Archive for April, 2009

10 Principles of Economics

Scarcity is taking over the world. “There just isn’t enough of anything” states the presenter; there is not sufficient money and time. Due to this we have to decide how to distribute these scarcities. “Decision making is the essence of economics” states Gregory Mankiw, everyday we make decisions and choices that help us allocate our scarcities. “Economics is the study of mankind, in the ordinary business of life” was said almost a century old by Alfred Marshall. Gregory Mankiw says that quote “captures economics perfectly” and it does, it studies the decisions we make in order to deal with this scarcities, we make decisions and choices everyday, when we go shopping and choose what to buy, since there is an scarcity of money, when we go to work and choose how many hours to work because there is an scarcity of life and etc. We impact and shape our economy with every decision we make.

1. Tradeoffs
As we make decisions we make tradeoffs, which mean we choose something over something else, or we have to give up something in order to have something else. Decisions such as having a child involve a tradeoff between money for yourself, and money to buy the child his necessities; it also involves trading off time, since you are giving up your personal or free time, for the time to give to the baby. In the movie a very good example of tradeoff is shown. It shows a college student that wants to move to Washington when he finishes college, and gives up some of the time he uses to study for tests or exams, for time to look for jobs in Washington. Choosing his priorities over other ones makes him face a tradeoff. Society as a whole also involves tradeoffs; the government has to choose how much money to use in certain aspects of the country. Something that I personally liked and made me think was when the movie shows how we face tradeoffs even in the environment, “We all want cleaner air but the tradeoff can mean loss of income or even the loss of jobs for some Americans” says the presenter. I didn’t understand the relationship of this two until they talk about a coal company in Ohio that had to be shut down because it was being harmful to the environment, the consequences? More than a thousand persons lost their jobs, the community decided to have a cleaner environment, but the tradeoff was the losing of the jobs of all those people.

2. Opportunity Cost
What you sacrifice in order to get something is its cost. The presenter and Gregory Mankiw explain this principle with a college student. By choosing to go four years to college the student’s costs are many. There is the cost of the money she is spending in books and tuition, and also the “opportunity costs” as said by Mr. Mankiw because since she decided to go to college she is giving up the opportunity of getting a job and the wages of the job she would’ve taken. “Nothing comes for free, our time is worth something” says Todd Buchholz an economists that makes you realize that a cost of something is not always involved with money; the cost of something you do can be as simple as spending time with loved ones. This segment of the movie contrasts to situations in where the opportunity cost varies, an example shown is how the opportunity cost of a college student is reasonably low, since the student is giving up low paying jobs, but the opportunity cost for a very talented high school athlete offered to go straight to professional is very high, because if he decides to go to college he is giving up the millions of dollars he would earn being a professional athlete.

3. Marginal Thinking
A rational person like the college student shown in the movie thinks at the margin, when given too much college work instead of quitting the job that earns her money for her personal spending, she simply cuts back a little on the work hours. She is not radical; she is adjusting instead of finishing, she is thinking at the margin. Another good example is that of a Broadway that sometimes faces empty seats. So thinking at the margin they decide to bargain with the public and sell them the seats at half the price some hours before the show instead of having empty seats in the show. Adjusting the ticket’s price actually gains the theater more revenues because even if it’s earning them 50% of the original cost, that’s more than zero, if the seats would’ve stayed empty. By being rational and thinking at the margin better decisions and choices can be made.

4. Incentives
When the cost and the advantages of something vary or change, our decisions change too. “If I want my son to wash my car I’ll say if you was my car you can use it tonight, that’s an incentive” says Robert Sobel from Hofstra University and for me is the best explanation for incentives. The incentive is that he can use the car that night, in other words he benefits from saying yes, but if they weren’t any incentives, he’ll probably doubt it. A very good example they give on how we respond to incentives, and applies to today’s situation, is that of how we response to the prices of gasoline. In Europe the price of gasoline is very high, this incentive makes people buy smaller and more economic cars, in contrast to America where the price is still relatively low, and people buy vans and big cars. Didn’t you notice that the stores and streets were packed the “Tax Free Week” here in Florida? That is because people are responding to incentives, incentives that benefit them; obviously you’ll do more shopping if you are not going to be taxed. When President Clinton was in office, he asked for the cigarettes prices to go up by a dollar and a half, because it was demonstrated that young people would not buy cigarettes and smoke. This is a perfect example of a disincentive since this discourages the youth from smoking. Another point explained is the behavior some people take with incentives. Nowadays safety belts are required because is proven to save lives but in the other hand “there is evidence that behavior does change in response to these safety belts” states Mr. Gregory, since some people exceed speed limits because they feel more secure.

5. Trade
Since we are not self-sufficient we trade. “People specialize; people do particular tasks and rely on other people to do other tasks for them” says Mr. Gregory. A hairstylist for example trades her service (that is cutting hair) for money, and the other person relies on her the hairstylist to get her hair cut. “The idea of: I have something and you have something and if we exchange it we are both going to be better off, is fundamentally what economics is all about” states Caroline Hoxby. We as humans and to be able to survive we trade, we exchange, we rely. This is explained in another example shown in the movie. We rely in a group of specialized farmers to grow the food for us, we both benefit since we get the food and they are paid for producing the food. Countries also trade between them when they sell each other products that they are good at making cheaper. We trade every day in order to survive.

6. Markets
In markets agreements are made, and prices are settled, which then are communicated to the world. In the food market farmers sell their goods, and supermarket owners buy them to then sell it. Another type of market is the Stamp Market. Mark Easter a stamp dealer explains that it is like the stock market where the dealers go for the highest price offered. The first person who explained how a market system works was Adam Smith the grandfather of economics published the first book about economics called “The Wealth of Nations” in 1776. How can buyers and sellers interact to each other and not create chaos? Adam Smith said “that markets are guided as if by an invisible hand at least to a desirable allocation of resources.” We all have interests, and if we all try to achieve them, we are all going to be happy. The invisible hand is explained in the movie with a simple example from Mr. Sobel he says, “If I have a $25 dollars and you have a good and you want to sell it to me, we both win, you wanted the $25 dollars more than the good, and I wanted the good more than $25 dollars.” The key of the invisible hand are prices, the sellers and consumers depend on them. When communism fell in Russia and Eastern Europe it showed that free market is the best way to operate, since people know what they want, how the want it, at how much they want to buy it and etc.

7. Government
Sometimes the government gets involved in developing better outcomes. This happens when any of two situations happens. First if the market outcome is not efficient, and second if it fails to distribute the income efficiently. In many cases, externality is the cause of failure. “Externality is when a company or an individual creates something that has an impact beyond the immediate buyers and sellers of that product. Electricity plants are obviously benefiting the users and buyers of electricity but it also has an externality since the smoke produced by them can harm the health of a person. Market power can also lead to market failures, since a certain firm or person’s services is outsized and can control and influence prices. When the market is not being fair the government also intervenes. Some people get paid for their services more than other; this is something that cannot be controlled by the invisible hand. When the government gets involved is because the situation is very complicated, the more complicated it gets, the harder it gets for the government to fix it.

8. Productivity
Statistics show that in 1998 the average American had a yearly income of $31,500, the average Mexican of $8,300 and the average Indian of $1700. You can notice that their quality of life is not the same for example Americans live better than Indians. Productivity explains it all; a rich country produces more than a poor one. And productivity depends on skills, capital and etc. If a country has a well educated work force, productivity will rise. Economic freedom and liberty means more productivity. An ideal example is the US and Hong Kong, where people are free to use their brains to create goods, services, or ideas that can be taken to the market where consumers take advantage of them.

9. Inflation
This basically means inflation which means that prices rise in order to mirror all the money that is being print out. The printing of money is something that needs to be controlled because even though it might “temporarily make the people feel wealthier” as said by Todd Buchholz, at some point prices will start going up, and inflation will come in play, and it will be very hard to take back under control. Stability between goods and money is the best way to keep inflation away.

10. The Phillips Curve
The Federal Reserve Chairman is supposed to maintain unemployment low, and inflation under control. Mr. Mankiw states that you can’t achieve both goals at the same time and that the policy instrument is money supply. When one goes up the other one goes down and vice versa, this is called The Phillips Curve. As stated in the movie this is a short run tradeoff, you have to choose on over the other one. But nowadays this tradeoff does not really exist because in the past year both inflation and unemployment has gone down. This doesn’t mean that The Phillips Curve would not come in play again, some economists say it will.

Understanding these 10 principles is the key to understanding the whole concept of economics.

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Retail Marketing

Shoppers Stop Retail Marketing
Retail Management is a very important part of the distribution process. It is the last link in the chain and is the direct interface of the process with the customer.

What is retailing?

Philip Kotler defines retailing as all activities involved in selling good or services to the final customer for personal use. In today’s scenario our retailer does not exist in the brick and mortar form alone. S/he can do it by using the telephone, by direct mails, by using television in the form of teleshopping networks, by e-mails, by using the Internet or absolutely impersonally by using vending machines.

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Store retailing

Store retailing is the traditional form of retailing wherein a customer physically goes to the store to buy goods or services. Some of the types of store retailing are:

Specialty stores:

This would typically specialise in selling one product. It has a highly targeted market segment that this type of retailing is trying to attract. . However, some speciality stores also include allied products targeted at the same marketing segment.

Department stores:

A department store is a store where multiple items are stocked and sold. These stores service all kinds of needs of the customers such as clothing, shoes, cosmetics, gift items, luggage, and other household goods.

Supermarkets:

These are similar to department stores but with a focus on food and household maintenance products. This is more of a self-service operation wherein a customer just goes and picks what he wants.

Convenience stores:

The differentiating factors for these types of stores are that they are open for relatively long hours and mostly on all the days of the week thus making it accessible to the customer. Typically this kind of retailing stores would be located in residential areas.

Discount stores:
A discount store sells products at a lower price by reducing its own margins. This type of stores target high volumes to ensure profitability.

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Non Store Retailing

Direct selling:

This is a scenario in which a sales person goes from door to door or from office to office and meets the customer directly to close a sale. A very good example is that of vacuum cleaners, wherein a representative goes to the homes of a customer at their convenience and demonstrates the utility of his products so that the customer can make a purchase decision based on the performance of the vacuum cleaner.

Direct Marketing

This is a scenario in which instead of directly visiting the customer, product information is supplied through other sources. These include sending mails, providing information over the telephone(also called as Telemarketing) and other media.

Television shopping

Today, television has become more popular means of selling products. Various channels have teleshopping programs through which marketeers demonstrate the usability of the products. The customer can then order the product through e-mail, Internet or the telephone.

Cataloguing

In this a booklet enlisting all the products on offer is sent to the customer. Based on the information provided, the customer can then make his buying decision and order it via the telephone, email the Internet.

Net marketing

This is the latest trend in marketing. Here the products are detailed on the website of the retailer and the customer can order it right way with the help of a few mouse clicks. The other electronic tool that is used is the email facility. E-Mailers are sent to prospective customers by providing the details of the products. This medium is also used to provide information about new products to existing customers.

In India, retailing has caught up in a big way. Today one finds the presence of huge retail stores like Crossroads, Shoppers Stop etc who are doing well. It has a bright future and looks all set to grow. Currently it is an urban phenomena, present in the metropolises like Mumbai, Delhi and Bangalore etc. However this trend is moving into the smaller towns and these present the market of the future.

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Political Advertising

George+Bush+Al+Gore

  1. Political advertising includes communications supporting or opposing a candidate for nomination or election to either a public office or an office of a political party (including county and precinct chairs).
  2. Political advertising includes communications supporting or opposing an officeholder, a political party, or a measure (a ballot proposition).

Part B. Where Does It Appear?

  1. Political advertising includes communications that appear in pamphlets, circulars, fliers, billboards or other signs, bumper stickers, or similar forms of written communication.
  2. Political advertising includes communications that are published in newspapers, magazines, or other periodicals in return for consideration.
  3. Political advertising includes communications that are broadcast by radio or television in return for consideration

The task of political advertising is a formidable one that is it reaches out to the whole country.

The campaign must have over a dozen advertisements. The mood of the people, the current scenario all has to be taken into consideration. Although rational appeals are not rejected but essentially there is an overdose of emotional appeal. Both negative and positive message is used. There could be major mud slinging too.

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Types of Product Advertising

Pioneering or Informative advertising: Here an attempt is made to stimulate the primMalaysia advertisementary demand of the product category rather than a specific brand. For example the advertisement Malaysia Tourism, with their pictorial TV commercial and the slogan ‘Malaysia – Truly Asia’ made an indelible mark where pioneering advertisement was concerned. Here the product category is introduced first, educative in intent and it appeals to the consumer’s rational as well as to his emotional being. At the introductory stage of the PLC this type of advertising is beneficial. Generating awareness is the main function of advertising here.

Competitive or Persuasive advertising: Here selective demand of a specific product brand is stimulated. By now the product is established in the market and has reached the growth in the market and has reached the growth or maturity stage of the PLC. Very competitive to market forces. Competitive advertising is again of two types:

  • Direct type, where it seeks to stimulate immediate buying action.
  • Indirect type, here the benefit of the product is emphasized in the anticipation of the consumer’s final action of buying.

Retentive or Reminder oriented: The product is now having a firm footing in the market place. Its sales may start to decline at a later point. The buyer must be reminded about the product to sustain his loyalty. It is a soft sell approach where the buyer is judged to continue the usage of the product. The essence here is to keep the brand name in front of the eye of the viewer. Used at both the maturity as well as the declining stage.

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Products can be classified as

Asmi Diamonds
Products

  • Products
  • Products for direct consumption.
    • Consumer durables
    • Consumer non durables

In the case of consumer advertising the following points should be taken into consideration:

1. Most of them are in competitive field and engaged in advertising.
2. Non-durables are frequently bought.
3. Non-durables are appliances, which serve for a long period of time.
4. Both rational as well as emotional appeals are used.
5. Use of celebrity endorsement is heavy.
6. Major chunk of advertising business.

Whereas the salient points to be remembered in the case of industrial advertising are:

1. Smaller percentage as compared to consumer advertising.
2. Elaborate buying process is involved.
3. Main objectives of this class is to Inform, get Orders, to stimulate queries, to empanel the marketer’s name on the buyer’s panel of sources.
4. Trade journals and lay press are the most sought after media vehicles.
5. Seeks to build the corporate image.
6. Rational appeal is used here. The copy gives facts and figures.

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Explain Baumol’s theory of sales revenue maximization

According to Baumol, every business firm aims at maximization it sales revenue (price x quantity0 rather than its profit. Hence his hypothesis has come to be known as sales maximization theory & revenue maximization theory. According to baumol, sales have become an end by themselves and accordingly sales maximization has become the ultimate objective of the firm. Hence, the management of a firm directs its energies in promoting and maximizing its sales revenue instead of profit.

The goal of sales maximization is explained by the management’s desire to maintain the firm’s competitive position, which is dependent to a large extent on its size. Unlike the shareholders who are interested in profit, the management is interested in sales revenue, either because large sales revenue is a matter of prestige or because its remuneration is often related to the size of the firm’s operations than to its profits. Baumol, however does not ignore the cost of production which has to be covered and also a margin of profit. In fact, he advocates the adoption of a price, which will cover the cost and also will yield a minimum rate of profits. That is, while the firm is maximizing its revenue from sales, it should also “enough or more than enough profits” to keep the shareholders satisfied. According to Baumol the typical digopolists objective can usually be characterized approximately as sales maximization output does not yield adequate profit, the firm will have to choose that output which will yield adequate profit even through it may not achieve sales maximization.

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What is Managerial Economics?

Economics is a social science, which studies human behavior in relation to optimizing allocation of available resources to achieve the given ends.

The application of economic science is all pervasive. More specifically economic laws and tools of economic analysis are applied a great deal in the progress of business decision making. This has led to the emergence of a separate branch of study called Managerial Economics.

“Managerial Economics is the study of economics theories, logic and tools of economic analysis that are used in the process of business decision making. Economic theory and technique of economic analysis are applied to analyse business problems, evaluate business options and opportunities with a view to arriving at appropriate business decision. Managerial economic is thus constituted as that part of economic knowledge, logic, theories and analytical tools that are used for rational business decision making .

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How does economic theory contribute to managerial decision ?

Economics through ,variously defined is essentially the study of logic, tools and techniques of making optimum use of the available resources to achieve the given ends. Economics thus provides analytical tool and technique that managers need to achieve the goals of the organization they manage.

Baumaol has pointed out there main contributions of economic theory to business.

First one of the most important! Unexpected End of Formula things which the economic theories can contribute to the management science is building analytical models which help to recognize the structure of managerial problems, eliminate the minor details which might obstruct decision making and help to concentrate on the main issue.

Secondly, Economic theory contributes to the business analysis & set of analytical methods which may not be applied directly to specific business problems, but they do entrance the analytical capabilities of the business analyst.

Thirdly, Economic theories offer clarity to the various concepts used in business analysis, which enables the the managers to avoid conceptual pitfalls.

The areas of business issues to which economics theories can be directly applied may be broadly divided into two categories :-

  1. Operational or internal issues and
  2. Environmental or external issues

Operational problems are of internal nature. They include all those problems which arise within the business organization and fall within the preview and control of the management. Some of the basic internal issues are

  1. choice of business and the nature of product i.e. what to produce;
  2. choice of size of the firm i.e.. how much to produce
  3. choice of technology i.e. choosing the factor contribution ;
  4. choice of price i.e. how to price the common;
  5. how to promote sales;
  6. How to face price competition
  7. How to decide on new investment;
  8. How to manage profit and capital;
  9. How to manage inventory i.e. stock of both finished goods and material.

The Microeconomic Theories which deals most of these questions include:-

  1. Theory of demand.

  2. Theory of production and production decisions.

  3. Analysis of market structure and pricing theory.

  4. Profit analysis and profit management.

  5. Theory of capital and investment decision.

Environmental issues pertain to the general business environment in which a business operates. They are related to the overall economic, social and political atmosphere of the country. The factors which constitute economic environment of a country include the following factors:-

  1. The type of economic system of the country
  2. General trend in production, employment, income, price, savings and investment etc
  3. Structure of the trends in the working of financial institutes e.g. banks, financial co-operations, insurance companies
  4. Magnitudes of trends in foreign trend
  5. Trends in labor and capital markets
  6. Government’s economic policies e.g.. industrial policy, monetary policy, fiscal policy, price policy etc.
  7. Social factors like the value system of the society, property rights, customs and habits
  8. Social organizations like trade unions, customer’s co-operatives and producers union
  9. The degree of openness of the economy and the influence MNCs

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