Thursday, November 24, 2011

Scarcity vs Shortage

The terms shortages and scarcity are often used interchangeably, but there is a difference. So what is the difference? Simply explained, scarcity is a result of demand exceeding the natural ability to meet these demands. For example; gold, diamonds, and truffle oil are all scarce resources. Due to the limitations rooted from the inability of mother nature to provide abundantly, scare resources are simply limited in number. Keep in mind that scarcity is permanent. Contrary to this, a shortage is when equilibrium price exceeds current market price. Consumers are willing to pay more than the selling price, causing a greater demand than supply. A company can remove a shortage simply by increasing the price, therefore shortage is temporary.

Essentially, every resource is scarce, because each individual must decide how to allocate their limited resources. What does this mean? Well, every resource will eventually run out, and time or money spent on one thing is time or money you could have spent on something else. We have explored this idea in previous posts, and referred to this as opportunity cost. We can't all have everything.

The bottom line is that every resource experiences scarcity but not all resources experience shortage. For example, as of right now, everybody who wants gold can buy it if they are willing to give up something else. But, not everybody who wants gold can have it without a tradeoff.

Friday, October 14, 2011

Law of 72 and Compound vs. Simple Investments Explained

Having taken economics over the summer, I was very excited when my Math teacher requested me to give a brief summary of the “Rule of 72” in class. Unfortunately, I fell ill on the day I was supposed to summarize the rule, (Sorry Mr. Tramontana!) so will explain it’s function here.

The Rule of 72 is an important investment technique, which is essentially an approach used to estimate the amount of time required to double an investment. The formula (Time to Double = 72/ interest rate) is shown below. It is very important to note that this law applies to compounding interest, as opposed to simple interest. Compounding interest is interest calculated on both principal and accumulated investment, while simple interest is interest calculated on just principal investment. Let’s show examples of all three concepts (Law of 72, Compound Interest, Simple Interest) below.

Slide One: Rule of 72: Formula and Example


Slide Two: Simple vs. Compound Interest Formula


Slide Three: Simple vs Compound Interest Application

Wednesday, October 12, 2011

Thursday, September 29, 2011

Why Smoking is Taxed, Not Banned

Recently, I have been published in the Hunterdon County Democrat with an article related to economic theory on smoking. This article appeared on page B-6 in the September 22 edition.
The article is below.

Thursday, September 1, 2011

Compliments and Substitutes

A consumer’s buying decisions are often affected by whether the product they are buying is a compliment or substitute to an existing good. A compliment good is a good which pairs well with an existing good, while a substitute good is a good which generally serves a similar function, and is therefore replaceable with, an existing good. Compliment goods are generally bought together, while substitute goods are often in competition against each other. Example of compliment goods include: milk and cookies, DVD players and DVDs, cellphones and cellphone cases, or cars and gasoline. Examples of substitute goods include: Coca-cola and Pepsi, chinese food and pizza, or Post cereal and Kellogg’s cereal. How is a consumer’s budget factored into this? If the price of a good increases, you are less likely to buy the compliment and more likely to buy the substitute. Conversely, if the price of a good decreases, a consumer is more likely to buy the compliment and less likely the buy a substitute. For example, if the price of DVD player becomes really low overnight, you will not only buy the DVD player, but also be willing to buy more DVDS because you have allotted a certain amount of your budget to home entertainment. Similarly, with substitutes, if the price of Coca-cola doubles, you are likely to be willing to drink Pepsi instead, even if you don’t prefer it as much.

Tuesday, August 30, 2011

Price Elasticity of Demand

Some products are naturally highly sensitive to a slight price changes, while other products remain almost completely unaffected by a large price change. Economics refer to this property of a product’s sensitivity to price as its elasticity. An elastic product is a product for which the demand is highly affected when a price change occurs. Meanwhile, an inelastic product is a product for which demand is somewhat unaffected when a price change occurs. In terms of a mathematical sense, an elastic good is one for which demand changes by more than one percent for every one percent change in price (again, displays sensitivity). An inelastic good is one for which demand changes by less than one percent for every one percent change in price (insensitivity). Following is examples and determinants of elasticity.
Examples of relatively elastic goods:
• luxury chocolates
• vacation
• technologies such as MP3 players
Examples of relatively inelastic goods:
• medicines
• gasoline
• electricity
• water
Clearly, elastic goods are generally luxuries while inelastic goods are logically necessities.

Here are some determinants of elasticity
• How badly you need it
• Substitutes (If Hershey’s doubles it’s prices, you’d be willing to settle for Mars, right?)
• Time factor (For example, a house is a long term purchase and it’s not an immediate necessity. If the prices of houses shot up, consumers would be willing to wait)

Public Relations And Why Established Companies Advertise

There are some brands that just stand out. For soda, Coca-cola tends to be a big name. For Cereal, Kellogs is the major player, and for a laptop, Apple or Dell is the “go-to” company. A big question that can come up, then, is why do established brands bother advertising? If you go to the store, chances are you already have the brand you’re planning to buy in mind; yet some already reputable companies spend millions of dollars for a thirty-second commercial (super-bowl!)- so how is that value determined? Well, the most significant reason companies like coca-cola still advertise is to uphold the public’s feeling of attachment to the product in order to continue the rate of revenue. This is known as sustaining or improving public relations, also known as PR. Public Relations are the reputation and perceptions of a company- how consumers view the product. For example, a commercial which evokes a sentimental feeling, laughter, or the “cool” factor will tend to be glorified in the eyes of a consumer. Companies can even create consumer pride if the PR is strong enough. For example, my dad is a die-hard apple fan. He pays to have Apple’s logo on hats, and he is willing to argue (rightfully) that apple macs are better than dell PC’s when discussing technology with a friend. Generating and maintaining this sense of pride (eventually translated into consumer-generated advertisement) is a difficult task, and one that takes quite a bit of work. So, next time you catch yourself arguing about how much better the Yankees are than the Red Sox, or Visa versa, consider the power of the PR that brand has built.

Wednesday, August 24, 2011

How Much Does It Cost You?- Explicit vs. Implicit Costs

How much does it cost you?
Generally, a person's first instinct is to respond by answering with the price. If it's social networking, such as twitter or facebook, it's easy to say "free". If it's an hour of tutoring, you might say $20. But if these are your answers, you're just accounting for explicit costs- a direct payment transaction. But it is also necessary to consider implicit costs- costs that might not necessarily be in the form of a direct transaction, but are still equally- if not more- significant. Examples of implicit costs includes an entity's opportunity cost. For example, twitter may be free, but for that hour you are tweeting, what else could you have done with your time? Babysit for $10? Read and acquire knowledge worth $5? Take a job for $15? Whatever the best alternative of your time is (your opportunity missed), is considered your implicit cost. While implicit costs are often hard to identify in terms of a pure cash transaction (how do you value acquired knowledge in terms of money?), they are ALWAYS important to consider.
Twitter may be costing you more than you think, so you probably shouldn't consider it a free service.

Sunday, August 21, 2011

Diminishing Marginal Utility and Why the Demand Curve Slopes Down

In life, it generally holds true that the more of something you have, the less you value it. This property is referred to as Diminishing Marginal Utility. Diminishing Marginal Utility is an economics term which basically states that the more of good X you consume, the less the utility you will gain out of consuming the next unit of it.
While you might value the first sip of water after exercizing a lot, the twentieth sip will have almost no value, and at a certain point, you might actually not want any more.

(in this diagram: while the consumer is willing to pay six dollars for the third unit, they are only willing to pay four dollars for the fourth. this displays diminishing marginal utility)

Diminishing Marginal Utility serves as a great explanation as to why the demand curve slopes down for a normal good. As the quantity increases, the willingness to pay for the next unit of the good decreases as well.

It's a simple concept, but very useful when it comes to understanding the demand curve.


©2011. All rights reserved.

Quantity Demand vs Demand: Explained Through Example

Economists often use the terms “quantity demand” vs “demand”, and sometimes it is easy to mix up the two, so in the following blog-post, I intend to differentiate the two through an explanation and graph. While it is hard to understand the difference between the two by definition alone, I will explain through an example. Let’s take the perfectly competitive market for oranges, and assume each type of a given orange originally costs one dollar.

Scenario one: All of a sudden, a study come out saying that if you eat an orange a week, you will add 10 healthy years to the end of your life. clearly, the demand for this product will increase. Now, for the same orange, you would expect to pay more than a dollar. Or, you would expect to get a fraction of an orange in return for the dollar. Basically, you are willing to pay more, and, as a result, the demand curve shifts to the right. This shift in demand caused a shift in the whole line. As scene in the “ health research” example, a change in demand can be caused by preferences and tastes, and it can also be caused by expectations.

GHANGE IN DEMAND:

* There's a shift in the demand point, and the demand line *
Scenario two: The manufacturing cost increases for a company, and, as a result, the price changes. The supplier can now produce less, and the supply curve shifts to the left. Consumers still demand the same amount (quantity demanded goes down).

CHANGE IN QUANTITY DEMAND:

*There's a shift in the demand point, but not the demand line*

©2011. All rights reserved.

Saturday, August 20, 2011

Inferior Markets Explained: Markets Which Rely on a Bad Economy

Sometimes, it is easy to assume that the demand of all goods and services will be increased as the economy improves, and that everybody can benefit from a good economy, but this is not true. There are many products, services, and markets that thrive under poor market conditions. These products are often referred to as "inferior" goods and services. An inferior good is a good for which demand DECREASES when income of a potential consumer increases and demand increases when income of a potential consumer decreases. Meaning that, in essence, when a potential consumer is “poorer”, they’ll buy more, but when they’re “richer”, they’ll buy less. At first, this does not make intuitive sense, right? But think about a kid in college. Because they are allocated a limited amount of money, they are forced buy more cup of noodles because of their budget. But, as that college student goes out into the labor force and starts earning more money, there are high chances they would start buying steak rather than noodles. Contrary to this, a normal good is a good of which you buy more of as a potential consumer's budget increases. For example, caviar (assuming you enjoy eating it) is a normal good. As your income increases, you will buy more caviar.


As seen with the cup of noodles, there are actually markets which are based around the assumption that a nation's economy will not increase beyond a certain point. For example, stores like Wal-Mart advertise the phrase "Save Money, Live Better". They have built their brands for years around a cheap, budget store. They're assuming the need for these items will last, and that all of a sudden the majority of consumers will no longer seek glamour and luxury.

Once again:

Inferior good: a good for which demand DECREASES when income of a potential consumer increases and demand INCREASES when income of a potential consumer decreases
Normal good: a good for which demand INCREASES when income of a potential consumer increases and demand DECREASES when income of a potential consumer decreases

©2011. All rights reserved.

Wednesday, July 20, 2011

Fiscal Policy Vs Monetary Policy

Once in a while pundits and gurus in the media discuss fiscal policy and the management of the US economy, and as a student of business in my early years I assumed that was the same as monetary policy. Now I know better - In essence, monetary policies are directed by a central bank, and fiscal policies come from the authority of a country's national government.

Fiscal Policy:

Simply stated, "Fiscal Policy" is defined as the governments ability to inflence the overall economy via expenditure and revenue collection. The government can spend more or less, and the government can increase or decrease taxes (revenues), borrow money, and sell fixed assets like government-owned land. Both of these "fiscal manipulations" (expenditure and revenue collection) can affect:

- "Aggregate Demand" - which is the total demand for goods and services at a point in time and a specific price level
- How resources are allocated within the economy
- How income is distributed among the population.

Fiscal policy can curb inflation, increase unemployment, and can maintain a proper (healthy) value of money.
Incidentally, John Maynard Keynes is widely credited to be the "Father" of fiscal policy.

Monetary Policy

"Monetary Policy" is more focused on the actual supply of money and targeting interest rates to grow and stabilize the economy. Monetary policy can either be referred to as expansionary or contractionary. Expansionary policy increases the total money supply more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even reduces it. In the US, the Federal Reserve system is the institution which is tasked with executing monetary policy. Othe "Central Banks" around the world are The Bank of England, the European Central Bank, , The People's Bank of China

Monetary policy can affect a number of economic factors, including:

- Economic Growth
- Inflation
- Exchange Rates with other currencies
- Unemployment

Monetary Policy has its roots in ancient China and other history, but one of the biggest "proponents" of Monetary Policy as a powerful tool in managing economy was Milton Friedman.

©2011. All rights reserved.

Tuesday, June 28, 2011

How Do Companies Set A Price For Their Products?

On vacation a few years back, I traveled with a group of friends and family to a foreign country.

While my family and I seemed somewhat local, the people we traveled with were clearly tourists. One day, all of us went out to dinner, and each of us were handed menus. Later, when I caught a glimpse of our friends’ menu who were sitting at another table, I was shocked to see that we were being charged two different prices for the same foods. The manager intentionally charged for the food according to how much he believed would make him the most money. Analyzing the situation now
with a much different perspective than I had viewed it with many years ago, I realize the restaurant manager must have found an effective price-point for the classifications he grouped us in. Clearly, he acknowledged charging everybody lots of money simply did not work, and, though unethical, his actions made me wonder about the practice.

This brought me to an interesting question: how do companies set the price of an item? In order to maximize profits, they must find an exact price at which the worth of the product or service becomes valuable enough for a consumer to buy. So what determines the price at which profits are highest, especially considering each individual has their own opinion as to the “ideal price”?

As any economics course would teach on day one, the intersection between the supply and demand curve determines equilibrium quantity and price, but what are some of the tools a company can use to determine where this intersection may be?

The answer obviously is different for different industries. In the case of Boeing, factors like fuel prices and growth of emerging markets and currency exchange rates factor heavily in pricing their products (planes and plane parts). However, in the case of the local pizza shop the pricing may be much less scientific but just as relevant to the long term success of the business.

Some of the tools that industries use to price their products are:
- Market Research / surveys (opinion)
- Market Research - Conjoint Analysis (examines the direct trade-ofs
among competing products)
- Market Research - perceptual mapping - assesses the benefits of
various products that may not be direct substitutes for one another,
and seeks to identify the benefit of one product that no other product
offers.
- Competitive Analysis (what is the other guy doing, price-wise ?)
- Historical Trend analysis (where is the price of this product most
likely to go)
- Purely quantitative materials costing (what does it cost me, and
what kind of premium should I be getting? AKA Floor pricing)
- Use a Life Cycle Strategy - Price a product for early adopters to
take advantage of its extra value early, then plan to reduce the price
later on for increased market share.

The science behind some of these techniques is astoundingly sophisticated, and I know for a fact that some industries spend millions on pricing their inventory, including Television Companies (price of Advertising), Pharmaceutical Companies (price of medications in line with Insurance Company expectations), and even Chocolate Manufacturers

Other factors also affect the ultimate price of a product:
- Speculation (Oil prices are affected by the perceived lack of
inventory in the future)
- Coolness Factor (Apple products are sold at a solid premium because
they are cool)
- Political Climate (fluctuations in the currency of a country that
produces a certain product will affect the price)
- Fluctuating Weather (especially for produce, etc)
- Artificial control of world supply (diamonds)

©2011. All rights reserved.

Tuesday, June 21, 2011

Is the nostalgia associated with print books powerful enough to stifle the uprising of e-books?

Recently, I read a very interesting article which stated that “E-books now outsell print books” (http://www.computerworld.com/s/article/9216869/Amazon_E_books_now_outsell_print_books?taxonomyId=77) . This fascinating transition from print books to e-books marks a huge movement away from the traditional method of reading that’s been used for so much time in history. This big of a shift away from an established method must be due to a significant technological advance, especially considering print books have been conventional entity— and the process of printing books is hardly one that has been modified over the years. Let’s take a look at the pros and cons of E-books vs. Print Books, and consider the reasons which e-books have been popularized.




In conclusion, many of the positives of print books are a result of the “nostalgia” which many feel in turning pages and holding a binded book. While print books are certainly still prominent in society, will society eventually turn to e-books? Please comment with your thoughts below.

©2011. All rights reserved.

Monday, June 20, 2011

How Large portion-sizes and Bringing Home Left-overs can potentially serve as a means of accelerating revenue for a Restaurant

Who doesn’t look forward to eating leftovers from last night’s big portion meal? In my opinion, while serving large portion-sizes and bringing home left-overs may seem like a benefit to only to the customer, I propose it can serve as a huge asset to the company too. In restaurants such as Cheesecake Factory, Maggianos, and T.G.I Fridays, customers can expect to come home with a bag full of delicious left-overs. When eating the leftovers the morning (or afternoon) after the dining experience, the customer relives the delicious food again the morning after. This forces a customer to not only enjoy the meal once, but to experience it twice, in two different atmospheres, at two different times. It makes economic sense for the restaurants to serve huge quantities and charge a few extra couple dollars for numerous reasons. While charging a customer an extra three dollars for a dish, and serving a three dollar out of restaurant pocket cost may seem somewhat ineffective , it is not. These large portion sizes add value of the meal in the minds of the customers, and also creates a more lasting impression. There is no denying that the food these aforementioned restaurants sell may be delicious, but no customer walks in these casual restaurants expecting a feeling of “gourmet”. Rather, customers expect an enjoyable atmosphere, friendly service, and their bellies to be filled. “Doggy-bags” serve as a way for middle-class restaurants to stand out from each other, because of their abilities to self-advertise and send some of the restaurant experience with the customer to enjoy a second time.

Tuesday, March 15, 2011

Does Apple Synthesize Supply and Demand?

Who can avoid the inevitable lines outside the Apple store when they release a new product? It has been well established that if Steve Jobs had his hands on a product, the world wants it. Consequently, when my Dad and my brother woke up at 6 am to buy our Ipad 2 the day after it came out, I wondered why avid lovers of Apple products have a difficult time obtaining the latest gadgets. I realized the power of Supply and Demand. The idea of Supply and Demand indicates the relationship between the amount of product available and the number of people willing to pay for that product. These two factors, as a result, affect the actual price of the product. I started considering the reasons that Apple, an established company and without a doubt household name, would not have enough of a product to stock on shelves when there was a recent release. Was it that the approval process was too lengthy and Apple wants to start sales or is it, perhaps, does Apple wants to exude an air of exclusivity? There are many possibilities, but my theory is that Apple wants create a sense of adventure in obtaining a new product. Maybe, if a company releases an abundance of the new products, a sense of excitement and “buzz” goes away.

Regardless of the reason, I continue to love Apple as a company, and I will undoubtedly continue to be a face in the “day after release” new product line crowd.


©2010. All rights reserved.

Thursday, March 3, 2011

What is company culture?

As discussed in one of my earlier blog posts, I spent a portion of my summer at Stanford University at a program called EPGY- studying Topics in business. As part of our field experience business field trips, my professor, Mr. Edwin Oh (a man I would consider myself extremely privileged to have worked with so closely this summer), took us to a variety of companies in Silicon Valley, and perhaps one of the most powerful things that stood out when I considered a company was the company culture. Company culture can be determined by many things- among which are the values and the behavior of the individuals which compose the company. The company energy has the potential to serve as a powerful asset- it can bring the company together and create a friendlier environment, or can serve as an disadvantage when not established properly. I would even argue that when establishing a company, or creating a start-up environment, company culture can really determine how successful (or unsuccessful) the company becomes. Even on a personal level, having an unresourceful work environment can be highly destructive, so magnifying that to a company can be even more terrible. Luckily- I had the opportunity to observe some empowering environments. For example, when visiting “Tapulous” headquarters, I noticed a sense of teamwork, and when there were employees playing with Nerf guns during their free time, I realized how much time Tapulous must have taken to establish their unique company culture. With the bright colored plastered over walls and games all over (refer back to Summer Visit to a Silicon Valley Dream Factory), a naïve visitor may mistake this atmosphere with an ineffective work environment, but the designers have the workspace down to a science. They realize that THEIR employees may be most efficient and happy in doing their work if they have a comfortable and welcoming environment. Contrary to this, we visited a very different start-up company in which the walls were white, cubicles were assigned to employees and there was a more formal attire. This company was easily as effective. In their own ways, they both established a good company culture, because they both factored in important things- such as employee efficiency and the product/brand they’re executing. I bet if you put the "cubicle employees" in Tapulous or Tapulous employees in the cubicles, the effect would be extremely different.


©2011. All rights reserved.

Friday, January 21, 2011

World's Smallest Economy vs. The World's Richest Man

Tuvalu is economically one of the smallest nation in the world, while Carlos Slim Helu is the richest man. I compared the statistics of the two below:


Population

  • Tuvalu : approximately 10,000
  • CSH: 1 person


GDP vs Net Worth

  • Tuvalu GDP: $12.0 million
  • CHS Net Worth: $53.5 billion


Ethnic group:

  • Tuvalu: Polynesian: 96%
  • CSH: Lebanese, 100%


Sources:

www.encyclopedia.com/topic/Tuvalu.aspx

Wiki