Expenses can be divided into 2 main categories: Variable Expenses and Costs. These change with the amount of good seems that is produced. For example, variable expenses can include Pepperoni, cheese, flour, tomato sauce. Fixed Expenses Costs: These costs don’t change with the quantity produced. In our pizza parlous fixed costs can include electricity, rent, insurance, etc. Economies of Scale: The more units you produce, the cheaper the cost is per unit. For example, the first Toyota Campy costs $800 million. Research and Development Costs: This includes prototypes, we have to perform crash tests.
Each prototype takes a lot of time and money to design and produce. We then have to purchase warehouse and factories We have to set up the assembly line, robotics, equipment tools. Hire employees to work the assembly line, hire managers, supervisors, etc. We then have to train the employees and pay them. The second Campy costs us $400 million, the third one costs us about $266 million, every Campy produced costs us less. Several million units later, the cost is $20,000. Not all industries require economies of scale. Our pizza parlous doesn’t really require economies of scale. Does the cellular phone service industry need economies of scale? Rogers) Yes. The first subscriber costs Rogers $500 million. Communication Towers-Rental and leasing costs. Canada’s geographic size, makes it very expensive to connect. Hire and train employees Information Technology (IT) infrastructure 1 -Corporate Social Responsibility (CARS) CARS measures the extent to which a business cares about the overall social welfare. For example, Cataracts, is relatively socially responsible. They’ve implemented the “Fair Trade Program” for the coffee and tea. This program makes sure suppliers are treated fairly, and paid an above subsistence wage/ ate.
While this benefits the farmers, Cataracts benefits with a positive reputation and develops good public relations (PR) In contrast, there are companies with terrible CARS. For example, Enron. Is the largest bankruptcy in US history. $36 billion. They were an energy company that ended up bankrupt due to fraud and mismanagement. They were able to continue the fraud with the help of their auditors, Arthur Anderson. Economic Conditions Affecting Business Success Economic conditions are beyond a company’s control. A business can only choose how they respond. Effective business have plans in place that dictate owe they respond. ) Supply and Demand. When prices are high and profit is relatively high as well. Demand tends be upward and rising. Due to the high profits, new entrants are attracted to the market, supply increases, prices decrease, profits decrease, the market reaches equilibrium, no new entrants as profits are no longer excessive. Price Fixing: We can skew the mechanisms of supply and demand via price fixing. In our pizza example, Abdullah, Melissa, Seined, Jenny, Jars they’re all in the pizza market. Abdullah, Melissa, etc. Would actually get together and agree to set the same prices.
This WOUld be considered price fixing/collusion, and is illegal in Canada. For example, the largest case of price fixing in the world was the Vitamin price fixing scandal in 2001. All the major vitamin producers colluded to keep prices artificially high, and they divided up territory amongst themselves. Due to the huge amounts of vitamins that are added to a wide variety of foods, people all over the world were paying more than they need to. The amounted to excessive profits and a form of ‘theft” from the public. The government ended up convicting several Coo’s and fining their companies.
Fine’s totaled more than a billion dollars. With Hoffman-La Ruche paying approximately $500 million. Why Businesses Fail? 1. Lack of skills or knowledge. Accounting and Marketing are common skills that are lacking. A lack of accounting skills means an inability to control costs. For example, Detroit Automobile Company (DACCA), founded by Henry Ford went out of business because of constant cost over runs. For marketing failures, we looked at Blackberry. Marketing isn’t just commercials and ads. It also looks at market segment analysis, which identifies your customers, their needs/wants and how those change.
Blackberry had an inability to see that customer would quickly adopt touch screen phones. 2. Expanding Too Quickly. Entering new markets too quickly, or product lines, etc. Assumes previous success is going to mean future success. Walter recently withdrew from India, Germany, part of China. McDonald’s famously withdrew from the pizza market. They spent hundreds of millions of dollars on special pizza recipes and ovens. They pizza were widely panned for the taste. They had to abandon the pizza market and deal with the financial aftermath. 3.
Lack of Capital: Firms need capital to fund continue reduction, marketing, inventory, paying workers, expansion, etc. To increase capital, we can get a bank loan, we set aside profit from current operations, we can raise funds from investors (from friends/families/acquaintances for small firms). Large firms will issue shares via an initial public offering (PIP). For example Faceable, last year had an PIP in order to raise funds for expansion. They needed the funds to facilitate global expansion, to add new features (had photos, videos, APS, etc. ) This requires a heavy investment in Information Technology (IT) infrastructure.
They raised $16 Billion dollars. ***Many early investors became very wealthy because they acquired their share much earlier. Lack of capital for Hag Clothing: -Our firm starts off intellectualized -We only have $15,000 in reserve -In the first month we have $5000 in losses. -The next month we have $4000 in losses -Then $3000 in the next month -Then $2000 in losses -Then $1000 in losses While our performance is improving and we’re very close to break even, we no longer have any operating capital left and unless we can draw new investors, we’ll have to go out of business.
Inability to Stay Competitive This often means a failure to adapt to changing business landscapes. You may have a business that is currently very successful and profitable, but if you neglect to adapt to any changes, your success will be threatened. In Canada the book industry 20 years ago was dominated by smaller chains and a lot of individual stores. The book industry shifted to one that used wide distribution channels via Chapters and Indigo. They sell at a national level. The large chains end up displacing the smaller stores/chains. Smaller shops can decide to specialize in pub-categories.
Comics only shops, Children’ only stories, Daybooks, etc. The landscape then shifts major, as Amazon enters. Amazon sells at a global level. They sell their books online, this makes easier for the customers to purchase from home, online purchases via “Amazon’s One Click” process, this greatly reduces purchase friction. Also, having no store front saves Amazon millions in overhead costs. Then we move from physical copies to digital formats. Other ways to adapt include: changing product mix, product quality (No Frills vs.. Longs/Whole Foods), Service (Walter vs..
Roots/Apple/J Crew/Hugo Boss/Gucci/ Holt Reenter), Price, Location, Expertise. Page 97: Labor Market Conditions. Be familiar with the following terms: unemployment rate-The percentage of people that are actively looking for work, who cannot find it. Labor force-people who are looking for work and working subsidies- when government gives special financial incentives so that firms will hire from that government’s jurisdiction. -Would we want an unemployment rate of -If the unemployment rate is high (1 0%), how do firms benefit? What is the long run issue with this? 0% Unemployment -Pros: Gob. Eves less social support, crime rate may go down, general demand for goods/service increases and thus positive cycle created, good optics/politics, lower taxes because all the employed help create a larger tax base. -Cons: Prevents expansion because firms don’t have the human capital to expand, Southern US and Mexican migrant workers, Taiwan, AAU, Switzerland, bring in a lot of immigrant Labor to satisfy human capital needs. -In Alberta there’s a relatively large Labor shortage due to the booming oil sector. Incomes are relatively high, but the cost of living is very very high. Rent, food, etc. Are much Geiger. This in total causes a spike in inflation Unemployment & Inflation -Due to the high unemployment rate, firms don’t have to pay their employees as much. They may also expand faster and farther because of the large pool of available human capital. -Due to the high level of unemployment, people have less money to spend on goods and services. Firms that produce these goods/ service have to cut back on production. Due to the production cuts, they have to lay off a certain amount of their workforce. These newly unemployed people, further reduce the demand for goods/services, this causes another round of bob cuts, etc. The easiest/quickest way to alleviate this, is for government to increase its spending. We call this a stimulus plan. This is often in the form of large infrastructure projects; bridges, roads, government buildings, dams, etc. This infusion of income helps reverse the negative cycle that started with the high unemployment rate earlier. Inflation: The worst case of inflation in recent history involves: Zanzibar at 24,000%. A pack of gum that costs $1 last year costs $240. In Hoagland (2012): we produced 5 cars, 10 cartons of orange juice, 10 pants, 10 jackets. The average income in our lass is $35,000.
The price of a car is $25,000, a carton of orange is $5, 1 pair of pants $45, 1 jacket $100. The government decides to double everyone’s income, the average income for 2013 is $70,000. What effect does this have on prices? Why? Inflation & Taxes Inflation is the general increase in prices in the economy. A common measure of inflation is the ICP (consumer price index). It is a basket of goods used to track the change in prices. Food, clothing, price of transportation, rents, etc. In our example when the Hoagland government increased everyone’s income, they increased the Money Supply.
Fifth money supply increases faster than the production of goods and services, we have inflation. If the money supply increases at a relatively low rate, inflation also increases relatively slowly. If the money supply increases a by a large amount, relative to the production of goods and services, inflation will also be large In Zanzibar, the government, through mismanagement, ran out of money. The government then decided to print more money. However, the production of goods and services didn’t increase. As a result of the surge in the money supply, prices skyrocketed. The Purchasing Power of the Zanzibar dollar dropped.
In Canada the government target for inflation is 2-3% depending on economic conditions. If the government mishandles inflation control, prices can spike, reducing the purchasing power of the average citizen, the government will likely face a difficult re-election. The inflation rate in Canada in the sass’s was about 15-20%. The cost to borrow money/loans also spiked. ***Even at 2-3% inflation, isn’t our purchasing power decreasing? This may be an issue for those retired on a fixed income. Ideally, what would happen for most of the employed part of the population would receive raises at work. Page 102:
How do governments influence business? Control of distribution Other regulations Taxes: Imports and customs duty: Import duties are used to protect domestic industries. In Canada, we have a huge T-shirt industry. The average price of a T-Shirt is $35. However, Hoagland, is able to design, manufacture and ship their T shirts for $15 each. In order to protect the Canadian T shirt industry, the government imposes duties on Hoagland T-shirts. So now the government adds a $20 import duty. So both shirts sell for $35. Taxes Count. D Taxes (Count) Sin taxes: Taxes imposed on “sinful” consumption, this includes, alcohol and tobacco.
This is related to luxury taxes as well, luxury taxes are taxes on items that are often related to conspicuous consumption. For example, high performance sports cars often include a “luxury tax”, due to their poor fuel efficiency. These taxes are rarely politically challenged and may even be politically popular. The government may also reduce taxes on items that are politically popular, such as baby products, clothes, food, books, child care, basic groceries, tutoring, music lessons, prescription drugs. How governments control distribution: Marketing Boards: control the distribution, manufacturing and processing of the reduce.
We use marketing boards to control price swings for certain industries. For example, eggs. Suppose that the price of an egg is $1. The current producers are making a large profit, which draws in new producers. The price then drops to $0. 75/egg. There is still large profits being made, so more producers come in. Eventually the price of eggs drops to $0. 05/egg. This causes a lot of producers to exit the market. Price then rebounds to $1/egg. To prevent over production the government imposes quotas. The government has enacted legislation to prevent anyone from controlling he supply/price of a product or service without it’s approval.
This prevents companies from colluding to restrict supply and raise prices and increase their profits. The worst case of price fixing involved the vitamin industry. Because vitamins are used in so much of our food supply, artificially raising prices has a huge effect on the population. In this case Hoffman La-Ruche was fined over $500 million. The executives involved were heavily fined and sentenced to jail time. How Governments Influence Business Money Supply: The money supply is controlled by the Bank of Canada. One f their mandates is to achieve a sustainable level of inflation in the economy.
Inflation (revisited): Some inflation is required for the economy to grow. Targets range from 2-3%. If inflation is too high, general prices increase, which negatively affects those on a fixed income. Even with a wage increase, excess inflation will reduce purchasing power greatly. High inflation also discourages savings because people want to spend their money before it’s purchasing power decreases. Deflation also isn’t ideal. Deflation is a period of falling prices. This also isn’t ideal. When people expect prices to drop they will hold off on institution.
This can lead too recession, and in a worse case scenario, depression. Canada is experiencing deflation in some sectors. Canada is an export economy. We export/sell to other countries our various commodities. Currently demand for our commodities is low, since there is less demand for our commodities, we must lower prices. If we want higher inflation, we would increase the money supply. With more money and the same amount of goods, prices will rise. Other Regulations Health and Safety: The government tries to ensure the safety of items sold via various laws and regulations.
For example the Food and Drug Act requires extensive testing of food and drugs. Most of the time the government does an adequate job. Ethical Business Practices The government also tries to ensure that businesses act ethically. However, at the end of the day, the saying “Caveat Emptor’ hold true ( Buyer Beware). The Competition Act helps prevent misleading advertising, it prevents companies from switching prices and using various “bait and switch” tactics. For example, a 60″ TV is advertised for $1 00, however when you get to Busty, they’ve run out of that model, but they have another one for $400.
