Management Test 1
Reading, Why do Americans Work more than europeans?
"WHY DO AMERICANS WORK MORE THAN EUROPEANS?" .. Is this due to cultural differences or mentality? US: 20% (Fought for higher wages) Europe: 80% (Fought for shorter hours) · Marginal tax rates · More of Europeans' work is not captured in the taxable market · Lower rates increase labor supply, output grows, and tax revenues increase · Given similar incentives, people make similar choices about labor and leisure Workers best off deciding for themselves • Europe restricts this; but, if you work less, your friends do too—which can be good if you are organizing a trip
Types of shareholders and incentives
- small shareholders (individuals) - institutional investors: differ in incentives to challenge management - block-holders: internalize many benefits of active involvement
Reasons small firms avoid IPOs
- Sarbanes oxley act of 202 has imposed costs on publicly traded firms, especially small firms - Drop-in analyst coverage for small firms - Value decrease due to larger organizations that can quickly implement new tech and benefit from economies of scope
Models of Man, Sociological model
- described as the social victim model Emile Durkeim Behavior is a product of the environment - sociological man does not choose or substitute - cultural effects determine behavior An alternative interpretation based on REMM - mores, customs, taboos reflect behavior and affect it in the short run - they are not just emulation of custom - remm evaluates and chooses
How do we observe discrimination in markets?
- discrimination against customers, students, job applicants, business owners
Models of Man, Psychological Model
- hierarchy of needs Human wants to be arranged in a hierarchy of needs No substitution between levels of needs - Psychological man evaluates, but like sociological man does not substitute -Implies that if the cost of any one good rises, people will consume less of their least important good Income effects: Maslow's model implies if income falls, people reduce consumption of their least important good; but income effects influence a person's demand for various goods
Models of Man, Economic Model
- money maximizing, narrow interpretation of the field Adam Smith Income money maximizers - in the short run - does not care for others, art, morality, love, respect, honesty, etc.
Models of Man, Political model
- perfect agent model Resourceful, Evaluates & Maximizes Maximizes a "Public Good" vs. own Welfare
Models of Man, Remm
- resourceful, evaluative, maximizing Evaluate and makes tradeoffs Maximize constraints Are not satiable (wants are unlimited) Are resourceful
Readings: "Why do Drug Dealers still live with their Moms?" Economics of Crack
- use an organizational structure economics - finances: monthly expenses, revenue, profits to leaders - Monthly revenue = drug sales, dues, extortion - Monthly expenses = drugs, weapons, wages, etc. - Profit to leader(s) - Rewards are small except for top leadership - Risks of arrest and death are high conflict of interests (management v. labor) - rewards are small except for top leadership - risks of arrest and death are high winner take all - The winner-take-all market for labor to perform gang-related work - Characterized by 4 variables: Supply of Laborers • Demand for Services Provided • The Skills Required • Unpleasantness of Work Tournament labor market - Start at the bottom & distinguish yourself to advance
Private solutions to externalities
-Moral codes and social sanctions -Charities -Contracts between market participants and the affected bystanders
reading: it is immoral to buy the right to pollute
-United States wants countries to commit themselves to restraints on emissions -Wanted any agreement to include a trading plan that would let countries buy and sell the right to pollute - Clinton Administration believed creating an international market for emission would be an efficient way to reduce pollution Buying the right to pollute has 3 problems: o Creates loopholes that could enable wealthy countries to evade their obligations o Turning pollution into a commodity to be bought and sold removes the moral stigma that is properly associated with it o It may undermine the sense of shared responsibility that increase global cooperation requires
reading: Many hands make light work: the causes and consequences of social loafing
-When an individual thinks his or her contribution to the group cannot be measured, they don't put in as much effort - Latane's theory of social impact: If a group is subject to outside social forces, the impact of those forces on any given member should diminish in inverse proportion to the strength, immediacy, and number of members -- The more people who are the target of pressure, the less pressure is felt by each individual -cheering and clapping - rope pulling test - why do people reduce their effort in groups? People attempt to compensate for what they believe is an unfair division of labor. Pre-existing notion that people do not pull their own weight in groups. People think all praise or blame is divided among the members of the group regardless of each one's individual contribution
Q. Black Disciples. How does a "winner-take-all" labor market work? Why would a street-level drug dealer be willing to accept low pay and poor working conditions?
A winner take all market does work. The vast majority of benefits go to the few individuals at the top, while the street-level drug dealers accept extremely low pay and poor, dangerous working conditions. They are willing to accept this because there is a chance that one day, they will move to the top of the ladder and reap all of the benefits that higher level gang members do.
Q. What does Grove think are the main problems facing Intel? What policies does he propose and what are their likely effects? Are these policies appropriate for all organizations?
According to Grove, Intel senior managers have specialized knowledge. They have power based on "position," which gives older managers power. The problem is how to bring this knowledge together with the changing engineering knowledge. Grove says that egalitarian culture is key, and Intel should mix knowledge-power people with position-power people. These policies may not be appropriate for all organizations.
Q. Remm, Does money motivate people? Only money? Should people be motivated by money?
According to the Economic Model of human behavior, people only want money and do not care for others, art, morality, love, respect, honesty, etc. However, people do not actually behave this way.
Application: Regulating Lower SO2 emissions (A)
Acme & US Electric run coal-burning power plants. Each emits 40 tons of sulfur dioxide per month, total emissions = 80 tons/month. GOAL: Reduce SO2 emissions 25%, to 60 tons/month COST OF REDUCING EMISSIONS: $100/ton for Acme, $200/ton for USE POLICY OPTION 1: REGULATION Every firm must cut its emissions 25% (10 tons) YOUR TASK: Compute the cost to each firm and total cost of achieving the goal using this policy. Answers POLICY OPTION 1: REGULATION Every firm must cut its emissions 25% (10 tons) COST OF REDUCING EMISSIONS: $100/ton for Acme, $200/ton for USE COMPUTE THE COST OF ACHIEVING THE GOAL WITH THIS POLICY: Cost to Acme: (10 tons) x ($100/ton) = $1000 Cost to USE: (10 tons) x ($200/ton) = $2000 Total Cost of achieving Goal = $3000
Cost of being unable to use the contract system
Activities are illegal and thus are not brought to court Cannot easily form firms, partnerships, etc., to pool resources and risks Cannot enter into beneficial long-term commitments between a producer and a customer
Nature of Man
Adam Smith's Theory of Moral Sentiments "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it." Plato's Republic, The Ring of Gyges When Gyges put on the Ring, Invisible Glaucon vs. Socrates &
Readings, Grove
American industry has lost its competitive edge but our high technology industry has not Intel -Wanted to do something different -Found themselves following no set ways of management -Every worker is considered equal -Everyone works in cubicles Team up people with hands-on knowledge with those in positions of power to create the best solutions in the interest of both
Q. What roles do specific and general knowledge play in determining organizational structure & policies?
An organizational problem that firms face is who should have the power; should the people with the knowledge get the power, or should the people with the power get the knowledge? Additionally, firms must know the transfer and production costs of knowledge in order to make the best decisions.
Equity financing for private companies... Who can finance them?
Angel Investors - successful, have a particular interest in technology or some industry - found through business or personal contacts of entrepreneurs - hard to find Venture Capital Funds - organized as a limited partnership - invest in the private equity of young, high growth firms - investments have a high probability of failure - investments have the potential for very high rewards
Readings: Potlatch
Anthropologists discovered certain primitive tribes engaged in conspicuous consumption and conspicuous waste unmatched by even the most wasteful of modern consumer economies Potlatch - Give away or destroy more wealth than one's rival - A chief was never content with the amount of respect he was getting from his own followers and from neighboring chiefs - Sometimes host chief would burn his house down The Big Man -The big men work harder, worry more, and consume less than anybody else... prestige is their only reward - The big man can be described as the worker-entrepreneur who renders important services to society by raising the level of production - Acts as an automatic equalizer of annual fluctuations in productivity among a series of villages that occupy different microenvironments alth in different quantities to different sets of people Kwakiutl chiefs - begun to keep the "meat and fat" and give the "bones and stale cakes" to their followers Contact between nations - gave rise to epidemics of smallpox - Wages paid by Europeans pumped unprecedented amounts of wealth into the potlatch network - Need to attract followers was greater than ever due to the labor shortage - Potlatch chiefs ordered the destruction of property in hope of bringing people back to the villages
Q. How does Apple deliver value to its consumers? How has this changed over time?
Apple delivers value to its consumers by providing them with sleek designs and easy-to-use products. Apple products have a great deal of storage and operating systems are upgraded every 12-18 months.
Q. What industry does Apple operate in? What is Apple's position in these industries? i.e. Historically, Apple operated in the PC industry. Analyze the personal computer industry. How this industry change over the last 30 years? Why did Apple struggle historically in PCs? Who were/are its competitors? Is it more/less competitive?
Apple is a mobile device company. Historically, it operated in the personal computer (PC) industry and competed against companies like Microsoft and IBM. Now, as a mobile device company, Apple competes with Google, RIM, and Nokia. It also competes with companies like Amazon, Napster, Nintendo, and Sony due to the versatility and various functions of its products.
Q. What are Apple's major competitive advantages? How have they changed over time?
Apple's products are extremely easy to use, even with competitors' products. Macs can use all of the Microsoft Office products, and documents from the iWork productivity applications can be converted into more common formats. Additionally, iPods, iPhones, and iPads can sync to both Macs and Windows. However, songs bought on the iTunes store cannot be played on other companies' music players, while the iPod is able to play most formats of music files.
PC Industry Analysis: Complements
Applications/ software peripherals services
Q. Levitt and Dubner. As part of the above discussion, Levitt and Dubner noted that "what did go away were the huge profits for selling crack ... Dealers began to underprice one another; profits vanished." Using the graphical tools you have learned, explain what they mean.
As crack became easier to produce and cheaper to sell, more dealers entered the market. As more dealers started selling, each dealer made less profit and eventually made zero economic profit in the long run. The burst of the crack bubble is a good example of how positive economic profits attract entry into markets and how that entry will erode excess profits over time
Q. Is a "market for organs" immoral? Why or why not?
As of now, a market for organs is illegal, which leads to a shortage of the good. Many economists believe that there would be large benefits to allowing a free market in organs, since every year thousands of people die because they cannot find a compatible kidney. Both the sellers and buyers of the kidneys would be better off and the shortage would disappear. However, some critics argue that a kidney market would benefit the rich more than the poor because they would be able to pay more.
Monopoly, Profit
As with a Competitive Firm, the Monopolist's Profit equals: (P - ATC) x Q
Basics of financial statements
Assets = Liabilities + Equity Assets: things you own and control Liabilities: obligations Equity: ownership in the company
Factors that influence IPO timing
Cyclicality of the IPO Market - take advantage of bull market - IPO market conditions - need external capital to grow at certain points in the growth cycle
Understanding financial statements (balance sheet and income st.)
Balance Sheet -Reports amount of assets, liability, and stockholder's equity owned by the company -Assets = Liabilities + Stockholder's Equity Income St. - Reports net income for that period - Revenues - Expenses = Net Income
Systems of exchange and purposes: Kwakiutl. Why did potlatch exist?
Because of "economic conditions" Show that the Chief was entitled to "Chiefly Status"
Pros and Cons of going Public
Benefits - facilitates takeover activity - cost of capital - pecking order - allows insiders to cash out Disadvantages - decreases original owner and management over decision making - underpricing of IPOs due to asymmetric info - selling equity in the firm dilutes the value of current equity holders' stakes - bad market industry conditions
Stock Market Basics, Bulls and Bears
Bull Market - The economy is great and stock prices are rising Bear Market - The economy is bad and recession is looming
CS, PS and Total Surplus
CS = (VALUE TO BUYERS) - (AMOUNT PAID BY BUYERS) = Buyers' gains from participating in the market PS = (AMOUNT RECEIVED BY SELLERS) - (COST TO SELLERS) = Sellers' gains from participating in the market TOTAL SURPLUS = CS + PS = (VALUE TO BUYERS) - (COST TO SELLERS) = Total Gains from trade in a Market
Cost of not having property rights
Cannot transfer property Little incentive to increase value Costly to defend possessions Informal housing cannot be developed in large scale, so cannot take advantage of the economies of scale
Systems of Exchange and Purposes: Kaoka. What is the economic effect of big man potlatch?
Carry out a form of economic exchange known as redistribution - They gather together the results of the productive effort of many individuals and then redistribute the aggregated wealth in different quantities to different sets of people
reading: What do al gore and mount pinatubo have in common
Climate change would force economic and social adjustments on a worldwide scale Human behavior contributes to greenhouse gases Greenhouse gases thought to be an externality of global warming
PC Industry Analysis: Suppliers
Commodity Suppliers Component suppliers (e.g. disk drives) No real power over PC manufacturer Monopolists Together Microsoft & Intel earned almost $20 billion in 2005 (Ex. 7) - high barriers to entry, intel/Microsoft, brand
Common resources
Common resources are not excludable Cannot prevent Free Riders from using Little incentive for firms to provide Role for Gov't: Seeing that they are provided Common resources are rivalrous in consumption Each person's use reduces others' ability to use -- Role for Gov't: Ensuring they are not overused
Market = P and Profit Max.
Competitive Firms are price takers Increase Output without affecting the Market Price A 1-unit increase in Q causes Revenue to rise by P i.e. MR = P (Only true for Competitive Markets) Profit maximization Think at the Margin: If increase Q by 1-unit, Revenue rises by MR, Cost rises by MC If MR>MC, then increase Q to raise Profit If MR
Different Types of Markets
Competitive Market Many buyers & sellers Each has a negligible effect of price Perfectly Competitive Market All goods exactly the same Many buyers & sellers No one can affect the market price - each is a "price taker"
Q. How are consumers' willingness to pay (sellers' costs), consumer surplus (producer surplus) and the demand curve (supply curve) related?
Consumer surplus is the amount a buyer is willing to pay minus the cost they do pay. (CS = WTP -P). On a graph, the consumer surplus is represented by the area underneath the demand curve and above the equilibrium price--usually a triangle Producer surplus is the amount a seller is paid for a good minus the seller's cost. (PS = P - cost). On a graph, the producer surplus is represented by the area above the supply curve and below price.
Systems of exchange and purposes: Kwakiutl. How did potlatch change once trade with europeans occured?
Contact between nations gave rise to epidemics of smallpox and other European diseases Wages paid by Europeans pumped unprecedented amounts of wealth into the potlatch network Need to attract followers was greater than ever due to the labor shortage
Cost and the Supply Curve
Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost). includes cost of all resources used to produce good, including value of the seller's time. A seller will produce and sell the good/service only if the price exceeds his or her cost. Hence, cost is a measure of Willingness to Sell.
Application: Why incentives matter
Definitions Moral, social, or economic • Ex: Cigarettes: $3 per pack (economic), no smoking in restaurants (social), and the gov. says terrorists raise sell black-market cigarettes • Ex: Daycare center Incentives to cheat Old school (test cheating) • Who cheats? Why? • School teachers • Sumo wrestlers • Bagel business • More cheating if don't like boss/executive Consequences: Government Regulation Standardized testing had unforeseen consequences
Cost of the inefficiency of extra contractual law
Difficult to provide public goods such as streets Extracontractual law deals with damages not covered by contracts -- Minibus operators do not bear the full cost of accidents they caused Restrict trades to relatives or close friends Informals regulate their own activities
MPL Diminishes because:
Diminishing Marginal Product An input's marginal product declines as the quantity of the input increases (other things equal) 1 Farmer Jack's Output rises by a smaller and smaller amount for each additional worker. Why? - As Jack adds workers, the Average Worker has less land to work with and will be less productive - In general, the MPL diminishes as L rises whether the fixed input is land or capital (Equipment, machines, etc.)
Challenges with these exchange systems
Do 50 salmon = 2 canoes or 25 blankets Mutual expectations or reciprocity might break down These systems do not scale up very well Someone might try to permanently size power
Q. What is efficiency? Is it the only goal for policy makers?
Efficiency occurs when an allocation of resources maximizes total surplus. It means that goods are consumed by buyers who value them the most, are produced by producers with the lowest costs, and raising or lowering the quantity of the good wouldn't increase total surplus. Total surplus = (value to buyers) - (cost to sellers). Efficiency occurs, ideally, at market equilibrium. It is a main goal for policy makers, along with equality.
Morality and the environment
Environmentalists argue..That no one should be able to "buy" the right to pollute; cannot put a price on the environment Economists argue... People face tradeoffs. The value of clean air and water must be compared to their cost The Market-Based approach reduces the cost of environmental protection so it should increase the public's demand for a clean environment
Demand Shifters
Etc.. Income - demand for a normal good: If income goes up, Qd goes up at each P, shifts D curve to the right. - demand for an inferior good: An increase in income shifts D curves for inferior goods to the left (Ex: bus rides)
Supply Shifters
Etc.. Input Prices A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the supply curve shifts to the right.
Excludable goods vs. rivalrous goods
Excludable goods A good is excludable if a person can be prevented from using it rivalrous goods A good is rival in consumption if one person's use of it diminishes others' use
Explicit vs. Implicit
Explicit Costs - Require an Outlay of Money
Reading: Fairness
Fairness Classic Studies - Snow Shovels - Beer on the Beach - Fehr & Gachter Theories of Fairness: The Sociological View - Equity Theory "In a Canadian telephone survey, Kahneman et al. Asked respondents how they felt if a hardware store raised prices on shovels from $15 to $20 after a snowstorm. 82% of respondents judged this action to be 'unfair.'"
Q. What kinds of knowledge does Grove think are crucial to the efficient operation of Intel? How does this relate to Hayek's insights about the use of knowledge?
General knowledge which is transferred from higher ups to lower individuals.
Fixed and Variable Costs
Fixed Costs Do not vary with the quantity of output produced For Farmer Jack, FC = $1000 for his land • Other examples: cost of equipment, loan payments, rent Variable Costs Vary with the quantity produced For Farmer Jack, VC = wages he pays workers Other example: cost of materials Total Cost TC = FC + VC
Q. Black Disciples. What are the monthly costs incurred by JT's unit of the Black Disciples? Which costs are fixed costs? Which would be considered variable costs?
Fixed costs would include weapons, storage, and weapons, etc. Variable costs would probably be the quantity of drugs.
Types of Firms
For profit Sole proprietorships, partnerships, limited liability company, corporation Non-profit Provide goods and services but do not have the fundamental purpose of earning profits.
Private markets have trouble providing public goods because of the...
Free Rider Problem Def: A person who receives the benefits of a good but avoids paying for it • If a good is not excludable, people have an incentive to be free riders, because firms cannot prevent non-payers from consuming the good --Example of the Greater Problem of Social Loafing Result The good is not produced, even if buyers collectively value the good higher than the costs of providing it.
Readings Jenson, Meckling Specific and General Knowledge
General Knowledge - Knowledge that is inexpensive to transfer -- Quantities and prices Specific Knowledge - Knowledge that is costly to transfer - causes two problems: The rights assignment problem(Who should exercise the decision right?) AND The control or agency problem ( How to ensure that self-interested decision agents make decision that benefit the organization) - Solve these problems by granting alienability of decision rights to decision agents
Digital discrimination: The case of airbnb.com
Goal Estimate price gaps between black and non-black hosts Procedure Combine pictures of all NYC landlords on Airbnb with their respective rental prices and information about the quality of their properties Control for effects of guest perception of location, quality, and other factors Results Non-black hosts are able to charge 12% more than black hosts
Other forms of potlatch
Greek weddings Feasting,Public nature, Absence of written contracts, served to publish the wedding before witnesses Parallel to burning = breaking plates, etc. Power of the host and neighboring villages.
Application: intel and andy grove What kinds of knowledge does Andy Grove think are crucial to the efficient operation of Intel? What policies does he propose and what are their likely effects? Are these policies appropriate for all organizations?
Grove said... They have power based on "Position" • This Knowledge gives older managers power Says Egalitarian Culture is Key: -- Mix Knowledge-power people with Position-Power People
Q. What kind of knowledge does Hayek assert is crucial to the proper functioning of an economy? Is this relevant to the proper functioning of an organization?
Hayek believes it is essential to have a baseline understanding of human nature in order to predict events in the economy and to predict the behavior of man in the work place. He believes human nature drives all human behavior so we must create a "model of man" on which we can base predictions.
Perfect Price discrimination vs. single price monopoly Perfect Price Discrimination
Here, the Monopolist Produces the Competitive Quantity, but Charges each Buyer his or her WTP. This is called Perfect Price Discrimination. The Monopolist captures all CS as Profit. But there is no DWL.
Perfect Price Discrimination vs. Single Price Monopoly Deadweight Loss
Here, the Monopolist charges the Same Price (PM) to all Buyers. A Deadweight Loss Results
Q. What strategies has Apple implemented to keep its costs down relative to its competition? Did these strategies work? Why or why not?
Historically, Apple has been able to sell its products at a premium price due its loyal customers. However, as the prices of PCs from other companies decreased, Macs were seen as overpriced. In 1990, Sculley, the Chief Technology Officer, tried lower the cost of Macs; this didn't work, however, and Apple's gross margin dropped to 34%. When Steve Jobs became CEO of Apple in 1997, he cut costs by keeping the company's products solely in desktop and portable Macs for business and personal use. Additionally, he cut down Apple's inventory, increased spending on R&D, and opened national chains of Apple stores. These strategies proved to be strategic, as in 1998 Apple had a profit of $309 million.
Q. Who gains and who loses from the Florida Attorney General's attempt to curtail price gouging?
Home Depot gains because it is able to curb price increases, which allows them to stay in the good graces of the community. Additionally, local contractors are able to buy their plywood at only slightly above average prices, instead of double the pre-hurricane prices. The big producers of plywood lose because they can't profit from the rising demand as much as they would like to, and companies that attempted price gouging are going to lose because people will boycott them for being unfair.
Q. Hayek says: "... the problem is precisely how to extend our utilization of resources beyond the span of control of any one mind; and therefore, how to dispense with the need of conscious control, how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do." What, if anything, does this have to do with managing organizations?
How do we spread knowledge but utilize this knowledge in a way that is most productive for an organization (who should have this information and what should they do with it.. without us telling them what to do)
Betrand and Mullainathan Study "Are Emily and Greg more employable than Lakisha and Jamal?"
Identical Resumes with Different Names ("White" names vs. traditionally African-American names) Respond to more than 1,300 help-wanted ads run in Boston and Chicago newspapers 5,000 fake résumés that are identical except for names - Half of the names were common in the African American community - Half of the names were more common among the white population Conclusions: Lower returns to their education because individuals would suffer from name discrimination. The research shows that firms with a more diverse workforce are more innovative, so hiring managers would increase firm performance by eliminating biases
Profit Maximizations
Identifying Quantity Like a competitive firm, a monopolist maximizes profit by producing quantity where MR = MC. Price Once the monopolist identifies this quantity, it sets the highest price consumers are willing to pay for that quantity Finding WTP It finds this Price from the D Curve. 1. The Profit-Maximizing Q is where MR = MC. 2. Find P from the Demand Curve at this Q
Q. What effect does raising price of plywood have on plywood supply and demand after the hurricane?
If a company raises the price of plywood, when the trouble from the hurricane is over, the company will lose customers because they will remember the price gouging. The quantity demanded from that store will decrease dramatically.
The coase theorem
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. - True regardless of the initial allocation of Property Rights Conditions Zero Transaction Costs Well-Defined Property Rights
Supply: QS and Law of Supply
QS: The amount that sellers are willing and able to sell. Law of Supply: The quantity supplied of a good rises when the price of the good rises, "other things equal."
Q. Freakonomics, The authors of Freakonomics describe situations where people of all different walks of life who are otherwise honest, find ways to cheat to advance their position or increase monetary rewards when incentives are strong enough. What is an incentive?
In Freakonomics an incentive is described as "a means of urging people to do more of a good thing or less of a bad thing." It is the motivation to change something in almost anything.
Q. Remm, Under the Psychological Model of human behavior, do people engage in substitution? How about under the Political Model? Under the Sociological Model?
In the Psychological Model, people do not make substitutions. In this model, human wants are arranged in a "hierarchy of needs," and there are no substitutions between levels of needs. The psychological man evaluates, but if the cost of any one good rises, he'll consume less of his least important good. Under the Sociological Model, a person does not substitute.
Implications of the Modigliani-Miller Theorem: Perfect Capital Markets
Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows There are no taxes, transaction costs or issuance costs associated with security training A firm's financing decisions do not change the cash flows generated by its investments, nor do they reveal new information about the,
Q. Levitt and Dubner. Consider the legal and illegal market for guns. Consider a law that restricts the type of guns. What happens to supply & demand?
In the legal market for guns, where there are restrictions that make it difficult to buy guns, both the supply and demand decrease. This causes a decrease in the equilibrium quantity but can cause either an increase or decrease in the equilibrium price. In the illegal market for guns, supply and demand either remain the same or they both increase. When they both increase, there's an increase in quantity, but the change in price is uncertain.
Where have all the criminals gone?
Increased reliance on prisons, increased number of police, changes in legal drug markets, the effect of legalized abortion
How to firms raise equity capital?
Infant start up - family friends Maturing start up- angel investors, venture capital firms Mature private firm- private equity firms, institutional investors, corporate investors Mature Public- public equity
Hayek on Prices
Information Role - Essential Information - Passed Prices Economize on the Cost of Transferring Information to Coordinate decisions Coordination Role - Activities of decentralized decision-makers coordinated by prices
Apple's critical problems in the PC industry
It costs 1 billion to develop and OS Really hard for apple to keep up
Application: Tradable Pollution Permits (Part B)
Initially, Acme and USE each emit 40 tons SO2/month GOAL: Reduce SO2 emissions to 60 tons/month total POLICY OPTION 2: PERMITS Issue 60 permits, each allows one-ton SO2 emissions. Give 30 permits to each firm. Establish market for trading permits. Each firm may use all its permits to emit 30 tons, may emit < 30 tons and sell leftover permits, or may purchase extra permits to emit > 30 tons. YOUR TASK: Compute cost of achieving goal if Acme uses 20 permits and sells 10 to USE for $150 each Answers GOAL: Reduce SO2 emissions to 60 tons/month total COMPUTE THE COST OF ACHIEVING THE GOAL FOR ACME:Sells 10 permits to USE for $150 each, gets $1500 Uses 20 permits, emits 20 tons of SO2 Spends $2000 to reduce emissions by 20 tons Net Cost to Acme: $2000 - $1500 = $500 COST OF REDUCING EMISSIONS: $100/ton for Acme, $200/ton for USE COST OF REDUCING EMISSIONS: $100/ton for Acme, $200/ton for USE: Buys 10 permits from Acme, spends $1500 Uses these 10 plus original 30 permits, emits 40 tons Spends nothing on abatement Net cost to USE: $1500 Total Cost of achieving goal: $500 + $1500 = $2000 Using tradable permits, goal is achieved at lower total cost and lower cost to each firm than using regulation
Decision Making
Initiation Ratification Implementation Monitoring Caveats about standard decision making - problem identification vs. problem solving: you do not want to solve the wrong problem - outcomes are uncertain - groups often make decisions in firms
Q. Black Disciples. How did JT, a branch leader of a Black Disciples street gang, acquire and maintain a regional monopoly over crack cocaine within the territorial domain of the gang?
J.T. acquired and maintained a regional monopoly over crack cocaine because he knew that it is disadvantageous to cause turf wars, as crack dealing is already an extremely dangerous profession. More importantly, he had a monopoly due to his great skills in record keeping and his business background. This monopoly was also established through violence and intimidation.
Systems of Exchange and Purposes: Kaoka. How did the potlatch for the kaoka differ from kwakiutl?
Kaoka: feat leaders give Kwakitul: feat leaders take Status-seekers of the Kaoka tribe say: "The giver of the feast takes the bones and the stale cakes; the meat and the fat go to the others." In contrast to the Kaoka tradition, the Kwakiutl chiefs begun to keep the "meat and fat" and give the "bones and stale cakes" to their followers
Apple: Early Sources of advantage
Mac was user friendly Powerful graphics capabilities Took 15-min (rather than 30-hours for PC) to figure out how to use a Mac Mac's manuals were 2-inches thick vs several feet high IBM PC manuals D Easy for 1st time users to operate Simple forms of communication Different approach than IBM
Monopoly vs. Competitive Market, Demand Curves
Monopolist is the only seller, so it faces the Market Demand Curve. To sell a larger Q, the firm must reduce P. Thus, MR ≠ P. In a Competitive Market, the Market Demand Curve slopes downward. But the Demand Curve for any individual Firm's Product is Horizontal at the Market Price. The Firm can increase Q without lowering P, so MR = P for the Competitive Firm.
Demand: Qd and Law of Demand
QUANTITY DEMANDED How much are buyers willing and able to purchase? LAW OF DEMAND The quantity demanded of a good falls when the price of the good rises, "other things equal."
PC Industry Analysis: Substitutes
Network computers, mobile devices, game consoles.
Basic Financial Formulas
Operating Income = Revenue - Operating Costs (COS, R&D, SGA) Net Income = Revenue - All costs (including taxes, interest, one time costs, etc.) Gross Margin %: (Revenue - Cost of Sales)/Revenue (% of money kept from sales after taking out direct costs of products sold) Return on Assets = Net Income/Total Assets (% of money earned for every dollar invested in assets to run the business)
Board of directors
Primary function is top-level decision control Fiduciary Responsibility: represents the interest of the corporation and shareholders Delegates legal authority to managers Other responsibilities include: hiring, monitoring and firing the CEO; authorizing strategic directions; approving capital outlays
producer surplus
PS = P - cost The amount a seller is paid for a good minus the Seller's Cost How lower prices reduce CS - fall in PS due to sellers leaving the market - fall in PS due to remaining sellers getting lower P
Price discrimination in the real world
Perfect price discrimination is NOT possible Firms don't know buyers' WTP Buyers don't reveal it Solution Firms divide customers into groups based on something observable (i.e. Age) Ex. Movie Tickets Airline Prices Discount Coupons Need-Based Financial Aid
What determines an organization's culture?
Personnel Selection Incentives Propaganda Leadership
Monopoly, Marginal Revenue
Price Effect Lower price reduces revenue Output effect Higher output raises revenue To sell a larger Q, the monopolist must reduce the price on all the units it sells. Hence, MR < P. MR could even be negative if the price effect exceeds the output effect (e.g. Common Grounds increases Q from 5 to 6).
Q. What role do prices play in the economy? How do prices economize on the transmittal of information?
Prices allow the transmittal of information and help with coordination roles. They allow essential information to be passed because it helps show who values the product the most. Additionally, the activities of decentralized decision-makers are coordinated by prices, and prices economize on the cost of transferring information to coordinate decisions.
Why is freeriding a problem?
Public goods would not get provided problem also arises in joint production
Types of Economic Systems
Pure capitalist economy - markets decide what how and for whom - adam smith's invisible hand Pure centrally planned/command economy - The government decides What, How, & For Whom -The government determines both Resource Allocation and Production Mixed and transition economies
Q. Remm, Is REMM a good/bad model? How can we tell? What criterion should be used for choosing a model of human behavior for use in management decisions? Why is a manager's view of human behavior important to his or her success as a manager?
REMM dominates all of the other models of man mentioned because it incorporates the best of each of them. It is a powerfully predictive model because it combines assumptions with knowledge of the opportunity set from which people are choosing in any situation. REMM can be used to explain organizational problems inside firms, which is important to a manager's success
Systems of Exchange and Purposes: Kaoka. Why wasn't reciprocity used instead?
Reciprocity is the technical term for an economic exchange that takes place between two individuals in which neither specifies precisely what is expected in return nor when they expect it
Tradable Pollution Permits
Reduce pollution at lower cost than regulations Firms with low cost of reducing pollution do so and sell their unused permits Firms with high cost of reducing pollution buy permits Result: Pollution reduction concentrated among firms with lowest costs
National consequences
Reduced Investment Increased utility rates Inefficient tax system Limited technological progress (weak property rights, no patents) Declining Productivity (limited specialization)
Ownership
Represented by shares of stock - public or public stock Ownership is called Shareholder, stockholder, equity holder No limit of shareholders Owner is entitled to dividends
PC Industry: Apple's Value Drivers
Reputation and Brand Customer Service Technology Quality (ease of use, plug and play, clever packaging)
Application of coase theorem
Rick owns a dog named Spot. Suppose: Negative Externality Spot's barking disturbs Jane, Rick's neighbor The Socially Efficient Outcome maximizes Rick's well-being + Jane's well-being. If Rick values having Spot more than Jane values peace and quiet, the dog should stay. Coase theorem: The private market will reach the efficient outcome on its own...
Industry Conclusions
Sophisticated, powerful buyers, Vicious rivalry, Low barriers to entry, Lots of potential substitutes, Complements fueling demand, Suppliers appropriating most of the industry's residual profits
Systems of Exchange and Purposes: Kaoka. Why was competition important?
Showed status
The production function
Shows the relationship between Quantity of Inputs used to produce a good and the Quantity of Output of that Good
What is society's main economic problem?
Socialism assumes that all available knowledge can be used by a Central authority Overlooks that the model society (which exceeds that of any individual person) is based on the utilization of widely dispersed knowledge
Case study: you've got spam
Some firms use spam e-mails to advertise their products. Spam is not excludable: Firms cannot be prevented from spamming Spam is rival: As more companies use spam, it becomes less effective Like most common resources, spam is overused - which is why we get so much of it!
Q. In this paper, Hayek does not mention the costs of communicating certain types of knowledge. What implicit assumption is he making about these costs? Is his assumption appropriate? Under what circumstances?
Specific knowledge is more costly to communicate than general knowledge
Started as a private company Now traded on NASDAQ stock exchange --> it became public to raise capital Advertisers are looking for people interested in buying their products, so they use data analytics to find out info about us to sell us stuff ---Age, gender, interest, profession, socioeconomic status, "likes," how we interact with content and friends · What do people do on online networks?
Q. Remm, Why is the principle of substitution important in predicting human behavior?
Substitution is important because without it, there are no real decisions to make. Substitution allows decision makers to evaluate potential outcomes and make decisions to maximize their own wellbeing by trading off costs and benefits of decision alternatives.
Labor Market Discrimination
Taste Based Discrimination Definition: Taste-based discrimination is where employers or customers discriminate against employees based on personal preferences Statistical Discrimination Definition: Statistical discrimination is where firms have limited information about worker ability or customer risk, and use demographics as proxies
Q. Is this an example of a situation where markets don't work, and thus intervention is appropriate?
Technically, markets do work in this situation. The demand for plywood increases, so companies technically do have the right to increase their prices. However, by doing this, people see the companies as greedy price-gougers and will not buy from them. This makes the government intervene and attempt to prevent price gouging, so all of the buyers can buy plywood at a "fair" price.
PC Industry Analysis: barriers to entry
Technology (Screwdriver or just snap together) Components: (standardize, widely available) Plant/Location (Can assemble PCs in garage) Distribution (Cheap, over the web/classifieds) Customers (Price sensitive; might want local service but realize that PCs are a commodity product) BARRIERS TO ENTRY ARE VERY LOW - hard to think of another industry in which they are much lower
PC Industry Analysis: Competition
Technology obsolescence, open standards, industry fragmentation, sophisticated buyers
Q. How does the "invisible hand" work? When doesn't it work? Why does this lead to inefficiency?
The "invisible hand" takes all information about buyers and sellers into account and guides everyone in the market to the best outcome as judged by the standard of economic efficiency. Although it usually leads markets to allocate resources to maximize the size of the economic pie, this isn't always the case. It does not work when there is an externality, which is the impact of one person's actions on the well-being of a bystander. This market failure is a situation in which the market on its own fails to produce an efficient allocation of resources.
Welfare economics
The Allocation of Resources refers to: -How much of each good is produced - Which producers produce it - Which consumers consume it Welfare Economics - Studies how the allocation of resources affects economic well-being
Marginal Product
The Marginal Product of any input is the increase in Output arising from an additional unit of that input (holding all other inputs constant)
Q. What does Hayek mean when he says, the economic problem is "a problem of utilization of knowledge which is not given to anyone in its totality, and not the logical problem of equating the marginal rates of substitution between any two commodities or factors in all their different uses" (that is, equating marginal costs with marginal benefits)?
The economic problem is a problem because not all of the knowledge is given to any one person, which makes planning extremely difficult. It is not about marginal costs and benefits; it's about figuring out who values products the most. If knowledge is well utilized, profit will come naturally. The key to an efficient organization is how the people involved use their knowledge.
Consumer Surplus (CS)
The amount a buyer is willing to pay minus the amount the buyer actually pays CS = WTP - P Higher prices reduce CS - fall in CS due to buyers leaving market - fall in CS due to remaining buyers paying higher P
Q. Freakonomics, What are some examples of situations where moral or social incentives and economic incentives are both present? Are the different incentives complementary or competing? For each example you think of, which do you think is a stronger incentive?
The anti-smoking campaign put multiple incentives to smokers. The sin-tax of $3-per-pack (economic), the banning of cigarettes in restaurants (social), and the U.S. government asserting that terrorists raise money by selling black-market cigarettes (moral) are all incentives not to buy cigarette. All of the incentives are complimentary, and I think that the banning of cigarettes in restaurants is the strongest incentive, as social pressure is usually a huge determinant.
Q. The authors of Animal Spirits argue that "fairness" is as important a driver of human behavior as economic (really, what they mean is monetary) motivation. What does their argument imply for price gouging?
The argument that "fairness" is as important a drive of human behavior as economic motivation implies that companies are better off when they don't price gouge. Although they have the economic incentive (and the right) to do so and make more money, they do not because they know that it is going to be seen as "unfair" by the consumers. Consumers will punish firms that price gouge and buy from the businesses that do not price gouge.
Readings: Hayek, Use of knowledge in Society
The economic problem of society is due to the fact that knowledge is not concentrated, but is dispersed The problem is the utilization of knowledge, since no one has access to all knowledge Knowledge somehow needs to be conveyed to the planner Scientific knowledge is the most often thought of knowledge, which is believed to be best utilized when centralized
What is Koaka, the big men society?
The giver of the feast takes the bones and the stale cakes; the meat and the fat go to the others.
Hayek on Types of Knowledge
The human mind is limited Makes transfer of knowledge costly Types of knowledge General Knowledge: Transferred at low cost through prices, quantities (Hayek) In contrast to centrally planned economies Specific Knowledge: Transferred at high cost Specific knowledge of people, production processes
Tradegy of the Commons
The idea that where there is no clear ownership of rights to a natural resource, the users of the resource are likely to overexploit it. This becomes an argument either for strong government intervention or for privatization of rights to the resource. ... TRAGEDY IS DUE TO AN EXTERNALITY Allowing one's flock to graze on the common land reduces its quality for other families. People neglect this external cost, resulting in overuse of the land
Q. What role does knowledge play in decision-making in a market-based economy? How is it reflected in prices and in decision-making? Why should this subject be of interest to managers?
The knowledge problem is so complicated that it makes planning extremely difficult. In a market-based economy, specific knowledge for decision making is distributed among many people, in order to get goods to people who value them the most highly. The activities of decentralized decision makers are coordinated by prices. Prices get the essential information of who values products the most passed along, and they economize on the cost of transferring information to coordinate decisions.
Public goods
The logic goes: If the Benefit exceeds the Cost, Gov't should provide the good and pay for it with a tax on people who benefit Problem: Measuring Benefit is difficult Cost-benefit Analysis: A study that compares the cost and benefits of providing a public good Cost-Benefit Analyses are imprecise, so the efficient provision of public goods is more difficult than that of private good ex. national defense, fighting poverty
Modigliani-Miller Theorem
The market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends. Increasing the amount of debt lowers the value of outstanding equity, keeping the total value of the firm unchanged.
Q. Black Disciples. Describe the organizational structure of the Black Disciples street gang. How is it similar to the organizational structure of most business?
The people at the top of the hierarchy make significantly more than those at the bottom. JT was almost at the top. He reported to a group of about 20 people who are called the Board of Directors. They functioned much like a board of directors for other companies. JT gave them about 20% of the revenue and they gave him the right to sell crack in a twelve-square-block area. JT distributed the rest of the money they made as he saw fit. JT had three officers who reported to him directly, an enforcer, a treasure, and a runner. Below these three people were street-level salesmen known as foot soldiers. They make below minimum wage and are similar to a basic worker at McDonalds. In the Black Disciples they also have members who pay dues to the gang to either gain protection or have the chance of being a foot soldier. This is obviously different from McDonalds. The Black Disciples would also hire mercenary fighters to fight gang wars. Overall: the Black Disciples worked like a standard capitalist firm—you have to be at the top of the enterprise to make a lot of money. The wages are skewed like the wages of Americans.
Monopoly, Barriers to Entry
The single firm owns a key resource Government grants a single firm the exclusive right to produce the good Natural monopolies: Single firm can produce entire market Q at a lower cost than could several firms
Positive externalities
The social value of a good includes -Private Value - the direct value to Buyers - External - Benefit - the value of the positive impact on bystanders The socially optimal Q maximizes welfare - At any lower Q, the Social Value of additional units exceeds their cost - At any higher Q, the cost of the last unit exceeds its social value Examples - vaccines, r and d, education
Q. Black Disciples. How do the incentives of the street-level drug salesman differ from those of the gang leader/franchise owner? Are they both attempting to maximize the profits of the gang? Why or why not?
The street-level drug dealer's incentives are to make more money than the other dealers at his level and get noticed by his superiors. They want to act tough by fighting in drug wars and do well in order to move up in the gang's leadership. The gang leader, on the other hand, wants to maximize the profits of the gang and does not want violent conflict in order to ensure the success of the gang.
Transaction costs
The time and expense of negotiating, writing, and enforcing contracts or exchanges (Bounded Rationality) PLUS The adverse consequences of Opportunistic Behavior When Party A takes advantage of his superior knowledge, to further his interests, by failing to disclose this information to Party B i.e. haggling, renegotiating, new planning costs, additional monitoring, potentially litigation, etc. Problems created Possible market failure A market does not form or is highly inefficient
Systems of exchange and purposes: Kwakiutl. What is potlatch and its importance?
Theories of Man - Social/Anthropologist: Status - Economist (Veblen): Conspicuous Consumption or Conspicuous Waste Objective: Give away or destroy more wealth than rival
Q. Levitt and Dubner. What explanations of the decline in crime in the 1990s do Levitt and Dubner offer? Which ones appear valid?
There were significant drops in crime and crime rates in the 1990s because of an increased reliance on prisons and an increased number of police. Additionally, there were more abortions due to the legalization, which lead to less crime, as well as a stronger economy. There were tougher gun laws, and changes in the drug markets.
Efficiency
Total Surplus = (Value to Buyers) - (Cost to Sellers) An allocation of resources is efficient if it maximizes total surplus.
Externalities
Uncompensated Impact of One Person's Actions on the Well Being of a Bystander An externality is a type of market failure Absent Market Failure, the Competitive Market Outcome is Efficient (Maximizes the Total Surplus) Argument In the presence of Externalities, we need Government to Improve Efficiency Examples Air pollution from a factor, the neighbor's barking dog, etc.
Q. Sandel Article. What are the costs and benefits of using government regulation as a way to reduce pollution?
Wanted any agreement to include a trading plan that would let countries buy and sell the right to pollute - Would make it easier to meet obligations
Stock market basics: New Stock Listings
Ways in which firms can bring their equity to public markets Initial Public Offering - new shares sold in primary markets - used to raise capital for the firm - the firm hires an investment bank to underwrite the offering and facilitate stable early trading Direct Listing - current private equity holders sell their shares on the public market - far less common than IPOS - no new shares are created and there is no investment bank underwriting the transaction ex, spotify
Application: policy options for common resources
What could the townspeople have done to prevent the tragedy? Could their government have prevented the tragedy? Try to think of two or three options for avoiding this tragedy in the use of common resources. Answers Impose a corrective tax on the use of the land to "Internalize the Externality" Regulate Use of the Land • The "Command-and-Control" Approach Auction off Permits allowing use of the Land Divide the land, sell lots to individual families; each family will have incentive not to overgraze its own land
Agency Theory
What is the problem? Tension because owners are not managers Shareholders better off if management makes decisions that maximize the value of their shares But managers may act in their own interest instead of shareholders'
PC Industry Analysis: 1986 vs. 1997. Why did the buyers change?
What was a PC in the old days vs. today? A standalone productivity device vs. A networked, communication device What were the key customer drivers? Customer Sophistication Changes in Functionality
Basic Issues regarding public goods
When goods have no prices, the market forces that normally allocate resources are absent We consume many goods without paying: Parks, National Defense, Clean Air & Water Private Markets may fail to provide the socially efficient quantity of such goods Governments can improve market outcomes
Q. Freakonomics, How did Paul Feldman set up his bagel business in Washington D.C.? How did it different from most business models?
While working for a big business in Washington D.C., he started to bring in bagels to work and basket them with a suggested price. Later he would collect the money and leftovers. After Feldman quit his job, he started doing this in multiple businesses. This is different because it leaves the consumer (the business getting the bagels) to pay for the bagels themselves. They are not forced to pay like you usually are. It is only a suggestion. This business model depends on people being honest and paying for their bagels.
Q. Remm, Under the Sociological Model, do people respond to incentives generated by rewards and punishments?
Yes, people do respond to the incentives generated by rewards and punishments. Rewards and punishments determine culture, and the Sociological Man is a product of his culture and environment.
Market Supply
add up quantity supplied by sellers at each price.
Solution: aligning incentives
corporate governance aligns top-level incentives and partition decision rights to... maximize shareholder value, protect the shareholder's assets and produce financial statements that meet legal financial
Swimming pools v. guns
correlation vs. causation supply and demand competition and economic profit positive vs. normative analysis
Leadership: Jobs returned
focus on traditional consumer base premium price through design and marketing imac is lower cost shift to owned retail and intel cpus challenged the status quo saw the future was in mobile computing; focused on delivering value
Market Structure: Perfect Competition v. Monopoly
perfect comp. Many Buyers & Sellers Goods are Largely the Same and Each Buyer & Seller is a "Price Taker" Firms can Freely Enter or Exit the Market Monopoly Sole Seller of Product (without Close Substitutes) Has "Market Power" (The ability to influence the Market Price of the Product it sells) ex. standard oil, Rockefeller
Examples of preventing overconsumption
regulating use of the resource auction off permits allowing use of the resource impose a corrective tax to internalize the externality if the resource is land, convert to a private good by dividing and selling parcels to individuals
Q. Remm, What are the essential differences between the models of human behavior addressed in the Jensen/Meckling paper?
see other flashcards
Q. Freakonomics, What do the authors of Freakonomics conclude from an analysis of Paul Feldman's bagel sales data? Do these conclusions match with economists' expectations of human behavior?
smaller offices are more honest than big ones. In 2001, payment increased immediately by 2 percent after 9/11. Additionally, the authors conclude that mood has a large effect on honesty. This is also the case with holidays; on most holidays, including Christmas, Thanksgiving, and Valentine's Day, payment rates drop significantly. However, the opposite occurs on holidays such as the Fourth of July, Labor Day, and Columbus Day. Additionally, executives are less honest than lower-level workers. These conclusions that the authors draw don't match with most economists' expectations of human behavior. Most economists view humans as profit maximizers who will take advantage of any exploitable opportunity, which in this case would be taking a free bagel.
Willingness to pay
the maximum amount the buyer will pay for that good WTP measures how much the buyer values the good
Why private solutions do not always work
transaction costs, stubbornness, coordination problems
Q. Strategic Evaluation Did Jobs solve Apple's longstanding problems in the personal computer industry? Are Apple's other products different (e.g. the iPod, iPhone, etc.)? Now that Steve Jobs is no longer with us, how is Apple doing? How sustainable is Apple's competitive position in smartphones? Evaluate Apple's strategy for Apple Watch. Has Tim Cook taken the right approach? Would you suggest any course corrections? What recommendations would you have for Tim Cook today?
· Did Jobs solve Apple's longstanding problems in the personal computer industry? o Yes, by targeting students as his main customers. He made Apple's products easy to use. All a customer had to do once buying a Mac was plug it in and it was ready. The computers were packaged cleverly, and Apple had great customer service. · Are Apple's other products different (e.g. the iPod, iPhone, etc.)? o All of Apple's products are user-friendly and have sleek designs. They're all sold at premium prices, due to the high quality and Apple's cult-like following. Additionally, Apple products are all connected through iCloud, etc. · Now that Steve Jobs is no long with us, how is Apple doing? o Apple is currently doing great, especially with the iPhone. Both iPads and iPhones are setting sales records. Many Americans have said that they would buy the new iPhone/iPad without even knowing anything about the new product. Apple has an extremely loyal customer base.
Reading: Lessons from a Hurricane: It Pays not to gauge
· Home depot didn't raise the price of plywood as much as the market price after a hurricane · "Act of collective corporate responsibility" · Refrained from capitalism's natural impulse .. pricing goods at whatever the market will bear · Consumers will remember price-gouging suppliers and will avoid them once shortages subside · Government can also penalize companies that are unfair · In general, people don't believe that scarcity is a good reason for a supplier to raise prices · "They will pay us back—people will remember"