Financial Concepts for Loans and Real Estates

A Dead Wight Loss is a permanent loss of well being of the society. It occurs when equilibrium for a commodity is not Pareto Optimal. Pareto Efficiency is a broad concept with a broad application in economics. A change that can make at least one individual better off without making any other individual worst off is Pareto Efficiency. A situation is Pareto Optimum when no further improvement is needed. Many natural wastes in a system for e.g., leakage in water pipe are equal to Dead Weight Loss. Monopoly leads to lack of economic competition; it also creates Dead Weight Loss. In loss of benefits due to indirect tax there is some amount of Dead Weight Loss or excess burden which the society has to bear. In case of relatively elastic commodities the Dead weight Loss is more than the revenue earned by the government though the indirect tax. This is the reason why inelastic commodities are taxed more than elastic commodities.

Producer’s Surplus

Producer’s Surplus exists when actual price exceeds the minimum price that the seller is ready to accept. Let us take an example. If Sam considers as CD worth Rs. 50 and Ram, who owns it values the CD for Rs. 10 then, if Ram sells the CD for Rs. 30, Sam, who willing to pay Rs. 50 maximum for the CD actually got it for Rs. 30. Sam is now enjoying a consumer surplus of Rs. 20 and Ram who was ready to accept the minimum price of Rs 10 for the CD, sold it for Rs. 30 and enjoys the producer’s surplus of Rs. 20.

Producer’s surplus may appear to be a profit, but it takes different forms. To understand how Produer’s surplus takes different forms. Let us see one example.

Suppose the price of wheat is Rs. 35 per kg for many years, but now it has increased to Rs. 45 per kg. This increase in price of wheat draws more land under wheat cultivation. Now, farmers, who are cultivating and selling wheat, are enjoying Producer’s surplus of Rs. 10 which they are having due to increase in the price.

“Managerial Economics” term is very old. The word has taken place in last fifty years or so. Economics is the study of human behaviour in production, distribution and consumption of material goods. Management is the disciplinary work of organizing and allocating a firm’s resources and objectives. So, these two definitions give the appropriate understanding of managerial economics.

Managerial economics is interchangeable with Business Economics. In spite of, there are some differences between these two terms.

Business Economics is known to understand for running any business.

Managerial Economics emphasizes on the function of managerial function of a business firm.

We can take some definition of Managerial Economics to clear its essence. Dean writes in his book Managerial Economics Text book, “Managerial Economics is the use of economic analysis in the formulation of business policies.” So, he emphasizes it as business policies.

On the other hand, Spencer and Seigelman, define it, “the integration of economic theory with business practice to facilitate decision making and forward planning.” So, the definition reveals it as business practices, decision making and forward planning.

Scope of Managerial Economics:

We will conclude it as a manager decision. So, for a manager there is different areas in which decision are required to be taken. These can be classified as:

Decision relating to demand – We already know, every manager is concerned with the demand for his product. So, a manager takes decision regarding the quality and quantity of his product. There are many economic tools which are applied during the decision making – Demand, Elasticity of Demand and Demand Forecasting.

Decision related to cost and production – Every manager has to analyze the cost and various laws governing production that is also a part of managerial economics.

Decision relating to price and market – We can’t escape with market analysis. So, Market analysis is the part of managerial economics. A manager should have various market structures and various pricing policies.

Decision relating to profit management – Maximum profit is the essence of every firm. So, these can be related to profit management.

Macro economic factor – A firm depends on socio-economic environment. So, to understand macro level factors there are needed of macro factors.

Significance of Economic Analysis:

All the economic has been divided into two categories – Macro and Micro. Micro economics are related to consumer products, individual products, whereas Macro is attached with aggregate demand, national income.

The same situation comes in a business man life. There is also needed of priority of business and products. A business man decides market segmentation, product segmentation and takes proper decision.

Definite and indefinite results are the outcome of market. These are inevitable in market society. This can be called as uncertainty.

Financial planning is a process by which funds required for each course of action is decided. It must consider expected business scenario and develop appropriate course of action. A financial plan has to consider capital structure, capital expenditure and cash flow.

Steps in financial planning:

1) Establish corporate objectives: Corporate objectives could be grouped into qualitative and quantitative. For example, a company’s mission statement may specify “create economic value added”. But this qualitative statement has to be stated in quantitative terms such as a 25% ROE or a 12% earnings growth rates. Since business enterprises operate in a dynamic environment, there is a need to formulate both short run and long run objectives.

2) Next stage is formulation of strategies for attaining the objectives set. In this condition connection corporate develops operating plans. Operating plans are framed with a time horizon. It could be a five year plan or a ten year plan.

3) Once the plans are formulated, responsibility for achieving sales target, operating targets, and cost management bench marks, profit targets, etc. is fixed a respective executives.

4) Forecast the various financial variables such as sales, assets required, flow of funds, cost to be incurred and then translate the same into financial statements. Such forecasts help the finance manager to monitor the deviations of actual from the forecasts and take effective remedial measure to ensure that targets set are achieved without any time overrun and cost overrun.

5) Develop a detailed plan for funds required for the plan period under various heads of expenditure.

6) From the funds required plan, develop a forecast of funds that can be obtained from internal as well as external sources during the time horizon for which plans are developed. In this connection legal constrains in obtaining funds on the basis of covenants of borrowing should be given due weight age. There is also a need to collaborate the firm’s business risk with risk implications of a particular source of funds.

7) Develop a control mechanism for allocation of funds and their effective use.

At the time of formulating the plans certain assumptions need to be made about the economic environment. But when plans are implemented economic environment may change. To manage such situations, there is a need to incorporate an inbuilt mechanism which would scales up or scale down operations accordingly.