30.09.19 Managerial economics
Identifying business opportunities, understanding cost and benefits
Creating value and wealth
o It is necessary to be clear about how wealth is created in order to identify opportunities to
create value.
o Value: Willingness to pay (value of an asset to you).
- Desire and ability to purchase (sufficient income).
o Wealth: The value of assets owned.
- Created when assets are moved from lower to higher valued uses.
Voluntary transactions, between individuals/firms, create wealth
E.G: Transactions between buyers and sellers must split the surplus – split the amount that
each individual values an asset.
Buyer values shop at £130,000
Seller values it at £120,000
They agree to split the surplus between buyer and seller. Here, say, £128,000.
o The buyer and seller both benefit from this transaction:
- Buyer surplus = buyers’ value – price. (£2000)
- Seller surplus = price – sellers’ value. (£8000)
- Total surplus = buyer + seller surplus, £10,000 = difference in values
E.G: Firm sets up a factory to mass produce a product. This creates wealth through
voluntary transactions.
A new firm attracts capital and labour from other jobs by offering a higher rate of return.
The firm moves labour and capital from lower valued uses to higher values ones
Firms can pay more because consumers value the product it sells more highly than
alternatives.
The one lesson of business
o Art of business: identifying assets in low valued uses and devising ways to profitably move
them to high valued use. (Uber)
o Under employed assets represent potential wealth creating transactions
o The art of business is to identify these transactions and find ways to profitably consummate
them.
Identifying business opportunities, understanding cost and benefits
Creating value and wealth
o It is necessary to be clear about how wealth is created in order to identify opportunities to
create value.
o Value: Willingness to pay (value of an asset to you).
- Desire and ability to purchase (sufficient income).
o Wealth: The value of assets owned.
- Created when assets are moved from lower to higher valued uses.
Voluntary transactions, between individuals/firms, create wealth
E.G: Transactions between buyers and sellers must split the surplus – split the amount that
each individual values an asset.
Buyer values shop at £130,000
Seller values it at £120,000
They agree to split the surplus between buyer and seller. Here, say, £128,000.
o The buyer and seller both benefit from this transaction:
- Buyer surplus = buyers’ value – price. (£2000)
- Seller surplus = price – sellers’ value. (£8000)
- Total surplus = buyer + seller surplus, £10,000 = difference in values
E.G: Firm sets up a factory to mass produce a product. This creates wealth through
voluntary transactions.
A new firm attracts capital and labour from other jobs by offering a higher rate of return.
The firm moves labour and capital from lower valued uses to higher values ones
Firms can pay more because consumers value the product it sells more highly than
alternatives.
The one lesson of business
o Art of business: identifying assets in low valued uses and devising ways to profitably move
them to high valued use. (Uber)
o Under employed assets represent potential wealth creating transactions
o The art of business is to identify these transactions and find ways to profitably consummate
them.
