Chapter 8 Economics

Chapter 8 Economics

Two branches of Economics {Micro, Macro}

• Microeconomics focuses on patterns of supply and demand and the determination of price and output in a certain industry. (i.e. Coffee, PC, Cars, etc) It analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households level. For example, people who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area.
• Macroeconomics is a national, regional, or global level behavior such as GDP, unemployment, inflation/deflation, international trade and finance. However to understand large scale behavior, understanding of micro level is crucial.  For example, to understand why a change in interest rates leads to changes in real GDP, we need to understand how lower interest rates influence decisions, such as the decision of how much to save, at the firm or household level.

Keynesian Theory
An economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.  A supporter of Keynesian economics believes it is the government's job to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation. - This is an opposite thoughts from Adam Smith's invisible hand.


Monetarist Theory
This theory states macroeconomic performance is mainly determined by the supply of money and central banking. (Milton Friedman – Nobel Prize in Economics)


GNP – Gross National Product
The centerpiece of macroeconomic.
GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living.


GNP ranking:
http://www.studentsoftheworld.info/infopays/rank/PNB2.html
Amazing that what US is making ??

List of countries by GNP(GNI) (nominal, Atlas method) (millions of US$)[5] (Top 10)

Rank	2010		2009		2008
1	* United States	14,600,828	* United States	14,223,686	* United States	14,506,142
2	* China	5,700,018	* China	4,857,623	* Japan	4,853,005
3	* Japan	5,369,116	* Japan	4,785,450	* China	4,042,883
4	* Germany	3,537,180	* Germany	3,473,814	* Germany	3,504,510
5	* France	2,749,821	* France	2,750,418	* United Kingdom	2,799,960
6	* United Kingdom	2,399,292	* United Kingdom	2,538,578	* France	2,700,770
7	* Italy	2,125,845	* Italy	2,114,668	* Italy	2,115,482
8	* Brazil	1,830,392	* Brazil	1,563,126	* Spain	1,449,186
9	* India	1,566,636	* Spain	1,472,046	* Canada	1,446,669
10	* Spain	1,462,894	* India	1,405,064	* Brazil	1,433,699

Finding happiness outside the GNP / Bhutan searching for a way to stop drift from harmony
January 23, 2006|Charles Burress, Chronicle Staff Writer
http://articles.sfgate.com/2006-01-23/news/17279481_1_bhutan-gross-national-happiness-consumer-goods

Chapter 7 Operation

Chapter 7 Operations

Operations generally mean production management in business. The important issues for production is how to produce and deliver 1) Cost effective 2) High volume 3) High quality products timely to the market.

When a company and its investors can profit from the products, it can continue the business and exist in the market.  Thus it is always important that the company can make profits, however on the other hand, it should be done in good and reasonable way, to make its employees proud and its customers beneficial, and finally overall valuable to human life and society.

POM Problem ~ Production Operation Management ~ is not only technical or numerical problems but also humanistic, workers’ condition, motivation, and environmental problems. It is a complicated issue which deals with a trade offs of 2 things.

Problem 1 Capacities in manufacturing process

• Has constraints
• How to maximize
• Basics of Mfg frame works: Flow Diagram, Linear Programming, Scheduling

Problem 2 Inventory

• Keep optimal inventory size, balancing of materials, sales and inventory sizes is the major issue.

Problem 3 Quality and Standards

• Increase of testing coverage for the products.
• Effectiveness of testing process.
• Trade off between high yield rate and quality

BUS600 - Group Assignment: Decide how are you going to fund your start up and why.

Problem Summary:

Using at least three tools/concepts in the Quantitative Analysis and Finance Chapter, decide how are you going to fund your start up and why.
Spend at least 30 minutes in your group, come to an agreement, upload 250-1000 words of your plan (mention the concepts/tools) to your learning journal. It is fine for each one to upload the same text, but variation and your own ideas are encouraged.

Problems

(1) Company type
s corp.: because we will not be responsible for double taxes, but we will have the liability insulation of incorporation. We may use stock to engage participants in our business, but we can reincorporate as a c-corp when we grow to a size that warrants that company type.

(2) Do we need to write a business plan to raise fund?
outline below

(3b) How much will we charge for our services.  $5000-$50000 plus expenses depending on the tier and complexity of certification. Paid annually for recertification.

(3a) How much fund will be needed for our venture “Society Trust”
Cost: Executive office suite (office space): USD 500 dollars average/month = $6K pa
Salaries: Staffs (5 founders + 1 accounting/MISC) average at 80K USD; So the total cost per year is 480K
Marketing costs: $200k for the first year

(4) Which way to raise fund and who are our targets to raise fund?

  (4a) Obtain bank loan: see foundation grants -- PRIs include loans

  (4b) Obtain Credit from suppliers: We don’t have any real supplier for our company. We are a service company.

  (4c) Issue stocks: looking for angel investors and venture investors. Internal stock structure; If we look for venture investment, VC will look for higher return from the company. We will need to have a 15 at higher end company services. so, the best option is to look for angel investment.

  (4d) Issue bonds: Not yet at the beginning.

  (4e) Foundation grants:
http://grantspace.org/Tools/Knowledge-Base/Individual-Grantseekers/For-Profit-Enterprises/Business-funding [PRIs program related investments]

  (4f) Donations? High profile/celebrity donors could have double impact of fund raising and testimonial marketing.

  (4g) Government legislation that requires business to use a certification like (or explicitly) ours. Good business model like “Energy Efficient Mark” for most of the appliances. The certification company is a private company but the company work with government to gain public conscense.

  (4h) Give the first few customers stock grants to engage them and build participation in our certification program. We can also provide free certification (and sell consulting service to get them up to certification level) to strategic partners that will help establish the brand.

(5) Which tools/concepts  we choose to do number (4) funding our venture

(a) Cash flow analysis: Investment, revenue, cost, and total cash flow

(b) Net Present value(NPV): our certification process creates an annual revenue stream from each participant, NPV allow us to calculate the current value of those income streams. Furthermore, using the probability of those clients maintaining participation in the program will allow us to calculate a weighted NPV and thereby establish a current valuation for the company.

 (c) Using FRICTO to balance our risk/reward on an ongoing basis. Flexibility, Risk, Income, Control, Timing, Other

(d) Regression analysis for forecasting/projections - we could identify relevant variables for the analysis

(e) Strategic mergers and stock purchase/sales with other related businesses to form and solidify partnerships.

More thoughts on Society Trust operations:

Revenue generating activities:
- Annual fees and expenses from certification and recertification:
reference ISO 9001 cert http://the9000store.com/ISO-9000-Tips-How-Much-Does-it-cost.aspx

- Consulting fees to address specific problems areas of members and applicants
- Referral fees for brokering new business deals with member businesses

Primary expenses to support revenue model:
- Marketing (brand building, lead pre-qualification, public relations)
- Staff (Experts, Administrators, )

Questions:
- Do we need office space, or can we conduct business in other ways to streamline?
- How should we approach launching the business? Begin with single industry, focused region, high-probability clients (such as those recovering from a recent negative PR hit)

DRAFT CASH FLOW STATEMENT (to facilitate budgeting)

Operating Activities
Net Income

Current Assets
    Customer Receivables
Current Liabilities
    Vendor Payable
    Wages Payable
    Taxes Payable

Cash Flow from Operating Activities
Investing Activities
Purchase of Equipment

Financing Activities
Proceeds from Bank Borrowing
Sale of Stock to Owner

Increase in Cash for the Year