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Microeconomics and Business Basics

Microeconomics and Business Basics. Revenues (sales), the total amount you sell to customers = number of Units x Price. Revenues. Sell 3 ice cream bars Each ice cream bar has a price of $2.50 Revenues = $7.50. Costs. What you spent to make the good that you sold

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Microeconomics and Business Basics

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  1. Microeconomics and Business Basics Revenues (sales), the total amount you sell to customers = number of Units x Price

  2. Revenues • Sell 3 ice cream bars • Each ice cream bar has a price of $2.50 • Revenues = $7.50

  3. Costs • What you spent to make the good that you sold • For the ice cream bar, the cost of all the ingredients + what it cost to make the bar

  4. Profit or Loss • Profit – When revenues are more than total costs • Loss – When revenues are less than total costs

  5. Types of Costs FixedCosts Expenses that don't change based on production or sales volumes.

  6. Toyota Example – Fixed Costs • Toyota must have an entire factory all ready to make just one car • To have a factory ready, you need to pay all the workers, pay the electricity costs, pay the salaries of management, pay insurance, pay accountants, rent, cleaning of the factory after the shift is over, etc..

  7. Burger King Example, Fixed Costs • IfBurger King is open from 1130am to 1130pm, itispossiblethattheycouldhaveonlyonecustomerduringthose 12 hours • But BK still has tohave a cashier, cook, personthatcleans, payelectricityfortheday, and paythesalary of the CEO in Miami, etc…

  8. Variable Costs Variable Costs are expenses that vary based on production volumes. They include materials and delivery costs

  9. Toyota example – Variable Costs • Theamount of thefollowingmaterialsthatyouneedwilldependonthenumberor cars manufactured! • Metal, tires, plastic, car radios, engines, brakes, paint, GPS systems, leather, car batteries, etc.. • Alsothe more cars yousell, the more itcostsyoutodeliverthemtocustomers (deliverycosts)

  10. Burger King´s Variable Costs? • Hamburger meat, buns, tomatoes, lettuce • The more hamburgers they make in one day, the higher the costs of these things are

  11. Total Costs Total Costs = FixedCosts + Variable Costs Profit = Revenues – Total Costs Forthe ice cream bar example: Revenues $7.50 Total costs $3.00 Profit $4.50

  12. Average Total Costs per unit • The total costsdividedbythenumber of units Example: 1 unit (1 Nestle ice cream bar) FixedCosts $10,000 Variable Costs $1 per unit $10,000 + $1 = $10,001 = $10,001 ATC per unit 1 unit

  13. Economies of Scale Spreadingyourfixedcostsover a larger base Itwillbecheaper PER ice cream bar forNestletomake 30,000 ice creambarsthantomakeone ice cream bar (oreven 20,000)

  14. Economies of Scale! Example: 5,000 units Fixed Costs $10,000 Variable Costs $1 per unit 10,000 + $5,000 = $15,000 = $3 ATC per unit 5,000 units

  15. Economies of Scale! Example: 10,000 units Fixed Costs $10,000 Variable Costs $1 per unit $10,000 + $10,000 = $20,000 = $2 ATC per unit 10,000 units

  16. Economies of Scale! Example: 30,000 units Fixed Costs $10,000 Variable Costs $1 per unit $10,000 + $30,000 = $40,000 = $1.33 ATC per unit 30,000 units

  17. Average Revenues (AR) Thepriceyoucharge Simple case, onlyoneproduct (Nestle ice cream bar)

  18. FACTORS OF PRODUCTION • LAND • LABOUR • CAPITAL • ENTERPRISE

  19. South American countries´ rankings formarketFreedom

  20. Sourceforreasonsthatsomeranklow 2011 Investment Climate Statement (Bureau of Economic, Energy and Business Affairs, US Government)

  21. Why Does Economic Freedom Matter? Economic freedom is a crucial component of liberty. It empowers people to work, produce, consume, own, trade, and invest according to their personal choices.

  22. Pinktidecountriesranklowonthemarketfreedomlist – Why? • Countries that rank low: Their overall investment climates remain uncertain as economic, commercial and investment policies continue to evolve

  23. Lower ranking countries • Various legal changes negatively impact private sector • Some governments have terminated investments by MEDCs in their countries

  24. Low ranking countries • In general, the legal complexity resulting from the inconsistent application of investment laws • Means risks of doing business in these countries

  25. Low ranking countries • Government officials and private businesses have used regulatory schemes and questionable legal maneuvers to affect foreign company operations in the country • Companies have sometimes been confronted with requirements of additional paymentsnot negotiated in original agreements.

  26. Low ranking countries • Sometines property, jointly owned by several persons or companies, can be seized by courts through judgments or seizure orders • Resolution and compensation typically require many years and significant legal costs

  27. Low ranking countries • The judiciary systems in some of the continues operate slowly • Enforcement against intellectual property infringement remains a serious problem

  28. Low ranking countries • Weakness in the judicial system and its susceptibility to political or economic pressures (slow and/or corrupt)

  29. Low ranking countries • Criminal complaints and arrest warrants against foreign company officials have been used to pressure companies involved in commercial disputes

  30. Low ranking countries • There is a widespread local trade in pirated audio and video recordings, computer software, and counterfeit activity regarding brand name clothing

  31. Low ranking countries There are sometimes no antitrust laws and industry is fairly concentrated

  32. Low ranking countries • Inconsistency: ministries and regional and municipal governments all impose their own requirements and regulations on commercial activity

  33. Low ranking countries • Customs procedures (for imports arriving) are sometimes too complicated and slow • Regulators sometimes provide little or no opportunity for public comment on newly proposed laws and regulations

  34. Low ranking countries • Capital marketsare notdeveloped • Corruptionsometimes • Labor lawsthat do notprotectemployeesadequataley (or are notinforced)

  35. Good news, some progress • In many of these countries the central governments and are exploring ways to support current investment and encourage the entry of new investment • and also lower the bureaucratic hurdles (RED TAPE) mentioned

  36. Where do South American countries rank? • Rankings of the 10 countries of South America in the Forbes Magazine ¨Best Countries for Business¨ in 2011 • The Rankings are based on 11 different factors, and evaluated 134 different countries:

  37. Forbes List • Propertyrights • Innovation • Taxes

  38. Forbes List • Technology • Corruption • Freedom (personal, trade and monetary)

  39. Forbes List • Red tape (havingtofilloutforms, gothroughdifferentsteps, etc..) • Investor protection • Stock market performance

  40. Forbes List • Canada is number one in the world • MEDCs rated higher than LEDCs • South America: #24 is Chile

  41. Forbes List • #42 is Perú – Case of Mr. Humala and observations of Mr. Simons, 2006 to 2011 (nextslide) • #61 is Uruguay • #62 is Colombia

  42. Regarding Perú and Humala • Not elected in 2006, was too extreme, too aligned with Chavez • Elected in 2011 on a more balance promise (to be more in the center, less on the left)

  43. Forbes List • #73 is Brazil • # 85 is Paraguay • #95 is Argentina

  44. Forbes List (at the bottom) • #114 is Ecuador • #123 is Bolivia • #130 is Venezuela

  45. Types of economies • Market, command, mixed • But, we find that virtually all economies are mixed

  46. Types of economies • A market economy(we also use the word capitalism) is an economy in which decisions regarding investment, production and distribution are based on supply and demand. • The prices of goods and services are determined in a free price system

  47. Command economy • Alsocalled a ¨plannedeconomy¨ isonthatiscompletelycontrolledbythegovernment. Thewordsocialismisusedto describe this, BUT MANY CAPITALIST ECONOMIES HAVE PUBLIC OWNERSHIP OF CERTAIN PARTS TOO (so wehavetorefertomixedeconomy) • Notcommon in theworld • Examples: former Soviet Union, Cuba, Libya, North Korea

  48. Mixed economy • Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety of government-sponsored aspects • The USA has been called a mixed economy and so have welfare states (Sweden and Norway, where the government plays are large role in the protection of the well being of its citizens)

  49. Mixed economies • Cuba has even been labled a mixed economy, so it gets confusing • So we can say that mixed economies is the most common type of economy.

  50. Mixed economies • In USA forexample, thereisthe Central Bank, the Post office, many of therailroadswereownedbythegovernment, publictelevisionstations, and many, manygovernment agencies • And muchregulatoryoversight and thingslikeminimumwages, and tradebarriers

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