Profits = (P – C)Q. Where P = Average Price; C = Average Cost and Q = Quantity
In order to maximize profits atleast one of the following should occur (i) increase average price; (ii) decrease average costs; or (iii) increase quantity.
* Relationship between Price and Quantity – If you sell more then lower the price /margin and vice versa
* Relationship between Cost and Quantity – Economies of Scale – Increase in quantity allows one to decrease costs and vice versa.
II. Cost Concepts
Total Costs = Fixed Costs + Variable Costs
Average Costs = Total Costs/Quantity
Marginal Costs (MC) = Incremental Cost of producing one Additional Unit
Marginal Revenue (MR) = ...view middle of the document...
g. giving message to competitors (BHP Case – setting up of Jansen Project)
* Costs that can be avoided if certain choices are made. For e.g. Aircraft leasing – if demand goes down then one will not lease more aircrafts and costs can be avoided.
V. Demand Curve
* The demand function describes the relationship between the quantity of product that the firm is able to sell and all the variables that influence that quantity. Law of Demand – The lower price, the greater the quantity demanded, the higher the price, the smaller the quantity demanded.
* Moving Along the Demand Curve – Lower price sell more but no change in no. of consumer preference or market share. Demand Curve is downward sloping.
* Horizontal Rotation of the Demand Curve (Cloning) – mere increasing in size of customer base without increasing the margins
* Vertical Rotation of the Demand Curve – Customer base does not change but preference changes.
VI. Value Creation (revenues) and Value Capture (profits)
A firm creates value by producing and delivering good/services at a cost that is lower then what the consumer is willing to pay for those goods/services. Value Creation is all about benefits to end users i.e. supplying better products at a lower cost or decrease the cost of producing the product.
Value Capture = Value Creation * Share Capture
(P-C)Q = (B-C)Q * (P-C)/(B-C)
Strategy – to consider whether want to increase value creation or share capture (e.g. Performance Indicator or BHP). Most strategies confront a trade-off between value creation and share captured.
VII. Added Value
Added Value is also about Share Capture i.e. what can the firms do...