Tag Archives: Economics

Managerial #Economics ~ Understanding #MRTS the Fun Way!

12 Jun

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

PART 1 – Key Words

1. Quantity (量) ~ How many products = Q (# of  🚗)
2. Labor (员工) ~ The Number of Workers = L (👱)
3. Capital (资金) ~ The Money ($$) we need = K (💲) 4. Change (变化) ~ How much did the # change? = Δ(🔺) 5. Marginal (边际成本) ~ Result if you add ONE MORE (+1) Q 6. Rate (比率) ~ Ratio 7. Substitution (取代) ~ XK = 1L (Substitution asks “what is X?”) 8. Input (输入) ~ All the resources you put into a product. 1. Ice Cream 🍦has many inputs: 1. Milk🥛 2. Eggs🍳 3. Sugar 4. Ice 5. Salt 6. Chocolate Sauce 9. Output (产量) ~ The product you create 1. Ice Cream 🍨🍦is the output! Part 2 – The Relationship Between L, K, and Q Every product (产量) can have lots of inputs (输入), just like the Ice Cream 🍦 or a Car 🚗. Input + Input + Input + Input = Output (🚗) But in our class, we focus on TWO inputs: Labor (👱) and Money (💲) 👱+💲=🚗 Labor (👱) + Money (💲) = Quantity (🚗) L (👱)+ K (💲)= Q(🚗) Example: Justin sells 200 cars 🚗every day. Not 201 cars. Not 199 cars. He sells EXACTLY 200 cars 🚗every day. L (👱) + K (💲) = 200 cars (🚗) Justin knows that in ONE DAY🔆: • 1 worker 👱 can create 50% of a car 🚗~ 2 workers 👱👱can create 100% of a car 🚗(one car) • 1L = 0.5Q 🚗 • 2L = 1Q 🚗 • 5 💲 can pay for 20% of a car 🚗~ 25 💲can pay for 100% of a car 🚗(one car) • 1K = 0.2Q 🚗 • 5K = 1Q 🚗 Rule #1 ~ If Land K ⬆, then the # of 🚗 cars will also ⬆ Rule #2 ~ If Land K ⬇, then the # of 🚗 cars will also ⬇ Rule #3 ~ If L ⬇ and the # of 🚗 cars is still 200 (stay the same), K must ⬆ Rule #4 ~ If K ⬇ and the # of 🚗 cars is still 200 (stay the same), L must ⬆ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Today, Justin looks 🤔at his Money 💲and is NOT happy😭. He thinks he spends TOO MUCH money😡! He wants to buy a new bicycle🚲, so he decides to SAVE 100 💲 This means today: 👱L + (💲K – 💲100K) = ? Q🚗 WHAT IS THE NEW Q (number of cars🚗) that Justin Makes Today? Day 1 (Yesterday): 👱L + 💲K = 🚗200Q Day 2 (Today): 👱L + (💲K – 💲100K) = 🚗200Q – all the 🚗cars 100K would pay for. Remember! 💲1K = 🚗0.20Q (one dollar pays for 0.20 cars in a day) If Justin does not spend 100 today, he will lose the money for 20 cars! 1K = 0.20 cars 💲-100K = -20 cars🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗 ANSWER: Justin makes 180 cars today! L + (K – 100K) = 200 cars – 20 cars = 180 cars🚗 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ OK?!?🤔 NO!!! 😡Remember –> “Justin sells 200 cars 🚗every day. Not 201 cars. Not 199 cars. He sells EXACTLY 200 cars every day. ” PROBLEM: How can Justin still make and sell 200 cars tomorrow if he still saves the 100 (-100K) as today. Rule #4 ~ If 💲K ⬇ and the # of 🚗 cars is 200 (the same), 👱L must ⬆ QUESTION: HOW MUCH should 👱L go up (⬆)? • Step 1 ~ How many extra cars 🚗does Justin need to make? ~ Justin can make 180 cars right now if he saves 100 (-100K) but L stays the same as yesterday. 200 🚗 – 180 🚗= 20🚗 Justin needs to make 👱L ⬆ enough to make 20 extra cars🚗 tomorrow. • Step 2 ~ How much L does Justin have to add (+) to make 20 more cars tomorrow? ?L + (K – 100K) = 200Q Remember, 👱1L = 0.5Q 🚗 | 👱👱2L = 1Q 🚗 20Q 🚗= 40L ANSWER: Justin will have to hire 40 workers (+40L) in order to make 20 more cars tomorrow. 👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫 FINAL SOLUTION *Substitution = Adding L to Decrease K (👱L + 👱40L) + (💲K – 💲100K) = 200 Q (🚗) Part 3 ~ MRTS MRTS = Marginal Rate of Technical Substitution Go Back to Part 2. • 🔺K💲 • Yesterday, Justin had K💲 • Tomorrow, Justin has -100K💲 • 🔺K = -100K💲 • 🔺L👱 • Yesterday, Justin had L👱 • Tomorrow, Justin has +40L👱 • 🔺L = +40L👱 MRTS = 5K : 2L |5💲 : 2👫 This just tells us: 1. For every 2 👫workers Justin has, he spends 5💲💲💲💲💲. 2. For every 1 👱worker Just has, he spends 2.50💲💲½ 3. If Justin wants to hire 1 worker (+1L) , he will save 2.50 (-2.50K) 4. I Justin wants to save 40 (-40K), he must hire 16 workers (+16L) MRTS shows how much L👱 can be a substitute for K💲! #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). 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.  ৳ 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 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) 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) 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 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. 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: STEP 1: COST OF PRODUCTION Venezuelan Government Confiscates 4 Million Toys Right Before Christmas 11 Dec This week, I was teaching my Economic Law and Int’l Economics students about the dangers of Government Mismanagement of resources as one of 6 leading causes for economic collapses. Then this article came out as a perfect demonstration! Venezuela is desperately in need on businesses to increase its economy. Now, thanks to this move, while poor children might enjoy it for a bit – the long term results are not promising. The company, with no profits for Christmas, will likely employ much fewer workers for the holiday and may in fact fire several. It is also possible that they will go bankrupt. Thus resulting in more poor children (demand) and an even smaller supply of toys. Which means both more poverty and likely higher prices. Even my students with an elementary economics-background were able to say “the government has poor long-term vision” “Venezuela seizes almost 4mn toys to distribute among poor children at Christmas” “Venezuelan authorities seized 3.8 million toys from one of the country’s main distributors, accusing it of hoarding and hiking prices. They promised that the seized goods would be distributed among poor children. Venezuela’s country fair pricing watchdog Sundde seized toys that distributor Kreisel kept in three warehouses located in Caracas and Guarenas on Friday, local media reported. Meanwhile, authorities ensured local supply committees (CLAPs), created in April, would distribute subsidized food and commodities, to “fairly” spread the confiscated toys among poor children.” . . . . READ MORE Understanding Compound Interest 14 Jun As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in a Managerial Economics and Corporate Finance class. Posted here for their use or for helping other students. Corporate Value (值) Financial officers and Managers are extremely responsible for the monetary (货币) goings-on in their companies. As we said before, the Wealth Maximization Rule means that Financial and Corporate Managers are required to maximize (最大化) the profits (收益) for their investors (投资者). However, maximizing profits requires in-depth (深入)planning and micro-managing (微观) your funds today while considering (考虑) future profits as well. There are two types of Value (值) that you should be aware of in Finance and Economics. The first is called Present Value (现值) and is the value today of something that will increase in value in the future. ExampleWhen we loan someone 1,000 at 10% interest, we know that our 1,000 loan will increase in value in the future. Present Value = PV. The second is called Future Value (未来价值) and is the value that the item will have in the future. Future Value = FV. Interest (利) I’ll make another post later discussing the many ways to use Present and Future value in your company, but today I just wanted to talk about using them to calculate (计算) “Compound Interest” (复利). Usually, when we loan money to someone or invest (投资) our money in something, we do so on the condition that we receive back more money than we put in. Our corporation is not a charity (慈善机构), we don’t loan you things for free! The original money we invest is called the Principal (本息). The extra money we get on top is called the Interest (利). Example ~ Company A (a large global corporation) invests 100,000 in a small new business called Company B. Company B has 10 years to pay it back. But Company A doesn’t do this for free ~ they want to maximize their profits too. That means they have to make some money on this contract (合同). So they ask Company B to pay an additional 7% per year. 100,000 = Principal 7% = Interest COMPOUND INTEREST (复利) Problem! ~ 7% of what? Answer! ~ It depends It depends on how Company A decides to count it. There are two separate mathematical formulas (数学公式) you can use to figure out the Interest. The first one is called Simple Interest (单利) and I’ve already looked at it before. The second method is called Compound Interest (复利). Compound Interest says that each payment period, Company B is going to pay an additional 7% of the currently owed principal! Lenders and Investors really like compound interest a lot better than simple interest. For example: I borrow 1000 due in two years. My interest rate is 10%. If I use Simple Interest: Year 1, I owe 1000 + 10% interest = 1100. Year 2, I owe 1100 + (10% of 1000) = 1200. 🙂 If I use Compound Interest: Year 1, I owe 1000 + 10% interest = 1100. Year 2, I owe 1100 + (10% of 1100) = 1210 The formula for Compound Interest is: $I = P(1+r) ^{nt} - P$ I = Interest P = Present Value R = Interest Rate T = Number of Years Involved N = Number of Times a Year Example Company A (a large global corporation) invests 100,000 in a small new business called Company B. Company B has 10 years to pay it back. The interest rate is 7% compounded bi-annually. What is the Total Interest (利) you will pay over 10 Years? $I = P(1+r) ^{nt} - P$ $I = 100,000 (1 + .07) ^{(2)(10)} - 100,000$ $I = 386,968.446 - 100,000 = 286,968.45$ Calculating FUTURE VALUE and PRESENT VALUE using COMPOUND INTEREST The total interest is of course important to both Company A and Company B, there are two other important numbers that the financial managers of Company A want to know–the Present Value of their money and the Future Value of their money. Future Value $FV = P(1+r)^{nt}$ FV = Future Value (how much money you will make in total) PV = Present Value R = Interest Rate T = Number of years involved N = Times per Year Using our example above with Company A & B, the Future Value is calculated like this: $FV = 100,000 (1+.07)^{(2)(10)}$ $FV = 386,968.46$ That means Company A will make a total of 286,968.46 if they invest their 100,000 in Company B now. Over 10 years, their 100,000 will change into 386,968.46. We like this plan! Present Value Sometimes, for example with bonds (债券), we know the Future Value (how much money will be paid to us in the end). But we don’t know how much money has to be invested (Present Value) to get that future result. So Present Value is calculated by the formula: $PV = \frac{FV}{(1 + r)^{nt}}$ PV = Present Value FV = Future Value R = Interest Rate T = Number of years involved N = Number of Times per Year Example: Mary Jane knows that in 4 years, she needs to have a total of 150,000 to pay her college tuition. She has an interest-generating account that gives her a 4% compound interest rate bi-annually on everything she puts in. How much money should she invest today (Present Value) in order to have 150,000 in 4 years? $PV = \frac{150,000}{(1 + .04)^{(2)(5)}}$ $PV = \frac{150,000}{1.48024428} = 101,336.67$ That means that Mary Jane needs to put 101,336.67 in her bank account now in order to get 150,000 in the future. KEY TERMS TO REMEMBER 1. Value (值) 2. Present Value (现值) 3. Future Value (未来价值) 4. Interest (利) 5. Simple Interest (单利) 6. Compound Interest (复利) 7. Principal (本息) 8. Monthly (每月一次) 9. Weekly (每周) 10. Annually (每年) 11. Bi-Annually (一年两次) 12. Quarterly (季刊) FORMULAS TO REMEMBER Compound Interest $I = P(1+r) ^{nt} - P$ Future Value $FV = P(1+r)^{nt}$ Present Value $PV = \frac{FV}{(1 + r)^{nt}}$ Understanding Simple Interest 6 Jun As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in a Managerial Economics and Corporate Finance class. Posted here for their use or for helping other students. Corporate Value (值) Financial officers and Managers are extremely responsible for the monetary (货币) goings-on in their companies. As we said before, the Wealth Maximization Rule means that Financial and Corporate Managers are required to maximize (最大化) the profits (收益) for their investors (投资者). However, maximizing profits requires in-depth (深入)planning and micro-managing (微观) your funds today while considering (考虑) future profits as well. There are two types of Value (值) that you should be aware of in Finance and Economics. The first is called Present Value (现值) and is the value today of something that will increase in value in the future. ExampleWhen we loan someone 1,000 at 10% interest, we know that our 1,000 loan will increase in value in the future. Present Value = PV. The second is called Future Value (未来价值) and is the value that the item will have in the future. Future Value = FV. Interest (利) I’ll make another post later discussing the many ways to use Present and Future value in your company, but today I just wanted to talk about using them to calculate (计算) “Simple Interest” (单利). Usually, when we loan money to someone or invest (投资) our money in something, we do so on the condition that we receive back more money than we put in. Our corporation is not a charity (慈善机构), we don’t loan you things for free! The original money we invest is called the Principal (本息). The extra money we get on top is called the Interest (利). Example ~ Company A (a large global corporation) invests 100,000 in a small new business called Company B. Company B has 10 years to pay it back. But Company A doesn’t do this for free ~ they want to maximize their profits too. That means they have to make some money on this contract (合同). So they ask Company B to pay an additional 7% per year. 100,000 = Principal 7% = Interest SIMPLE INTEREST (单利) Problem! ~ 7% of what? Answer! ~ It depends 🙂 It depends on how Company A decides to count it. There are two separate mathematical formulas (数学公式) you can use to figure out the Interest. The first one is called Simple Interest (单利). Simple Interest says that each payment period Company B is going to pay an additional 7% of the original principal (100,000). The formula for Simple Interest is: $I = PRT$ I = Interest P = Present Value R = Interest Rate T = Number of Years Involved Example Company A (a large global corporation) invests 100,000 in a small new business called Company B. Company B has 10 years to pay it back. The interest rate is 7% per year. What is the Total Interest (利) you will pay over 10 Years? $I = PRT$ $I = (100,000)(.07)(10) = 70,000$ Calculating FUTURE VALUE and PRESENT VALUE using SIMPLE INTEREST The total interest is of course important to both Company A and Company B, there are two other important numbers that the financial managers of Company A want to know–the Present Value of their money and the Future Value of their money. Future Value $FV = PV(1+RT)$ FV = Future Value (how much money you will make in total) PV = Present Value R = Interest Rate T = Number of years involved Using our example above with Company A & B, the Future Value is calculated like this: $FV = (100,000)(1+(.07)(10))$ $FV = (100,000)(1.7) = 170,000$ That means Company A will make a total of 70,000 if they invest their 100,000 in Company B now. Over 10 years, their 100,000 will change into 170,000. 🙂 We like this plan! Present Value Sometimes, for example with bonds (债券), we know the Future Value (how much money will be paid to us in the end). But we don’t know how much money has to be invested (Present Value) to get that future result. So Present Value is calculated by the formula: $PV = \frac{FV}{(1+RT)}$ PV = Present Value PV = Future Value R = Interest Rate T = Number of years involved Example: Mary Jane knows that in 4 years, she needs to have a total of 150,000 to pay her college tuition. She has an interest-generating account that gives her a 4% interest rate on everything she puts in. How much money should she invest today (Present Value) in order to have 150,000 in 4 years? $PV = \frac{150,000}{(1+(.04)(4))}$ $PV = \frac{150,000}{(1.16)} = 129,310.35$ That means that Mary Jane needs to put 129,310.35 in her bank account now in order to get 150,000 in the future. KEY TERMS TO REMEMBER 1. Value (值) 2. Present Value (现值) 3. Future Value (未来价值) 4. Interest (利) 5. Simple Interest (单利) 6. Principal (本息) FORMULAS TO REMEMBER Simple Interest $I = PRT$ Future Value $FV = PV(1+RT)$ Present Value $PV = \frac{FV}{(1+RT)}$ Calculating the Value of a Company 25 Apr As always, this lesson is not intended to be professional advice. This is simply my lesson material for ESL students in a Managerial Economics class. Posted here for their use or for helping other Economics students. Finding the Value of the Firm We measure the success of a financial manager (how well they maximize profits) by finding the overall Value of the Firm (公司的价值). Value of the Firm = Value of the Company = Present Value (现值)= How much money ($$/￥/₩) the company would be worth if you tried to sell it today (多少钱该公司将是值得的，如果你想出售它). The Value of the Firm should include

1. How much money the company is worth today and
2. Expected profits in the future.

Mathematical Equation for Calculating the Value of the Firm

1. Value of the Firm = Current Profit + Expected Future Profit.

Each Year’s Profit is calculated with the following formula:

$Y_{T}=\frac{X}{(1+R)^{T}}$

• X = Current or Expected Accounting Profit (预期会计利润) = Revenue – Explicit Costs
• R = Risk-Adjusted Discount Rate (风险调整贴现率) (although we hope we will make the expected accounting profit this year or in future years, there is always the possibility that we will not. No one will pay us the full expected value of the company because of this risk. So to give the buyer some protection, just in case, we remove the Risk-Adjusted Discount Rate from the total.)（我们从方程中删除的金额，因为我们现在可能不会真正使所有预期的利润，我们想要的）
• T = Number of Years from Today

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”