not as good.  But they are also Price-Setting because they can raise their price a little high without being too expensive.  For example, maybe a popular singer like Jay Chou or Taylor Swift can make their CDs more expensive than singers who are not popular. 

Let’s say most CDs are selling for $15.  Then you probably cannot sell your CD for $40.  People will be unhappy with your company and choose to leave. But you might be able to sell it for $22 if your music is better than normal. 

5) Perfect Competition (完全竞争)

The biggest markets are the Perfect Competition Markets.  These are markets where:

  1. There are MANY sellers.  
  2. The products are pretty similar or “non-differentiated.”
  3. Companies are Price-Takers

Image result for bottled water

Think about the water (水) market.  Here in China, there are many, many, many different companies selling bottled water. For example, Nongfu (农夫山泉)  and Evian (依云).  Although the companies are different, the water is pretty much the same. You don’t care if you drink water from one company or water from another company – they are all the same. So why do so many students at my university drink Nongfu instead of Evian? Because Nongfu water is only 2¥, but Evian is often 10¥ or more.  What if Nonfu changed their price to 4¥? Would you still buy their water? Maybe no! Because there are other companies (竞争者) who sell the same water for less money!  So maybe it is very difficult for Nongfu to change their prices.  They do not have a lot of “price power,” so we call them a ‘Price-Taking’ company. This kind of situation is called competitive market.

Image result for nongfu

KEY WORDS

  • Market (市场)
  • Industry (行业)
  • Market Structure (市场结构)
  • Substitute (替代)
  • Monopoly (垄断)
  • PRICE-SETTING (价格制定者 or 决定价格)
  • PRICE-TAKERS 价格的接受者
  • Oligopoly (寡头垄断)
  • Monopsony (买方垄断)
  • Monopolistic Competition (垄断性竞争)
  • Perfect Competition (完全竞争)

Understanding the #IncomeStatement

5 Apr

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in a Managerial Economics and International Finance class. Posted here for their use or for helping other students.

There are 3 main Financial Documents you should be familiar with. Each paper is typically published once a year, so we say they are annual reports (年波).  

**Please notice that all three documents only count and discuss EXPLICIT COSTS (明确的成本).  These documents are working with numbers and math, so the Explicit Costs includes only the money paid out to market-suppliers. It does not include any of the Implicit Costs like time and effort that the owner loses.  Therefore, the profits we see are only ACCOUNTING PROFITS (会计利润).  You can find a more detailed explanation of Costs and Profits here.

The Income Statement (损益表)~ Tells the reader very specifically (with a lot of detail):

  • How much REVENUE (收入) they earned and where it came from,
    • Revenue = Income, Sales, Yield, Gains
  • How much COST (成本) they had and what the money was spent on,
    • Cost = Expenses, Loss
  • How much PROFIT (收益) was left at the end and what of that the owners will be paid.
    • Profit = Returns, Sales, Yield, Income

EXAMPLE OF AN INCOME STATEMENT:Target Corporation Income Statement-page-001

STEP 1: COST OF PRODUCTION

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Christmas Countdown Begins!

25 Nov

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Economics ~ Introduction to Managerial Economics

24 Mar

Hello-our internet sucks, so I’m posting this for some of my students 🙂 You’re welcome to enjoy it too!

What is Managerial Economics?

  • Economics (经济学)= The study of how resources (资源) are created (创造), gathered (搜集,聚集), traded (营业), and divided (分离,划分).
    • Resources = Anything you use to help the company work. Examples: time, money, land, tools, labor, raw materials.
      • Natural Resources (自然资源) = Resources created by nature. Examples: wood, water, air, rocks/stones, flowers, natural chemicals
      • Man-Made Resources (人造资源) = Resources created by humans by either combining (mixing together) or changing natural resources into something new. Examples: jewelry, paint, fabric, steel, hammers.
      • Limited Resources (限制性资源) = Resources either no longer being created or only created in small amounts. Meaning the supply is not enough.Examples: Gold, Diamonds, Water in a desert.
      • Unlimited Resources (无限制性资源) = Where there is a large amount of the resource or it is created fast enough to replace any that is lost. Supply is enough.Examples: Water, Air.
      • Raw Materials (原材料) = The resources that are put into the product. Example: If we make a computer, raw materials would include wires, plastic, metal, paint, springs, etc.
      • Market-Supplied Resources (市场提供的资源) = Resources owned by someone outside of the company. Examples = Taxes, Utilities, Rent, Raw Materials, Wages
      • Owner-Supplied Resources (业主提供的资源) = Resources owned by the company’s owners.
  • Manager (经纪, 经理) = A person who is obligated to ensure the company (or department) is effectively organized and controlled.
  • Managerial Economics (管理经济学) = The study of the best method for managers to create, gather, trade, and divide the company’s resources.

Goal of Effective Managers 

  • Wealth or Profit (收益) Maximization Rule = #1 Goal of Effective Managers is to make the owner’s the most profit (as long as they do so ethically and legally)

How to Maximize Profits (收益)?

  • Profit = Revenue – Cost
  • Two ways to Maximize Profit:
    • Make the Highest Revenue
    • Pay the Lowest Costs

What are Revenue, Cost, and Profits?

  • Revenue (收入) = Total Income or Money the Company makes from its work.
  • Cost (成本)  = The losses or sacrifices the company makes in exchange for getting and using resources in its work. 
    • Opportunity Costs (机会成本) = The company’s costs created because it lost some opportunity. 
      • Opportunity Cost of using Market-Supplied Resources = $$ Spent paying for those resources (you lose the opportunity to spend the money on something else)
      • Opportunity Cost of using Owner-Supplied Resources = $$, time, effort lost that the owner would have had if they spent their resources on something else.
    • 2 Types of Opportunity Costs
      • Explicit Costs (明确的成本) = Any money the company pays owners of Market-Supplied Resources
      • Implicit Costs (隐性成本) = Anything the Owner loses by giving the company Owner-Supplied Resources
    • Total Economic Cost = Explicit Costs + Implicit Costs 
  • Profit (收益)  = Everything the company gets to keep from the Revenue after it pays its costs!
    • Present Profit v. Future Profit
      • Present Profit = What we are keeping right now. (Most Important)
      • Expected Future Profit = What we think we’ll get in the future (Companies with higher expected future profits have more value. While companies with a possibility of low future profits will have a lower value)
    • Profit is Counted in Two Ways
      • Example: Joshua has a company (Company A) that just made $150,000 in Revenue. The company spends $9,000 on Taxes and Utilities, $3,000 on Wages, and $5,000 on Raw Materials. Joshua gave the company the building but would have made $2,000 if he used it as a school instead. He also lost $5,000 on his original investment. 
      • Economic Profit (经济利润) = Revenue – Total Economic Cost
        • What is Company A’s Economic Profit?
      • Accounting Profit (会计利润) = Revenue – Explicit Costs.
        • What is Company A’s Accounting Profit?
      • In Managerial Economics, we usually mean Accounting Profit when we say “Profit”

More to come later 🙂

Couldn’t be more Proud

28 Nov
20141128_234639[1]

My Finance Students in their Graduation Photo. ❤

I’ve just spent the last week working for hours and hours with some of my students to get their papers finished. One of my students told me it was the first time a teacher had ever told him good job, and another said he had never worked so hard on an assignment. In the end, I’ve never been so impressed or proud as I have been of these people. They work their butts off trying to not only comprehend difficult subjects, but also to explain it back to you in a completely foreign language. And after looking at the finished works tonight, I could almost cry I’m so happy. They got it! and they wrote it! and they even added in some really great ideas for the solutions part, things that I wouldn’t even have thought of. So tonight I want the world to know that my students rock and I love them all!

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