Apple

Financial Terms Revenue: total amount of money company earns from sales Cost of Sales (COGS): amount of money firm must pay to produce goods Income (profit): Revenue-Cost Operating Income: Revenue-R&D-SGA(Selling, general, administrative) Return on Assets (ROA)%: Net Income/ Total Assets Net Income: Operating Income-taxes-interest Gross Margin %: (Revenue-Cost of Sales)/Revenue Operational Excellence: High Volume, Low Price (Walmart, IKEA) Product Leadership (Differentiation): Cutting edge products that demand higher prices (Nike, Mercedes) Customer Intimacy: Customized products that lead to long term relationships (Ritz-Carlton, Bentley)

Shareholder Theory Milton Freidman ONLY mission for a for profit business is to maximize profit for shareholders Only people can have social responsibilities, not businesses Executives do not know how to solve social problems-not their job Stakeholder Theory Ed Freeman Managers have duty to all stakeholders (shareholders, employees, customers, suppliers, community) Firms are legal persons and have social responsibilities Firms actions are not only paid for by firm; pollution Need to consider interest of all stakeholders even if it decreases profit Merck Pharmaceutical company that discovered potential cure to river blindness Expensive to do, customers cant afford, govt wont pay for Positive impact on public image, and scientists motivation, company philosophy Ended up producing drug; had to spend more money to create a distribution system Financial failure, but good public image and boosted company morale

Hayek Societys biggest problem is how to allocate resources and maximize utility Market exchange allows for distribution of knowledge

Most economic decision rely on time and place If each person had perfect knowledge, there would be no need for a market, but this is not the case When govt restricts market exchange, knowledge is lost Markets naturally allocate resources efficiently; maximize utility through pricing

North Korea

Potlatch Kwaikutl-American Indians o Potlatch stimulated flow of goods o Production and distribution from high productivity to low Haves to have nots o Greatest chiefs are the greatest givers Cheifs did little work; workers worked hardest Koakoa-Somewhere else o Big men held competitive feasts o Big men work harder than anyone else- for prestige o Equalized productivity between areas with different ecosystems Reciprocity not used because easier to redistribute as a clan than individually Potlach-obligated, socially meaningful, ambiguous exchange ratio Markets-voluntary, anonymous, exchange ratio in terms of prices Types of costs firms incur Fixed Cost: Cost of resources that cannot be easily altered (equipment) Variable Cost: Cost that can be changed quickly to change output (labor) Total Cost: FC+VC Avg Cost: TC/q Marginal Cost: cost of producing that next unit (new TC- previous TC) Profit: TR-TC (produce when this is the greatest) Perfect Competition Many buyers and many suppliers; homogeneous good P=MC=MR=AC for all firms No producer surplus exists Ex. Flower market, commodities and agricultural products, same product Ebay Negative Externalities Cost of a party not involved in the action (Smoking, Pollution) Can reduce by implementing taxes o Not effective because its hard to put a value on social cost

Public Goods Cannot be excludable or depletable (roads, parks, military) Taxes force people to pay for public goods Incentive to pay for public goods by putting names on them Climate is not an ex of a public good; non excludable, but depletable Silicon Valley vs. Route 128 Positive Externalities Example of market failure when MC not equal to MU Subsidies encourage firms to make MC=MU Firms either try to internalize public externalities (Rt 128) or live with them (Silicon Valley) Silicon valley experienced knowledge spillover by living with them Ex. Nice garden, vaccines, education Firms can benefit in long run from producing positive externalities even if they are not subsidized Agglomeration Economics Economic efficiencies when business locate close to eachother o Knowledge spillovers, supply of skilled workers, proximity to specialized suppliers and customers Ex. Silicon Valley, Shopping Centers, Hotels Asymmetric Information When one side knows more than the other side (buyers/seller; visa versa) Getting complete information is not always possible (transaction costs) o Not a problem for one time purchases since brands want to create trust Market failure-inefficient prices cause high quality sellers leave buyers demanding high quality products leave all leave Adverse Selection Asymmetric info selects certain firms to enter and others to not (lemon market pushes high quality cars out) High risk buyers more likely to purchase under adverse selection Ex. Labor market, life insurance, car insurance Moral Hazard When asymmetric info leads to self-interest inefficient behavior More likely to act reckless when health insured; sex education Principle Agent Problem Agents of clients act in best interest of client with hidden actions High incentive to seek self-interest with guile

Ex. Partnerships, real estate agents

Big Dish

Airline Deregulation When regulated, higher costs for airlines were passed onto customers o Regulation on new airlines entering market; prices stayed high Contestability: Deregulation sent prices tumbling as new entrants came in and dropped prices o Airlines suffered as new entrants dropped prices and profits decreased o Innovations like computer reservation and mileage points arose Deregulation didnt really work