Professor John Palmer states that when we developed the Law of Diminishing marginal returns, we simplified our analysis by concentrating on just two inputs in the production process: labor and capital. There are tow ways of viewing the firm’s input use decision if we want to use some simple graphs. In the first approach, we consider the firm as hiring increasing amounts of labor while holding its amount of capital fixed. The graph below shows the diminishing marginal productivity of labor. As the labor force gets bigger and the stock of machines does not, each individual worker has a smaller quantity of machines to work with and less productivity.
Another way of viewing the diminishing marginal return is to consider the firm as hiring more and more capital while holding the size of its labor force fixed. According to Prof. Palmer, the second way of viewing this phenomenon of diminishing marginal returns is to consider the firm as hiring more and more capital while holding the size of its labor force fixed. The graph below shows the diminishing marginal productivity of capital. As the quantity of capital gets bigger, with the size of labor force fixed, each additional machine has a smaller quantity of labor to work with; so it ads less to the firm’s total output.
- Some small e-businesses will lack internal IT expertise
- Need to ensure adequate support available either internally or externally
- Valuable for internal expertise to be gained through training where possible
- Large web strategies and other IT initiatives can be very costly
- Need to determine true “needs” not just the “wants”
- Develop systems that can be scaled up and expanded easily
- Small businesses will also face change management issues
- Owner/manager needs to be promoter of e-business
- Provide adequate training and support
- Volume of data can be small and yield limited results from analysis – need to determine case by case
- Ability to integrate can be limited if back office not integrated
- Support for growth must be available
- Develop a strategy for e-commerce
- Implement strategy effectively
- Evaluate and revise
Benefits can include :
- access to new markets
- improved customer responsiveness
- increased flexibility
- improved profits
- increased innovation
- better managed resources
- Depending on business can be critical
- Technology approaches can be remote
- As market expands need additional details
- Simplify processes electronically
- Expanding the market
- Reach your audience at reasonable cost
- Section titles and page numbers (for easy reference)
- Business Concept
- The business concept identifies your market potential within your industry and outlines your action plan for the coming year. Make sure your stated business goals are compatible with your personal goals, your own management ability and family considerations.
- The heart of the Business Concept is your monthly sales forecast for the coming year. It is your statement of confidence in your marketing strategy and forms the basis for your cash flow forecast and projected income statement.
- The business concept contains an assessment of business risks and a contingency plan. I urge you to take the offensive and be your own devil’s advocate. Being honest about your business risks and how you plan to deal with them is evidence of sound management.
- Product(s) or service (pictures, drawings, characteristics, quality)
- Product protection/exclusive rights (patents, copyrights, trade marks, franchise rights)
- Target market (typical customers identified by groups, present buying patterns and average purchase in dollars, wants and needs)
- Competitive advantage of your business concept (your market niche, uniqueness, estimated market share) Business location and size (location(s) relative to market, size of premises)
- Staff and equipment needed (overall requirement, capacity)
- Brief history (principals involved, development work done)
- Distribution (direct to public, wholesale, retail, multiple outlets)
- Pricing (costing, mark-ups, margins, break-even)
- Promotion (media advertising, promotions, publicity-appropriate to reach target market)
- Guarantees (product guarantees, service warranties)
- Tracking methods (method for confirming who your customers are and how they heard about you)
- Monthly forecast for coming year (sales volume in units and dollars)
- Annual forecast for following 2-4 years (sales volume in dollars)
- Brief description of production process (don’t be too technical)
- Physical plant requirements (building, utility requirements, expansion capability, layout)
- Machinery and equipment (new or used, lease or purchase, capacity)
- Raw materials (readily available, quality, sources)
- Inventory requirements (seasonal levels, turnover rates, method of control)
- Suppliers (volume discounts, multiple sources)
- Personnel required (full-time, part-time, skill level, availability, training required)
- Cost of facilities, equipment and materials (estimates and quotations)
- Capital estimates (one time start-up or expansion capital required)
- Purchasing plans (volume discounts, multiple sources, quality, price)
- Inventory system (seasonal variation, turnover rates, method of control)
- Space requirements (floor and office space, improvement required, expansion capability)
- Staff and equipment required (personnel by skill level, fixtures, office equipment)
- Share distribution (list of principal shareholders)
- List of contracts and agreements in force (management contract, shareholder or partnership agreement, franchiser service agreement, service contract)
- Directors and officers (names and addresses and role in company)
- Background of key management personnel (brief resumes of active owners and key employees)
- Contract professionals/consultants (possible outside assistance in specialized or deficient areas)
- Organization chart (identify reporting relationships)
- Duties and responsibilities of key personnel (brief job descriptions who are responsible for what?)
- What if . . . list of critical external factors (identify effects of strikes, recession, new technology, weather, new competition, supplier problems, shifts in consumer demand)
- What if . . . list of critical internal factors (sales off by 30%, sales double, key manager quits, workers unionize)
- Dealing with risks (contingency plan to handle the most significant risks)
- Steps to accomplish this year’s goals (flow chart by month or by quarter of specific action to be taken and by whom)
- Checkpoints for measuring results (identify significant dates, sales levels, production levels as decision points)
- Previous years’ balance sheets and income statements (include past 2-3 years if applicable)
- Opening balance sheet (for a new business only)
- Projected income statements (detailed operating forecast for next year of operation and less detailed forecast for following two years. Use sales forecast as starting point)
- Cash flow forecast (budget of cash inflow and outflow on a monthly basis for next year of operation)
- Purpose of term loan (attach detailed description of assets to be financed with cost quotations)
- Owners’ equity (your level of commitment to the program)
- Summary of term loan requirements (for a particular project or for business as a whole)
a market-oriented strategy that establishes a profitable and sustainable market position for the firm against all forces that determine industry competition by continuously creating and developing a competitive advantage from the potential sources that exist in a firm’s value chain.
The key elements are:
- Market-oriented: the strategy is based upon the needs and wants of the marketplace.
- Establishes a profitable market position: the end goal of the strategy is tomake a profit in the for-profit sector or to meet alternative metrics such as in the not-for-profit sector. In the latter case for example, a road safety campaign based on a particular marketing strategy might ‘make a profit’ if there is a decline in road injuries and deaths attributed to it.
- Establishes a sustainable market position: marketing strategy is not about one-off transactions. The aim is to reach a point where an organization finds a place in the market that fits its available marketing resources.
- Forces that determine industry competition: these are all the complex mix of ingredients that create the marketing ‘whirlwind’, such as government regulation, global competition, or the extent of buyers’ knowledge and understanding of a particular market.
- Continuously creating and developing a competitive advantage: few (if any) organizations can just rest on their laurels, so the idea is to find a spot where, if need be, the primary challenges can be tackled. Not all organizations have to do this on a continuous basis of course, but if it had to, an organization with a sound competitive marketing strategy would be able to. A simple example: you might make the best tomato ketchup in the best-recognized glass bottles, but if the market moves towards plastic ‘squeezy’ bottles you need to be able to adapt.
- Potential sources that exist in a firm’s value chain: competitive marketing strategy relates to what value any organization wants to create using its available marketing resources.
The concept of opportunity cost and Comparative Advantage
- The opportunity cost of producing something measures the cost of not being able to produce something else.
- A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries.
- A country with a comparative advantage in producing a good uses its resources most efficiently when it produces that good compared to producing other goods.
A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in another country
Opportunity cost of producing
- 1 unit of wine is 4 units of cheese
- 1 unit of cheese is 1/4 units of wine.
Opportunity cost of producing
- 1 unit of wine is 1/2 units of cheese
- 1 unit of cheese is 2 units of wine.
The opportunity cost of producing wine in terms of cheese is lower in Portugal than in England (1/2<4), therefore Portugal has a COMPARATIVE ADVANTAGE in the production of wine.
Likewise, the opportunity cost of producing cheese in terms of wine is lower in England than in Portugal (1/4<2) so England has a COMPARATIVE ADVANTAGE in the production of cheese.
Let England and Portugal expand production in the direction of their comparative advantage.
England reduces production of wine by 1 unit freeing 8 hours of labour which go on to produce an additional 4 units of cheese.
Portugal reduces the production of cheese by 1 unit freeing 4 hours of labour which go on to produce an additional 2 units of wine.
Additional CHEESE Additional WINE
ENGLAND +4 -1
PORTUGAL -1 +2
World +3 +1
Without using any additional resources the world output rises just following the simple rule of Comparative Advantage.
Question: If each country specialises in the good in which it has a comparative advantage and exports it in exchange for the other good would both countries be better off? Why?
Answer: Yes if the relative world price is right!!!
Assume that the Relative World Price: One unit of wine sells for one unit of cheese.
With Trade: Gets 1 unit of cheese from England for 1 unit of wine.
Autarky: For 1 unit of wine Portugal could only get ½ unit of cheese.
Result: Better off!!!
With Trade: Gets 1 unit of wine from Portugal for 1 unit of cheese.
Autarky: For 1 unit of cheese England could only get 1/4 unit of wine.
Result: Better off!!!
1. The principle of comparative advantage predicts the pattern of trade and the gains from trade on the basis of relative prices in autarky (opportunity cost).
2. If a country trades at relative prices that differ from its relative autarky prices, then the country will be better off as a result of trading.
Assume that consumers trade at a new relative price that differs from the autarky price → New Equilibrium
A country will export the good which relative price under autarky is smaller than under trade.
The Ricardian Model is based on
*Technological differences (differences in labour productivities) between countries
*Concepts of opportunity cost and comparative advantage.
- A simple example
Unit labour requirement (number of hours) to produce ONE unit of each good:
ENGLAND 2 (hours) 8 (hours)
PORTUGAL 4 (hours) 2 (hours)
England has an ABSOLUTE ADVANTAGE in producing cheese.
Portugal has an ABSOLUTE ADVANTAGE in producing wine.
Countries are different to each other: preferences, culture and institutions, weather, factor endowment (land, capital and labour), technology, distance and transportation costs.
Differences in labor, physical capital, natural resources and technology create productive advantages for countries.
Also economies of scale (larger is more efficient) create productive advantages for countries.
- Countries are linked via trade (goods and services) and capital (international lending and borrowing, foreign direct investment). In the last decade we have observed the emergence of a ‘Global Economy’
- It is a discipline that deals with economic interactions between sovereign (independent) countries. Governments regulate: trade, investment, the movement of capital (and other factors of production) and the supply of currency (exchange rate).
- International Trade (gains from trade, pattern of trade, how much trade, protectionism)
- International Monetary (open economy macroeconomics and policy): balance of payments, exchange rate determination, international capital markets, international policy coordination)