Suyash kulkarni

Section -D
Roll no.-2017143137

Assignment 1
Business& Economic way of Thinking: Value Lessons for a Manager
1. SCOPE OF ECONOMIC ANALYSIS
A. Introduction

 Economics is the study of how societies use scarce resources to produce valuable
goods and services and distribute them among different individuals.
 Basically, what is economics. It is a very dynamic subject. Economics aims to explain
how its analysis is applied throughout society, in business, finance and government,
but also in crime. Economics can be used for raising the living standards of society and
their welfare.
 Understanding of economic issues has become quite indispensable for all sections in
the society. Everyone wants to get rich; wants to increase their wealth holding; wants
to have hold over productive resources; wants to expand their business activities. To
understand the nature of scope of economics we have to understand the scope of
wealth, human behaviour and the scarce resources available in the society.
 Such understandings are developed through learnings. Most of the people learn
through their personal experience in real life situations and the rest who wants to
pursue a career in those dimensions learn it formally which gives them a proper
understanding of economics.

B. The Three Issues of Economic / Business Organization

 What commodities are produced & in what quantities?

Society has various needs and wants. But the resources are scarce. So, in production
there is always some sort of compromise where we have to compromise some of
personal wants to fulfil all the needs. So, it is a problem that using the scarce resources
what to produce and in what quantities.

For example:

In free economy, price mechanism is used to solve that problem. Price mechanism is a
way that includes thinking about supply and demand, and the decisions which are taken
get based on it.

In mixed economy, government has got some hands over goods. That’s why though
one has got enough resources and demand, cannot produce the things in the desired
quantities and desired price.
  How goods are produced?

How to produce refers technique of efficiently producing the necessary goods in the
best way possible. The best way relies on the production cost and proper use of
resources. As the resources are scarce, we have to prioritize the needs. So, the society
or the economy will have to find out the best way to produce a commodity which will
low down the production cost, will use less resources, electricity, man power.

 For whom goods are produced?

For whom to produce is a problem because society cannot produce a commodity as

much as its peoples need as the resources are scarce. So, the society will have to find
ways to distribute the commodities. One thing also has to be noticed, that all kind of
goods are not for all.

C. Society’s / Organization’s Technological Possibilities

In every economy, the resources are scarce such as labour, technical knowledge, factories
and tools, land, energy. In decision making what and how things should be produced
efficiently. How to allocate the resources by thousands of different ways.

1. Factors of production

 Land- It consists of the land used for farming or for underpinning houses, factories,
and roads etc.
 Labour- It consist of human time spent in production working in different sectors.
With various skills and tasks.
 Capital- Resources from the durable goods of an economy, produced in order to
produce yet other goods.

2. Microeconomics
 Microeconomics today has moved beyond the early concerns to include the study of
monopoly, the role of international trade, finance, and many other vital subjects.
 Individual entities markets, firms, household.

3. Macroeconomics

 Total investments and consumptions are determined.

 How financial crisis happens how bank manages money and interest rates.
 Study of the behaviour of the whole economics or economic systems.
 4. International economy

There are two broad sub-fields within international economics: international trade and
international finance.
 International trade- It is a field in economics that applies microeconomic models to
help understand the international economy. Its content includes the same tools that are
introduced in microeconomics courses, including supply and demand analysis, firm
and consumer behaviour, perfectly competitive, oligopolistic and monopolistic market
structures, and the effects of market distortions.
 International finance- It applies macroeconomic models to help understand the
international economy. Its focus is on the interrelationships between aggregate
economic variables such as GDP, unemployment rates, inflation rates, trade balances,
exchange rates, interest rates, etc. This field expands macroeconomics to include
international exchanges. Its focus is on the significance of trade imbalances, the
determinants of exchange rates and the aggregate effects of government monetary and
fiscal policies.

D. Positive VS Normative Approach of Decision Making

Positive economics is objective and fact based. Positive economic statements do not
have to be correct, but they must be able to be tested and proved or disproved.

Normative economics is subjective and value based. Normative economic statements

are opinion based, so they cannot be proved or disproved.

While this distinction seems simple, it is not always easy to differentiate between the
positive and the normative. Many widely-accepted statements that people hold as fact
are actually value based.

For example, the statement, "government should provide basic healthcare to all
citizens" is a normative economic statement. There is no way to prove whether
government "should" provide healthcare; this statement is based on opinions about the
role of government in individuals' lives, the importance of healthcare, and who should
pay for it.
E. FALLACIES OF ECONOMICS
 Post hoc fallacy
It is the reasoning that since event B followed event A, event B must have been
caused by event A. The conclusion you reach is based solely on the order of events
that happened rather than taking into account other factors or potential logical
reasons.
For example, suppose you bought a new necklace and wore it before your big history
exam. You just happened to do really well on the exam, even though you didn't study
much. You reason that your good luck necklace was the cause. There may be several
other logical explanations, but you don't consider them. Maybe the test was simply
easy, and everyone else in the class did well, too. Not taking the time to research other
potential causes and simply believing in your new good luck charm is an example of a
post hoc fallacy.
 The fallacy of composition.

This error also involves individuals. It holds that what is true for one individual will
be true for all others.

A counterfeiter who prints a million dollars will certainly benefit himself (if he
doesn’t get caught) but if we all become counterfeiters and each print a million
dollars, a quite different effect is rather obvious.This suggests a widespread
recognition of the fallacy of composition, yet it is a fact that the error still abounds in
many places.

 Failure to hold other things constant

Cause and effect relationship between two specified variables, so much so that
additional relevant factors that hold influence over said variables are assumed to be
constant through this assumption.
2. VALUE LESSONS – INDIA’S ECONOMIC GROWTH SLOWS
SHARPLY, FINANCIAL TIMES

The economic growth of India declined due to demonetization in November. This step taken
by Mr. Narendra Modi resulted in the loss of economic growth.

 Growth rate in the Ist quarter (2017) – 6.1 %

 Growth rate in the Ist quarter (2016) – 7 %

Demonetisation lead to decline in GDP and it lead to the problems of unemployment,

inflation, declination in real estate, construction and FMCG. Modi’s moto was to revive
Indian economy and create jobs which back fired and exactly opposite took place.

However, this activity in the private sector was cushioned by a sharp increase in government
activity, with public administration, defence and other services expanding by 17 per cent year
on year during the quarter. Without the impact of government spending, growth would have
been just 4.1 per cent, according to Yes Bank analysis.

Demonetisation was the economic equivalent of heart attack but the government were saying
the economy had a mild headache and we are now over it.
3. THEORY OF FIRM, (PRESENT) VALUE (PV) AND WEALTH
CREATION

A. THEORY OF FIRM

The only reason a business exists and makes decisions is to maximise profits. The
primary objective is wealth creation through the concept of constrained optimisation.
Examples of firms: Campus oxygen (in our college), Cooperative store (in our
college) etc. So basically the organizations that provides services or goods not with a
motive of profit are excluded from the categories of FIRMS.
GOALS OF THE FIRM
 Profit- Economic
 Return on investment
 Customer value
 Technology enhancement
 Service to the community

B. MANAGERIAL ECONOMICS

It is the study is how to direct scarce resources in the way that most efficiently
achieves a managerial goal. There are a host of sound decisions to be made as a
manager. Economic concepts and economic analyses to the problems of formulating
rational managerial decisions. It bridges the distance between economic theory and
economic practices.

C. PRESENT VALUE

In regards to Time value of money, the value at present of a sum of money, in contrast
to some future value it will have when it has been invested at compound interest. Time
value of Money concept states that the value of $1 is worth more today than $1 worth
tomorrow.

D. DECISION MAKING AND WEALTH CREATION

Firm’s wealth maximisation with risk – Internal and External Risks – under
constrained optimisation will still be able to generate value for the firm. Internal Risk
is also called systemic risk since the factors involved are controllable. External risk is
also called unsystemic risk since the factors are uncontrollable.
E. WHY FIRMS EXISTS?

1. Profit maximisation which is achieved through maximising the shareholder’s

wealth.

2. Long-term Survival – All decisions are reviewed cautiously and are safety oriented.
Such firms do not like to reap larger profits in short-run but prefer lower profits in
the long run.

3. Sale-maximisation – maximising value of sales.

4. Balanced growth of Firm – maximisation of rate of growth for the product of firm
and growth of its capital supply.

F. AGENCY PROBLEM

Conflict of interest (moral hazard) between company’s management and company

stockholders. In order to align interests of principals and agents.

G. PROFIT MAXIMIZATION VS PRESENT VALUE: DISCOUNT RATE,

DISCOUNT FACTOR, FV, PV AND NPV

 Profit maximization is a process by which a firm determines the price and the output
levels that returns the greatest profit.
 Present value deals with the cash flow, it is the amount that would be invested today
at current interest rates to generate the FV (Future Value).
 Discount rate is an interest rate used to compute PV of cash flows
 Discount factor is a factor which when multiplied by future cash flow from any sort
of debts gives it present value in the market.
 Future value is a value of assets at a particular date in future which gives an
approximation of the total amount of assets in hand at that period in time.
 Net present value is a combination of both present value and future value and gives a
clearer picture of sum of money which is acquired by investing the money and getting
an approximate by the future value

H. PRINCIPLES OF BUSINESS FINANCE AND VALUE CREATION.

THE FUNDAMENTAL FINANCE PRINCIPLE Before making a business decision

manager should ask: Will the decision create raise value for the firm? It can be
answered with the help of the fundamental finance principle - A business proposal
such as:
• a new investment
• the acquisition of another company
• a restructuring plan will raise the firm’s value only if its net present value is positive
 I. PV FOR A PURELY DOMESTIC COMPANY VS PV FOR A GLOBAL
COMPANY: HOW DOES THIS DISTINCTION MATTER FOR TODAY’S
CFOs/ TODAY’S GLOBAL MANAGER?

Domestic company

 For domestic company’s CFOs the only countable risk is the market risk.
 The risk involved in taking decisions are lower in domestic market companies.

Global company

 It depends on overall market which includes domestic as well as the overseas

market and gets the broader picture as compared to domestic company.
 In this it doesn’t depends on one COs as there are two or more COs to finalize the
decision with all COs consent.
 This also depends on FOREX.

So, by this distinction between domestic and global companies differentiate the risk planning
for the CEOs/ Managers

The PV calculation is less complicated in domestic company as compared to the global

company because the number of factors under consideration differ between the two.
4. Uber Chief Travis Kalanick to take indefinite leave

As we all know Travis Kalanick is in large measure responsible for the

company culture at Uber, and he has set tone for it from the beginning.
As he all by himself handled the sexual harassment case and fired 20 of
his employees.
So as the case moves forward we got to know more about Travis
Kalanick:
He was a irresponsible person who gave the company with a laidback
attitude the CEO’s of a company have enormous power to change the
thinking of the society the rules which the can mend and give more
opportunities
As we all know that the board as well as Travis Kalanick resigned due to
his careless and unprofessional behaviour his employees last the faith in
him.
5. Amcott Fires Manager.

What Ralph portrayed?

 He was just a Culprit for the attorneys.
 Legal department of the company made a mistake while buying the rights to
Magicword.
 He projected annual sales of $7 million per year for three years.
What actually happened ?
 Ralph’s plan was to generate $7million revenue through sales by investing $20
million in Magicword.

 This investment resulted in a loss of $1.6 million.

Conclusion
 Ralph’s investment prediction was not accurate and did not process the information
provided to him.
 He was fired because of his managerial ineptness not because of his legal
department’s mistake.
 He did not recognize the time value of money.
6. Learning in a group & My gains

As we all know in a group we get to know all the point of views of all the
people around for a better understanding which did help me. As well as the
personal life experiences, people share some times which really connects well
with the subject and creates a different atmosphere around the round table. As
I got to know various aspects of a firm how it works what goals the pursue.
How the companies act upon theirs goals. How domestic market is different
from the global market. The vast study of economics related to present, future
and net present values we get the gist of how the loan interest rates are
calculated. All this information was gathered and presented in this analysis.