1 FUNDAMENTALS OF ECONOMICS (Observing and explaining the economy) 1.1 Processes of making economic decisions 1.2 Basic economic concepts 1.3 Interpreting the observations 1.4 Household and organization. A circular flow diagram 1.5 Economic models 1.6 Prediction and Ceteris Paribus assumption 1.7 Types of economic policy of government. Positive and normative economy 1.1 Processes of making economic decisions Economics is concerned with consumption (naudojimas), distribution and production. It deals with activities of huge amount of businesses workers, producers and consumers. Economics – the science of activity, concerned with exchange of goods. Economics – the science focused on production of goods and consumption. Economics – special way of thinking that uses different models to explore reality. Economics – the science about the use of scarce (riboti) resources (labour, capital, land) for production. Economics – the science about activity when resources are used and needs of people are met. Economics examines 3 main aspects: • Scarcity of time and resources. Scarcity is a situation when people want to exceed (viršyti) their resources • Choices among several alternative possibilities • Interaction of people using their resources to achieve their goals. Economic interaction among people takes place when they trade or exchange their goods or services Economics helps individuals and societies to make choices about their challenges and opportunities they face. Process of making economical decision consists of steps: Economics requires: • To describe economic events • To explain why the events happen • To predict under what circumstances such events might take place in the future • To recommend appropriate courses of actions: what to do and what decision to make 1.2 Basic economics concepts Economic has two main branches – microeconomic and macroeconomic. Microeconomic is defined as an analysis detail of behaviour in a particular market or set of related markets. In other words, microeconomic is the study of individual units within the economy, such as households, firms and industries and their interrelationships. Study of allocation (paskirstymas) of resources and distribution of income is the object of microeconomics. Macroeconomics is a study of overall indicators of economy, such as total employment, unemployment rate, GDP (Gross Domestic Product), the rate of inflation. GDP – the most comprehensive (išsamus) available measure of size of economy. GDP is a measure of the value of all goods and services produced in an economy over a specified period of time. Economical history – study of economical events in the past. In order to document observations and look for patterns economists need to look back in some historic period and see what has happened. Economists gather information from surveys of the prices of goods and services. They average these prices, giving greater weight to the prices of items on which is spent more. This average of prices is called overall price level. There is a tendency for all prices to rise over time. The general increase of overall price level is called inflation. Inflation rate – a percentage increase of overall price level through year. The tendency of the overall price level to rise over time shows the growth of GDP. Real GDP is measure of the value of the goods and services produced during the period of time adjusted for inflation. Real GDP increases slower that GDP. When we measure an increase in some particular price, we need to compare it to the OPL. Ex.: We have data about increase of prices in healthcare. To determine if the price has increased more or less rapidly than the overall price level, we must look at the relative (santykinis) price of health care. Relative price – price of a particular good, compared to the price of other goods. Ex.: Relative price of healthcare = (Health care price)/(Overall price level). If result is less than 1, it means that overall price level has increased more rapidly, if more than 1, it means that the price of health care has increased more rapidly. 1.3 Interpreting the observations Economical variable – any economical measure, which can vary over a range of values. Economical variables can correlate. Economical variables are correlated if they tend to move up or down at the same time. Positive correlation – if two variables move in the same direction. Negative correlation – if two variables move in the opposite direction. If two economical variables are correlated it doesn’t mean that one caused each other – there is a difference between correlation and causation. Correlation shows a degree to which economical variables are observed to move together. Causation means that one event brings about another event. Remember – correlation doesn’t imply causation. Ex.: High thermometer readings don’t imply hot weather. Correlation coefficient can be between -1 (negative correlation) and 1 (positive correlation). -1 strong negative correlation, 1 strong positive correlation. 1.4 Household and organization. A circular flow diagram. Interpreting economical observations requires a group of two people. Economists often group people who consume goods and services into households. A household is an individual or a group of individuals who share the same living quarters. Every individual in an economy belongs to a household and each household must make decisions about the products and services it consumes. Producers of goods and services are called organizations, which include firms and governments. Governments also produce goods and services such as national defence, education and serve other functions, such as maintain of law and law enforcement (įstatymų paisymas). A market - an arrangement through which people exchange goods and services. Buying and selling takes place in the labour, capital and product market. Circular flow diagram: Diagram shows how spending in general equals production in general. Buying and selling of goods and services takes place in the product market. The inputs of production are supplied by households (either as workers or owners). Households supply their Labour to the firms or organizations that employ them. Households also supply capital (resources, such as machines, land and equipment) to organizations. Organizations fund households either by owning shares, renting or buying equipment. 1.5 Economic models Economic model is an explanation of how the economy or part of it works. Economic models are always abstractions or simplifications of the real world. They include complicated phenomena such as behaviour of people, companies, and governments. There are many ways to describe economic models: words, numerical tables, graphs or algebra (which is the most precise). Existing models are constantly being re-examined and tested. Some economists specialize in testing models, others specialize in developing them. There is an on-going process of creating and testing models in economy. New economy models are applied because some new observations can’t be explained by the existing models. 1.6 Prediction and Ceteris Paribus assumption Prediction is one of the most important uses of economic models. Economists use models to predict variables in the future. In order to use models for prediction economists use the assumption of Ceteris Paribus (“all other things are equal”), which refers to holding all other variables constant or keeping all other things the same when one variable is changed. The phrase Ceteris Paribus is close to the definition of demand, because the quantity consumers are willing to buy depends on many other things besides the price. We want to hold these other things constant while we examine the relationship between price and quantity demand: 1.7 Types of economic policies of government. Positive and normative economy Since the birth of economy as a field in 1776, when Adam Smith published the “Wealth of Nations”, economists have been concerned about economical policy of government. In fact Economics was originally called political economy. Adam Smith argued for the system “laisser faire”, in which the control of the government was very small – only to promote competition, provide national defence and reduce the restrictions of exchange of goods and services. Carl Marks was of different opinion – he claimed that the government should essentially own and control all production. Partly as a result of these different views 2 quite different types of economy exist: • Market economy • Command/centrally planned economy Market economy is an economy in which characterized by freely determined prices and a free exchange of goods and services in the market. Command economy is an economy in which prices and production are determined by the government. However, in many modern market economies government plays quite an important role, so mixed economies exist. In debating the role of government in the economy, economists distinguish (išskiria) positive and normative economics. Positive economics is about what is and normative economics is about what should be. Ex.: Positive economics aims to explain why the Great depression happened, while normative economics aims to develop recommended policies to prevent another great depression in the future. Positive economics is an economic analysis that explains what happened and why without recommendations about economical policy. Normative economics is an analysis that makes recommendations about economical policy. 2 ECONOMIC GOALS AND MARKET ECONOMY 2.1 Economic goals: a) A high level of employment b) Price stability c) Efficiency d) Equitable distribution of income e) Growth of the economy f) Production and pollution g) Economic freedom h) Interrelationship among economic goals 2.2 Key elements of market economy 2.1 Economic goals The final target of economy is to develop better policies to minimize our problems and maximize the benefit. a) A high level of employment A high level of employment means that people, willing to work, would be able to find jobs. Unemployment involves dashing (griūtis, žlugimas) of hopes. The people unable to find job feel worthless. The term unemployment is reserved for those, who are willing and able to work, but are unable to find job. A very high rate of unemployment for a long time causes depression. The unemployment rate is calculated as a percentage of the total Labour force plus those, who are unemployed. Total Labour force is calculated as a sum of those, who are actually employed and those who are unemployed. b) Price stability Rapid increases or decreases in average price level should be avoided. When price rises there is both – a gainer and loser. There is a loss to the buyer, who has to pay more. But there is a gain to the seller, who gains more. This two sided nature of price increases make it difficult to evaluate the danger of inflation, which means an increase of the average level of prices. Deflation is opposite process to inflation, it means fall in the average price level. A small rate of inflation makes it easier for the economy to adjust to changes and makes it easier to maintain a high level of employment. But when inflation gets a high rate it may cause serious problems. Inflation can have serious consequences: • Inflation hurts people living on fixed income and people who have saved money • Inflation can cause business mistakes. When there is a rapid inflation, some businesses may report profits but on a more accurate calculation they might actually be suffering losses. Hyperinflation is a very high increase of prices at annual rates of 100% 1000% and more. c) Efficiency When we work we want to get as much as we reasonably can out of our productive efforts. Efficiency can be technical or locative. Technical efficiency exists when the same amount of production is produced using smaller quantity of income, such as labour and capital. Ex.: 2 bicycle manufacturers. One uses lots of workers and many machines to produce 1000 bicycles. The other uses fever workers and fever machines to produce the same number of bicycles. The 2nd manufacturer is a better manager and the 1st manager is technically inefficient. A locative efficiency involves the production of the best combination of goods, using the best combination of inputs. d) Equitable distribution of income The main idea: when many live in affluence (perteklius), no group of citizens should suffer strong poverty. A general increase in production may be one of the most effective ways to fight poverty. As the general level of income rise, the income of poor will also rise. There can be used different programs of Government aimed to help the poor. e) Growth of the economy Growth means an increase in output that results from economical improvement and additional factories, machines or other resources. The advantages of growth are obvious. If the economy grows, our income will be bigger in the future. Some of the rising production can be used to benefit the poor. More of our current efforts will have to be directed to the production of machines and away from consumption of goods. f) Production and pollution We want to produce more, but we have to do so without damaging our environment. g) Economic freedom The right of people to choose their own occupation, to enter contracts and to spend their income as they want. h) Interrelationship among economic goals The poverty problem is easier to solve if an unemployment rate is kept low. Some goals are complimentary, like this, when achieving one goal helps to achieve another. Economic policy making is relatively easy. However economic goals in many cases are in conflict. Ex.: When the unemployment problem is reduced the inflation problem tends to get worse heavy purchasing by the public tends to reduce unemployment, but tends to increase inflation. 2.2 Key elements of market economy Economists focus on 3 essential questions: • What is to be produced • How are these goods to be produced (how it is better to use available resources) • For whom are the goods to be produced Market economy and the command economy are 2 alternative approaches to these questions. In the market economy most decisions about what, how and for whom to produce are made by individual consumers, firms, government and other organizations, interacting in market. In a command/centrally planed economy most decisions about what, how and for whom to produce are made by those who control the government. Key elements of market economy: • Freely determined process. In a market economy most prices are freely determined by individuals and firms. These freely determined prices are essential characteristic of the market economy. In the command economy most prices are set by government and this leads to inefficiencies in the economy • Property rights and incentives (skatinimas). Property rights give individuals the legal authority to keep or sell property. Ex.: If an inventor can’t get the property right on the invention then the production of the inventions is low or doesn’t exist • Competitive markets. Markets are competitive when there are many buyers and sellers and no single firm or group of firms dominating in the market. When a market is dominated by a large firm, the outcome will most likely be inefficient. A single firm may be able to control the price, set it very high and produce very little • Freedom to trade at home and abroad. Allowing people to interact freely is another necessary condition of a market economy. International trade increases the opportunities to gain from trade. This is especially important in small countries where it is impossible to produce everything • A role of government. Just because prices are freely determined and people are free to trade in a market economy, it doesn’t mean that there is no role for government. In all market economies, the Government provides for defense and police protection. In certain circumstances can be market failure, when the market economy doesn’t provide good enough answers to the questions what, how and to whom produce. Then the government has to try to improve the situation in the market 3 THE SUPPLY AND DEMAND MODEL 3.1 Demand 3.2 Supply model 3.3 Market equilibrium 3.4 Interference with market prices Supply and demand model describes how particular market works. It consists of 3 elements: demand (describing the behaviour of consumers in the market), supply (describing behaviour of firms in the market) and market equilibrium (connecting supply and demand and describing how consumers and firms interact in the market). 3.1 Demand Demand is relationship between 2 variables: • The price of the particular good • The quantity of goods consumers are willing to buy during a period (all other things being equal) We call the 1st variable – the price and 2nd variable – quantity demanded. The law of demand says that the higher the price, the lower the quantity demanded in the market (or conversely – atvirkščiai). In other words – the price and the quantity demanded are negatively related (or other things being equal). Ex.: If the price of bicycles falls, then some consumers, who previously found the price too high, may now decide to buy a bicycle. The lower price of bicycle gives them an incentive to buy bicycles rather than other goods. It is important, that when economists draw the demand curve, they hold constant prices of other goods. Price is not the only thing which affects the quantity of goods people buy, other sources: • Consumers’ preferences. A change in people taste for a product, compared to other products, will change the amount of goods they purchase at any price. • Consumers’ information. Ex.: When people learned about the dangers of smoking, the demand of cigarettes decreased. • Consumers’ income. An increase in income increases the demand for most goods. Ex.: higher income increases the demand for eating out, cars and movies. The decline in income reduces the demand for these goods. Goods, for which demand increases when the income rises, are called normal goods. However, the demand for some goods, such as one speed bicycles, day old bread may decline if the income increases. These goods are called inferior goods (prestos kokybės). • The number of consumers in population. Demand is a relationship between the price and the quantity demanded by all consumers. If the number of consumers increases then the price will increase. • Consumers’ expectations of future prices. If people expect the price to decline in the future they will buy less and wait for the decline of price. • Price related goods. A substitute is a good that provides some of the same uses as another good. Ex.: butter and margarine. A compliment is a good that tends to be consumed together with another good. The movement along demand curve: Using demand curves is very important to distinguish shifts from the movements. A movement takes place when the quantity demanded is changed due to the change of the price. If the quantity changes due to the price it is said “there is a change in quantity demanded”. A shift of the demand takes place if there is change due to any other source except price. When the demand shifts it is said “there is change in demand” Change in demand = shift in demand. Change in the quantity demand = movement along the demand curve. 3.2 Supply model While demand is connected with behavior of consumers, supply is connected with behavior of firms. Supply is relationship between 2 variables: • The price of a particular good • The quantity the firms are willing to sell at that price (all other things are being equal) The law of supply says, the higher the price, the higher the quantity supplied. The sources that influence the supply curve: • Technical improvement. Increase supply and shift the curve to the right. If the price of material increases it becomes more easily to produce the goods and firm would produce less at any price, so the supply curve shifts to the left • Number of firms in the market. The supply curve refers to all the firms producing the product. If the number of firms increases, more goods will be produced at each price and the curve shifts to the right the decline in number shifts to the left • Expectations of future prices, that tends to reduce the price if expectations increases • Taxes. Taxes increase costs and reduce supply. The curve shifts to the left, when a tax on what firms sell in the market increases • Subsidies of the government. The government makes payments – subsidies – to firms to encourage producing certain goods. An increase in subsides reduces the company’s costs and increases the supply. A movement along the supply curve happens, when a change in the price causes the change in quantity supplied. A shift happens if there is a change due to any source except price. When the supply curve shifts: “there is a change in supply”. The term supply refers to the entire supply curve. The term quantity supplied refers to a point on the supply curve. 3.3 Market equilibrium (pusiausvyra) Market equilibrium combines supply and demand. When consumers buy, and firms sell, they interact in the market and the price is determined. No single person or firm determines the price in the market, the market determines the price. Prices adjust until they settle down to a level where the quantity supplied by firms equals the quantity demanded by consumers. Price Quantity demanded Quantity supplied Shortage, surplus (perteklius), equilibrium. Price rises or falls 140 18 1 Shortage = 17 Rises 160 14 4 Shortage = 10 Rises 180 11 7 Shortage = 4 Rises 200 9 9 Equilibrium No changes 220 7 11 Surplus = 4 Falls 240 5 13 Surplus =8 Falls A shortage is a situation, whereas the quantity demanded is greater then the quantity supplied. A surplus is a situation, in which the quantity supplied is greater that the quantity demanded. Equilibrium price – the price at which quantity supplied equals to the quantity demanded. The quantity bought and sold at equilibrium price is an equilibrium quantity. When the price equals the equilibrium price and the quantity bought and sold equals the equilibrium quantity we say “there is market equilibrium”. If the prices were lower than the equilibrium prices, then there would be a shortage and the prices would rise. If the prices were above the equilibrium prices then there would be a surplus and the prices would begin to fall. The market price will move towards the equilibrium price. 3.4 Interference with market prices (price ceiling and floor) We use the supply and demand model in situation, in which the price is freely determined without government control. But many times in history governments have controlled market prices. In general there are 2 broad types of government control: • Price ceiling • Price floor Control can fix a price ceiling – maximum price, at which a good can be bought and sold. Ex.: some cities in the USA have price controls on rental apartments. Landlords are not permitted to change a rent higher than the maximum fixed the rent control law in these cities is to help the consumers who must pay the rent. Problems resulting from the price ceiling leads to the shortage – black market. If government prevents firm from charging more than a certain amount for their products, then a shortage is likely to result. In this case the sellers are unwilling to supply as much as the buyer want to buy. The problem causes – black market – lower quality market. Government price control can also fix a free floor or minimum price. Ex.: In the Labour market the government requires the minimum wage. The supply and demand model applied to Labour market – in that case, the price is the profit of the Labour or a wage. A minimum wage can cause misunderstanding. If the equilibrium wage is below the minimum wage, then some workers would be willing to work for less then the minimum wage. The minimum wage would have no effect if the equilibrium wage were above the minimum wage. The minimum wage effects workers whose wages are below the minimum wages. 4 FORMS OF BUSINESS OWNERSHIP 4.1 Legal forms of business ownership 4.2 Price takers and price makers 4.1 Legal forms of business ownership A firm is an organization that produces goods or services. 3 different legal forms of firms: • Sole proprietorship (individuali įmonė) • Partnership • Corporation / Joint stock (kapitalas) company Main differences between these forms of firms: • Sole proprietorship is a firm, owned by 1 person. The manager and the owner is usually the same person, but sometimes the owner may hire a manager to make day to day decisions. The income earned by the business becomes the owners personal income and is reported to the government on a personal income tax form along with any other income of the owner • A partnership is a firm, owned by more than 1 person in which the partners decide the division of the firms income among them • A corporation is a firm characterized by limited liability (atsakomybė) on the part of owners and the separation of management and ownership. The owners are liable only for a limited amount of the losses the corporation has. If the corporation runs losses for several years and can’t repay all its debts (skolos) the owners don’t have to sell their cars or give up their houses to pay the lenders at value of their shares of ownership in the firm. This feature of the corporation is called limited liability. Limiting the liability of the owners of the corporation reduces the risk of the owners and makes owning shares more attractive. A corporation pays the corporation income tax that is different from the personal income tax paid by owners. The corporation pays out a part of is profit to the owners and can use remaining profits to expand the firm by buying additional capital or other firms. This pay out to the owners is called dividend. Owners can sell the stock in the stock market. 4.2 Price takers and price makers Price taker is a firm that takes the market price as given. This firm can’t affect the market price much because the market is competitive. Ex.: If one producer changes the price of the goods by 10 LTL all the other producers change by 5 LTL for the same goods. So customers are not going to buy goods from the 1st producer. Although the individual firm has an ability to set any price but it can’t change a price far from the price that prevails in the market. A market in which a firm can’t affect the market is called competitive market. Not all markets are competitive. Market in which there is only one firm is called monopoly. How much does the monopoly produce at the given price has no meaning, because the monopoly doesn’t gave to take the price as given. Definitions of economics: • Utility of the goods and services. A numerical indicator of a person’s preference for some goods compared to others. The additional utility a person gets consuming one more of an item is called marginal utility. Marginal utility is the change in utility as one more unit of the good is consumed. Pounds of grapes Utility form grapes Marginal utility 0 0 - 1 6 6 2 10 4 2 13 3 4 15 2 5 16 1 • Total costs are what the firm has to incur to produce the product. Total cost – the sum of variable costs and fixed costs. Fixed costs are defined as the cost of production that doesn’t depend on the quantity of production (rent, land and so on). Variable costs are defined as the costs that vary depending on the quantity of production. Variable costs are generally associated with Labour. • Marginal costs – the change in total costs due to one unit change in quantity produced. Marginal costs increases as the quantity increases. Quantity produced Total costs Marginal costs 0 50 - 1 70 20 2 100 30 3 150 50 4 230 80 5 350 120 Break even analysis (lūžio taško analizė arba pelningumo analizė) helps the firm to analyze the level of sells at which total revenue equals the total costs. Selling price per unit = 100 EUR Variable cost per unit = 60 EUR Total fixed costs = 1000 EUR Total revenue (pajamos) = Total costs Price * Quantity = Total Fixed costs + Total Variable costs 100*Q = 1000 + 60*Q >> Q = 25 Break Even Analysis tells how many units must be sold in order to break even. In this case we assumed that any number of units can be sold of 100 EUR per unit. 5 MARKETING 5.1 Marketing concept and marketing 5.2 Marketing mix 5.2.1 Product 5.2.2 Price 5.2.3 Distribution / placement of the product 5.2.4 Promotion 5.3 Developing marketing strategy 5.1 Marketing concept and marketing The definition marketing emphasizes a variety of activities: deciding what products to offer, setting prices, developing sales’ promotion, distribution of goods and services, etc. 5.2 Marketing mix Marketing mix - typical market activities (4P): Marketing mix is controllable by the company itself. Marketing environment is uncontrollable. Product includes: 1) development of new product; 2) modifying existing products; 3) testing products that are in the market; 4) selecting names of brands; 5) packaging products. Price includes: 1) establishment of price objectives; 2) conducting cost analysis; 3) analysing competitives’ prices; 4) setting actual prices. Promotion includes: 1) determining type of promotion; 2) design of the advertising message; 3) selecting the advertising media. Distribution includes: 1) selecting wholesalers and retailers 2) finding the best location The marketing concept is a managerial philosophy stating that an organisation should seek to satisfy needs of consumers through a coordinated set of activities that also allows the organisation to get profit. The firm must determine consumer needs and wants: develop products that satisfy them, make products available and prices acceptable to buyers, provide service and offer sales support or promotion. Markets are divided into 2 broad categories: • consumer; • industrial. Consumer markets are made-up of individuals who purchase products for personal use. Industrial markets consist of individuals and organisations that purchase goods and services in order to produce products and supply them to others. Consumer or industrial markets include numerous customers with many different needs. Businesses are rarely able to satisfy the needs of all customers in the market, so the market is divided into market segments. Market segments are groups of individuals of one or several similar product needs. Companies decide which segments to serve. The segment to which a firm directs its marketing activities is a target market (tikslinė rinka). Marketing mix gives synergy effect - the result of the common activity of system elements (4P) is greater than a sum of results of separate elements of activity. Well coordinated marketing mix gives a better result than the sum of results of separate elements of activities. 5.2.1 Product Product life cycle Products have life cycles. The traditional product life cycle describes a product’s sales history through 4 main stages: • Introduction • Growth • Maturity • Decline Introductory stage. Launching a new product is called an introductory stage. Introducing a new product is always risky venture, even for a skilful marketer. A new product category requires a longer introductory period because primary demand must be stimulated. The basic targets in the introductory stage are the acceptance and initial distribution. Promotion is needed to inform potential buyers of the product’s availability, nature and uses and to encourage wholesalers and retailers to stock it. Funds are invested in promotion on the expectation for future profit. Profits are negative in this stage because sale’s volume is low, distribution is limited and promotion expanses are high. Growth stage. If the product has been launched successfully, sales will begin to rise rapidly. New customers are entering the market and old customers repeat purchases. New wholesalers and retailers may be needed. Competition intensifies and profit starts to decline near the end of the growth stage, but total sales are rising. Maturity stage. The greatest number of competitors, competitive products and brands exist in this stage. Competitors copy features of successful products and they become more alike. The decline in profits that has begun in the growth stage accelerates. Decline stage. The final stage in the life cycle. Shifts in consumers’ taste, technological progress and competitive attacks from domestic and foreign rivals are among the reasons products enter the decline stage. Sales and profits fall rapidly in this stage. Product life cycle: 5.2.2 Price There are 2 price strategies for introducing a new product: • Price skimming (aukšta kaina) • Penetration (skverbimasis į rinką) In price skimming the introductory price is set relatively high to skim the top of the market. The companies of video games, security systems, PCs and other technical products often use the skimming strategy. In penetration pricing, the initial price is set low because demand is thought to be priced highly plastic or because the segment of customers willing to pay a higher price is small. A low price may enable to gain deep market penetration quickly. Large volume sales could lead to declining unit production and distribution costs. Since per-unit profit is not high, the firm attracts a large number of customers rapidly. Price elasticity of demand Price elasticity of demand is defined as a percentage’s change in quantity demanded compared to the percentage change in price. If 1, it means that the demand is elastic. Elasticity of demand indicates what happens to total revenue as the price falls or rises. Price elasticity of supply As elasticity of demand indicates the reaction of buyers in a change of price, so elasticity of supply indicates the responsiveness of sellers. Supply is elastic if producers respond strongly to price changes or inelastic if they respond weakly. If 1, the supply is elastic. Goods of high supply elasticity include items that can be easily and cheaply stored, and goods with close substitutes in production. 5.2.3 Distribution / Placement of the product The company has to make decisions on the distribution of the product. The members of the distribution channel are a part of a social system and each member has certain functions to perform. Typical distribution channel: 5.2.4 Promotion The most important factor influencing the development of promotion is a choice of strategies to build sales. A marketer can choose a push or pull strategy. A push strategy focuses on shoving (stumti) the product through the marketing channel. A product manufacturer actively promotes the product to a wholesaler, the wholesaler – to a retailer, the retailer – to a customer. With a pull strategy the manufacturer tries to stimulate buyers’ demand by focussing promotion effort directly on the final buyers instead of on intermediaries. The objective is to stimulate consumers to ask retailers for the product, the retailers – to ask wholesalers, the wholesalers – to ask the manufacturer. 5.3 Developing marketing strategy To select a target market the company uses either a mass/total market, or a market segmentation approach. A marketer who uses a mass/total market strategy defines the target market as all potential buyers of brands in a product category and offers them marketing mix. Organisations that use the market segmentation strategy assume either that people in the market have very similar characteristics and wants or that one marketing mix will satisfy them all. Marketing segmentation approach. Customers in a market may have different needs that can’t be satisfied by a single marketing mix. Then the company divides the total market into segments and creates a marketing mix or one smaller market segment rather than for the total market. Firms segment market in one or two ways: • Company could specialise for one group of customers with a concentration approach. In this way firms of limited resources often can compete with larger firms. However, a draw in demand will draw in sales and profits. • A company with considerable resources may use a multi-segment approach, directing its efforts at 2 or more groups by developing a marketing mix for each. This approach can help an organisation reach more customers and increase sales in the total market. But it also can push up company’s costs since the firm often must use more material and labour, as well as several different promotion, pricing and distribution methods. To sum up, there are 2 main strategies: No segmentation Segmentation Mass market strategy Concentration strategy Multi-segment strategy Organisation’s single marketing mix for the mass market Organisation chooses one segment from the mass market Organisation chooses some segments and forms different mixes for each 6 ACCOUNTING FUNDAMENTALS 6.1 What is accounting. The accounting equation 6.2 Financial statements (ataskaitos) 6.3 Financial analysis 6.1 What is accounting. The accounting equation Accounting is defined as the process of identifying and measuring economic information, which interests investors, creditors, management and governmental organisations. Current investors use it to review the last performance of the company which they have invested in, and to determine if to maintain increase or liquidate their investments. Creditors use financial information to evaluate credit applicants. Company’s managers are the biggest part of the accounting information users. They must have reliable information to make decisions about allocation (lėšos) of the company. Accounting information can also be used to predict each alternative’s consequences. Managers also use it to compare actual financial results with the expectations. Governmental organisations rely on accounting information when establishing a company’s tax liability. The steps in accounting cycle include analysing, recording, posting and preparing financial statements. The accountant first analyses business transactions (operacija) to determine which should be recorded and at what amount. Managers need to know the balances of various financial elements: assets (turtas), liabilities (įsipareigojimai), owner’s acuity (nuosavybė), revenues and expanses at any time. Accounts are used to summarize all transactions that affect a particular financial statement element. The final step of the accounting is preparing financial statements. Financial statements present a company’s financial position, results of operations and flow of cash during a particular period of time. They can be prepared for any time interval, but they are always prepared annually. The main accounting equation: Assets = liabilities + owner’s equity The accounting equation indicates a company’s financial position at any time. The equation is reflected in the balance sheet. Assets are everything of value owned by a business and used in performing its operations. Ex. cash, inventory, accounts receivable (pirkėjų įsiskolinimai), equipment. Liabilities – amounts owned by the business to its creditors, including obligations to perform services in the future (įsiskolinimai iš tiekėjų, paskolos iš bankų). Liabilities include accounts payable, wages payable to employees and taxes payable. Liabilities show the financial resources of the company and how they are used. Owner’s equity represents the claims of the owner or shareholders against the firm’s assets. 6.2 Financial statements Financial statements are the major source of information about the company. A firm’s financial statements typically are a part of the annual report that the firm sends to its shareholders. Annual report, containing financial statements and other information, is prepared by management to shareholders annually. The financial statements are designed to measure the past. The main financial statements are: • Balance sheet, • Income statement/ profit-loss statement, • Cash flow statement. Balance sheet is an accounting statement of a firm’s financial position at a specified point of time. The left side of it shows the assets, or how funds have been used, while the right side shows the liabilities, or how the funds have been formatted, including shareholders’ funds. In general, the balance sheet shows the firm’s investments and how it is financed. The income statement (profit-loss statement) is a financial statement, showing a firm’s revenues and expenses during a specified period. It is based on an identity: Revenues – expenses = profit An income statement can be divided into sections. The operating section scows the operations of firm in terms of its sales and expenses, while the non-operating section shows such items as interest expenses. Subtracting interest expenses and taxes from operating income results in net income/ net profit (grynasis pelnas). Net income/ profit is the profit of the shareholders. It can be divided into 2 parts: • Dividends, paid directly to the shareholders; • Retained earnings (nepaskirstytas pelnas), reinvested to the business. Cash flow statement – a statement of a firm’s cash receipts and payments during a period. Cash flow – an amount of cash inflow and outflow during a specified period. A firm can be profitable according to the reported earnings and still bankrupt due to the lack of cash: net profit doesn’t measure cash flow. The value of a firm depends on future cash payments that investors expect to receive. We need to evaluate the firm’s net income or net profit and consider its cash flow, provided by continuing operations. The statement of cash flow classifies cash receipts and payments into 3 categories: • Operating • Investing • Financing activities It shows the sources of cash during the period and how the cash was used. 6.3 Financial analysis The object of a financial analysis is an evaluation of a firm’s performance. Financial analysis can be used to analyse the determinants of a firm’s reported earnings, helping to identify the potential strengths and weaknesses of a firm’s performance. Financial analysis is associated with ratio analysis. Ratio analysis is defined as the analysis of relationships among different financial statement items, both at a point of time and over time. To carry out a ratio analysis the financial statements are used to compute a set of ratios. Each ratio emphasizes a particular aspect of a balance sheet. The calculated sets of ratios are then compared to industry averages to assess the financial performance of the firm. All ratios of a firm’s performance analysis can be grouped into: • Liquidity ratios, • Activity ratios, • Leverage ratios, • Profitability ratios. TASK 1 (spėju, kad totaliai neteisinga...) A price taking firm has a total price schedule. Quantity Total costs Marginal cost 0 20 - 1 30 10 2 42 12 3 55 13 4 75 20 5 100 25 6 130 30 1) Calculate marginal cost. 2) If the price in the market is 20, how many units will the firm produce? 4. 3) If the price in the market falls to 12 per unit, how many units of output will the company produce? 2. 4) Suppose, there’s improvement in technology that shifts total costs down by 8 at every level. How much will the firm produce and what profit will be at price 12 and 20? 12*2-36=-12; 20*4-67=13. TASK 2 Group the articles of the balance sheet into 3 groups: Assets Liabilities Equity Land Long term debt Capital reserve Equipment Short time debt Current year profit Inventories Accounts payable Registered share capital Furniture Accrued expenses Buildings Inventor Cash Accounts receivable Short time investments TASK 3 Make balance sheet: Patents 35000 (A) Share capital 165500 (E) Capital reserve 42000 (E) Net profit 45020 (E) Land 150000 (A) Buildings 137120 (A) Equipment 46500 (A) A long term debt to the bank 104000 (L) Debts of the buyers 12700 (A) Debts to the supplier 39500 (L) Cash 14300 (A) Rent paid in advance 400 (A) A= L+ E 396020= 396020 Liquidity Ratios It measures the extent (laipsnis) to which the firm can service its obligations. Two commonly used liquidity ratios: • Current (einamasis) • Quick (kritinio likvidumo) The current ratio is the ratio of current assets to current liabilities: Current ratio = (Current assets / Current liabilities) * 100 % Relatively high current ratios show that the firm is liquid and in good position to meet its current obligations. The quick ratio is the same as the current ratio except its inventory: Quick ratio = ((Current assets – inventory) / Current liabilities) * 100 % This ratio reflects the firm’s ability to pay its short term obligations Activity Ratios It shows how rapidly inventor is being turned over into sales: Inventory turnover = Sales / Inventory (atsargų apyvarta) Fixed assets turnover = Sales / Fixed assets Total assets turnover = Sales / Total assets High assets turnover ratio indicates successful assets management. Sales per day = Sales / Days Average collection period = Receivables / Sales per day Average collecting period is the average time period between sales and payment for those sales. The shorter the collection period, the better the quality at the receivables because a short period means that the firm’s customers are prompt payers. Leverage Ratios (įsiskolinimas) It indicates to what extent the firm has financed its investments by borrowing. Debt-equity ratio = Debts of the company / Equity Debt ratio = Total debt / Total assets The debt ratios describe the financial structure of the firm. Profitability Ratios It measures the profits of the firm relative to sales, assets or equity (nuosavybė). It describes the firm’s past profitability: Profit margin = Net profit / Sales (net – grynasis) . Profit margin ratio describes how well a litas of sales is squeezed into profit. It shows what percentage of every sales litas the firm was able to convert into the net-profit: Return on assets = (Net profit / Total assets) * 100 % (turto pelningumas) This ratio describes how profitably the firm uses its assets. Return on equity = (Net profit / Equity) * 100 % (nuosavybės grąža) It indicates the rate of returns earned on the book value of the owner’s equity (balancinė vertė) The DuPoint System of Analysis (DPSA) Many of the financial ratios are related to each other because the firms’ activities, assets and liabilities are interrelated. Thus, it has become a common place to bring together balance sheet and income statement activities into a form of system for analyzing a firm’s profitability. The DPSA is widely used by financial managers to assess a firm’s financial condition and examine the underlying determinants (veiksniai) of its profitability. ROA = (Net profit / Sales) * (Sales / Total assets) = Net profit / Total assets This approach clearly shows the two determininants of return all assets: • How much the firm earns per litas of sales • Assets utilization or how many litas of sales are generated by one litas of assets Although ROA is important, but shareholders are more interested in the return of equity (ROE), since they haven’t put up all the funds to finance the firm. DPA examines the relationship that determines ROE given ROA. In doing this is convenient to use the equity multiplier. Equity multiplier = Total assets / Equity The equity multiplier shows the value of assets, financed by one litas of equity. ROE = ROA * Equity multiplier = (Net profit / Total assets) * (Total assets / Equity) The important point is that we can see if ROE is adequate. It is a result of one of two determinants: • Assets utilization, measured by ROA • How the assets are financed and measured by the equity multiplier. 7 FUNDAMENTALS OF MANAGEMENT 7.1 What is management? A variety of objectives 7.2 Management functions 7.3 Core management roles and skills 7.4 Organizational structures of business 7.1 What is management? A variety of objectives Perhaps the most succinct (glaustas) description of management was offered by early management scholar M.Fallet. She stated that management is the art of getting things done through people. The manager coordinates the work of others to accomplish goals that might not be achievable by an individual. The management will be defined as the application of: • Planning • Organizing • Staffing • Directing • Controlling functions in the most efficient manner to accomplish organizational objectives. Research has described a direct relationship between the organizational objectives and business success. Objectives are desired results or targets to be reached by on a certain time. Organizations have multiple sets of objectives. Some are short-range targets, others are based on a longer time. Managers developing a strategy of firm must set priorities among sometimes conflicting objectives. Procedure for setting objectives in terms is called cascade approach in which objectives are set from the top level of management downwards. The illustration of cascade approach: Main aspects of the cascade approach: • Clear statement of organizational purpose is issued. Long range goals are developed. • Long range goals are converted into specific performance objectives. • Objectives are then developed for each subunit of department. • Within the subunits personal objectives are set. 7.2 Management functions Five functions of management are distinguished: • Planning • Organizing • Staffing • Directing • Controlling Planning When managers plan they project a course of action for the future. They attempt to perform a systematic set of business actions aimed at achieving objectives. So planning means deciding in advance what is to be done. Organizing This function of management consists of grouping people and assigning activities so that the job tasks and the mission can be properly carried out. The establishing of the managerial hierarchy is the foundation of the organizing function. Staffing Staffing means selection, placement, training and evaluation, and appraisal of performance. Directing Directing means issuing directives, assignments and instructions. Directing can be accomplished through leadership. The process of influencing the activities of an individual or group towards the accomplishment of the objectives. Managers may choose directing style. Two general styles of direction are autocratic and democratic leadership. Autocratic leadership means providing subordinates with detailed job instructions. Managers using this style delegate as little authority as possible. Some employees respond positively to the autocratic style. Others tend to loose interest, lack initiative or even develop hostilities towards the autocratic manager. Under certain circumstances with specific employees autocratic direction may be necessary. Employees with lack of experience or certain features want directions. Some employees feel that general supervision is no supervision at all. Democratic leadership or general supervision is a style when the manager consults with subordinates about job’s activities, problems and actions. Managers using the general approach seek help and ideas. Democratic leadership doesn’t lessen manager’s formal authority. Decision making power doesn’t change. With an experienced skilled and intelligent group of employees a manager would likely benefit from using a democratic style that encourages participation. Controlling Managerial function of checking in order to determine whether employees are following plan and progress is being made, and of taking action to reduce discrepancies. The core idea of control is to modify behaviour and performance when deviations from plans are discovered. The process of control has four basic steps: • Sets standards for time, quality and quantity. • Measure performance. • Compare performance to standards, plans. • Make necessary modifications. Steps in the strategic planning process Strategic planning involves both, the development of organizational objectives and specifications for how they will be accomplished. Development of the strategic plans forces managers to broaden their concerns from an exclusive focus on short-range matters to an examination of broad organizational issues. The six steps are involved in the strategic planning process: I. To determine more specific objectives a company must asses its mission. The mission of a business is a fundamental, unique purpose that distinguishes the company from other firms of its type. A mission statement should involve three important issues: • What business are we in? • Who are our customers? • What good or service will we offer? For example: mission of a company can be to improve products and services to meet customers needs or to provide an above average return on invested capital. II. To determine organization objectives means to establish how that mission is to be accomplished. The objectives are concrete specific aims that management seeks to achieve for the organization. III. This step involves the assessment of the firm’s strength and weaknesses and comparison with those of other organizations and evaluation of risks and opportunities in the environment in which firm operates. It means that the company makes SWOT analysis. SWOT analysis is the strategic planning tool which forces managers to identify internal strengths and weaknesses to asses them in relation to external opportunities and threats. IV. The firm’s assessment of its resources in relation to its environment concludes with the selection of an appropriate strategy to the advantage of existing and expected environmental conditions. V. Once the strategic plan has been developed implementation of that plan leads to tactical and operational consideration. Tactical planning is a type of planning that focuses on short term implementation of current activities and the allocation of resources for those activities. Advantages: The matrix structure responds to 3 conditions: • It includes dual focus (functional (product)) • It gives the mass-functional benefit of a product structure, while keeping an administrative controls of a functional structure • In this structure talent and resources can be moved from project to project Priorities for the use of limited resources are measured against the overall business objectives and interests. Disadvantages: • Confusion about who reports to whom and when • Power struggles between functional and product manager • Too much group decision making • Too much time wasted in the meetings • A lot of paper writing • Excessive cost of having more managers 8 INTERNATIONAL MANAGEMENT: 8.1 Development patterns in international business 8.2 Managerial orientation of international executives 8.1 Development patterns in international business International business can be defined as all economic activities that cross national boundaries. The term “international management” can be used to refer to the decision making involved in international business activities and its implementations. It might refer to the activities of the head of the firm, export or import department, or to a privately employed person engaged in such activities. An international manager might also be someone who works abroad in a firm’s subsidiaries or sales offices. International managers have duties similar to those of domestic managers, except that their functions are performed in a different environment. The experience of numerous firms suggests that international business activities tend to follow a standard development sequence: • Beginning stage (exporting, licensing) • Intermediate stage (foreign sales subsidiaries) • Advanced stage (foreign production, joint) Exporting or selling abroad domestically – made products is usually the first step. Importing or purchasing foreign – made products is the mirror image of exporting. Firms typically begin to export through an agent who facilitates the transactions with foreign buyers. An affirmative strategy, frequently employed by smaller firms, is licensing, granting an outside firm the right to produce or distribute the firm’s products in another country. As sales expand, the company concludes that its own foreign sales subsidiary is justified and sets up an overseas marketing aim. In the final step management decides to begin producing the product abroad this step is often called “direct overseas investment”. Joint ventures are sometime the mechanism for achieving overseas production. A joint venture is a separate organization, owned by one or two parent companies. 8.2 Managerial orientation of international executives How the manager views his or her foreign employees plays a big role in the success in international management. The basic issue is how the manager views his employees. 3 categories have been proposed for classifying managers according to their international orientations: • Ethnocentric • Polycentric • Geocentric Ethnocentric managers apply the firm’s domestic policies and practices to its overseas units. Decision making is centralized and the firm’s headquarters provides directions for the entire organization, regardless for geographical location. Polycentric managers believe in decentralized decision making for international units. They believe that overseas managers are closest to their markets and work environment, so they are best able to make important decisions. Headquarters provide only general guidance. Each international unit essentially plays by their rules, in their competitions with other foreign divisions. Geocentric managers use the organization’s skills and resources, regardless of their national origin. A geocentric manager is global manager. An executive with this perspective might obtain raw material from one foreign unit, produce component parts in another country and arrange for final assembly to be done in yet another nation. The manager uses the resources and skills that are available throughout the organization. 9. RISK TYPES: 9.1 Legal risk 9.2 Financial risk 9.3 Business risk 9.4 Process of risk management 9.1 Legal risk 9.2 Financial risk Financial risk: • Credit • Market • Currency • Liquidity • Interest rate • Geographical 9.3 Business risk: Business risk: • Investment • Production • Commercial • Financial • Political and juridical 9.4 Process of risk management Process of risk management: • Risk identity • Risk analysis • Actions and control
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