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Basic Economics 2 : Industry and Commerce Cheat Sheet by

Basic economics as set out in the book by Thomas Sowell.

The Rise and Fall of Businesses

Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward. - Forbes magazine
Social Changes
In the years following the end of WWII, suburb­ani­sation and the American public's rising prosperity gave huge superm­arkets in shopping malls with vast parking lots decisive advantages over neighb­ourhood stores. Automo­biles, refrig­erators and freezers became far more wide spread, it completely changed the economics of the grocery industry.
Economic changes
Many things that we take for granted today (like credit cards), as features of a modern economy, were resisted when first proposed and and had to fight to establish themselves by the power of the market­place.
Technological Changes
Changes can leave companies scrambling to convert from old to new techno­logies, even when they are the ones that came up with the idea (Kodak invented the digital camera). Others can see the potential earlier or develop the technology better.
Business leadership
Business leadership is a factor, not only in the relative success of of various enterp­rises, but more fundam­entally in the advance of the economy as a whole through the spread of the impact of new and better business methods to competing companies and other indust­ries.

The Role of Profits - and Losses

From the standpoint of the economy as a whole, and the well-being of the consuming public, the threat of losses is just as important as the prospect of profits.
Profits as Incentives
The hope for profits and the threat of losses is what forces a business owner to produce at the lowest cost and sell what the customers are more willing to pay. In the absence of these pressures, those who manage enterp­rises have far less incentive to be as efficient as possible under given condit­ions, much less to keep up with changing conditions and respond to them quickly in order to survive.
Profit Rates
Rates of profit are nowhere as high as the the average person believes, and there are vas differ­ences between profit on sales and profits on invest­men­ts.And they can move in opposite directions.

Changing rates of profit allocate resources in a market economy - when these are rates of profit on investment.

Things might be sold at at prices much higher than the seller paid for them, but if those items sit on a shelf for months, the profit on investment may be less than other items with a smaller markup.
Economies of Scale
Large fixed costs are among the reasons for lower costs of production per unit of output as the amount of output increases. Lower costs per unit of output as the number of units increases is what economists call "­eco­nomies of scale".
Diseconomies of Scale
There comes a point, in every business, beyond which the cost of producing a unit of output no longer declines as the amount of production increases.

With increasing size, eventually the diseco­nomies begin to outweigh the economies, so it does not pay a firm to to expand beyond that point.
Costs and Capacity
In many industries and enterp­rises, capacity must be built to handle the peak volume - which means that there is excess capacity at other times. The cost of accomm­odating more users of the product or service during the times when there is excess capacity is much less than the cost of handling those who are served at peak times.
"­Passing On" Costs and Savings
The passing on of of either higher costs or savings in costs is not an automatic process and, in both cases, it depends on the kind of compet­ition faced by each business and how many of the competing companies have the same cost increases or decreases.
Despite superf­icially appealing phrases about "­eli­min­ating the middle­man­", middlemen continue to exist because they can do their phase of the operation more effici­ently than others can, since they usually specialise in their phase.
Socialist Economies
Socialist economies not only lack the kinds of incentives which force individual enterp­rises toward efficiency and innova­tion, they also lack the kinds of financial incentives that lead each given producer in a capitalist economy to limit its work to those stages of production and distri­bution at which it has lower costs than altern­ative enterp­rises.

The Economics of Big Business

Big business can be big absolu­tely, even when only selling a modest percentage of the total mercha­ndise in its industry, or they can be big in the sense of making a high percentage of all the sales in its industry. And an absolute monopoly in one industry maybe smaller in size than a much larger company in another industry.
Corpor­ations are different from enterp­­rises owned by indivi­­duals, families or partners. A corpor­­ation has a separate legal identity, so that the individual owners of the corpor­­ation are not personally liable for its financial obliga­tions.
Corporate Governance
Like limited liability, the separation of ownership and management is a key charac­ter­istic of corpor­ati­ons.Co­mpl­aints about this separation often overlook the fact that owners of a corpor­ation's stock do not necess­arily want the time consuming respon­sib­ilities that go with control.
Executive Compen­sation
Some critics have claimed that corporate executives have been overly generously rewarded by boards of of directors, even though they are paid much less than any number of profes­­sional athletes and have billions of dollars at stake. And while severance packages can be in the millions, it can still be cheaper than having an underp­­er­f­o­rming individual at the helm
Non-co­mpe­titive industries (monop­olies and cartels), while not being the same thing, generally have detrim­ental effects on the economy. Keep in mind that most big businesses are not monopo­lies, and not all monopolies are big business.
Monopoly Prices vs. Compet­itive Prices
Compet­itive prices allow the consumer to ignore the cost of a product or service, as all the players in an industry will need to make sure their wares are priced at a level that is appealing to consumers. In monopoly prices, the prices remain at levels higher than necessary to compensate for the costs, and also reduces the output for the product, as consumers will not buy as much of it at those higher prices.
Govern­mental and Market Responses
Laws are not the only to fight monopo­lies, and have also been used to keep out potential compet­itors by making it illegal for others to operate in particular indust­ries. Private businesses that are not part of a cartel have incentives to fight them in the market­place.

Regulation and Anti-Trust Laws

Regulatory Commis­sions
Ideally, a regulatory commission would set prices where they would have been if there were a compet­itive market­place. In practice, there is no way to know what those prices would be. And while the original rationale for regulation is to keep prices from rising excess­ively, the regulatory restri­ctions most often than not prevent the the prices from falling to a level that would threaten the survival of existing firms.
Anti-Trust Laws
The basic rationale for anti-trust laws is to prevent monopoly and other non-co­mpe­titive conditions which allow prices to rise above where they would be in free and compet­itive market­place. In practice, most cases have involved some business that charged lower prices than its compet­itors.
Competition vs. Competitors
The most important thing about compet­ition is that it is a condition in the market­place. Throughout the history of anti-trust prosec­utions there has been an unresolved confusion between what is detrim­ental to compet­ition and what is detrim­ental to compet­itors, and the question of what is beneficial to the consumer has often been lost sight of.
"­Con­tro­l" of the Market
Even in the rare case where a genuine monopoly exists on its own - that is, has not been created or sustained by government policy - the conseq­uences in practice have tended to be much less dire than in theory. Percen­tages of the market "­con­tro­lle­d" by this or that company ignore the role of substi­tutes that may be officially classified as products of other indust­ries, but which can nevert­heless be used as substi­tutes by many buyers, if the price of the monopo­lised product rises signif­ica­ntly.
"­Pre­dat­ory­" Pricing
One of the most remarkable things about this theory is that those who advocate it seldom even attempt to provide any concrete examples of when this ever actually happened. Is is also something that make little or no economic sense, the only thing it can be sure of is losing money initially. And it is by no means clear that elimin­ating all existing compet­itors will mean elimin­ating compet­ition.
Benefits and Costs of Anti-Trust Laws
Perhaps the most clearly positive benefit of anti-trust laws has been a blanket prohib­ition against collusion to fix prices. Whether this outweighs the various negative effects of other anti-trust laws on compet­ition in the market place is another question.

Market and Non-Market Economies

The activities engaged in by profit seeking and non-profit organi­sations overlap. So do the activities of some govern­mental agencies, whether local, national and intern­ati­onal. Miscon­cep­tions of business are almost inevitable in a society where most people have neither studied or run busine­sses. In a society where most people are employees and consumers, it is easy to think of business as "­the­m" - as impersonal organi­sat­ions.
Business Versus Non-Market Economies
There have been many theories about the merits and demerits of market versus non-market ways of producing goods and servic­es.But the actual track record of market and non-market producers is the real issue.

Monopoly is the enemy of effici­ency, whether under capitalism or socialism. The difference between the two systems is that monopoly is the norm under socialism.
Winners and Losers
Whatever the merits and demerits of various political proposals, what must be kept in mind when evaluating them is that the good fortunes and misfor­tunes of different sectors of the economy may be closely related as cause and effect - and that preventing bad effects can prevent good effects.


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