Thursday Ramble: Economics 57

 Last Saturday morning I went to the Community First Saturday Cup of Joe, a coffee gathering in the condo community center.  I got to talking with a neighbor I had never met. He asked me what kind of work I do, and I clarified that it is aging not asia. I asked what he did, and one of the things he has done was teach economics at Harvard, and in Bagdad.  

I took one economics class in College, and looking back at it, it was a class that I have used a huge amount of the basic principles that I learned in that one class.  I should have taken more, though most of the classes beyond that one went deep into my phobia of mathematics. I have been surprised over the years at the number of bright people who failed to understand a few simple principles of finance. 

Here are a few. 

Fixed costs, these are costs that remain the same for a business, no matter how much business they do.  The cost of office space is a good example.  

Variable costs, these are things that vary depending on the volume of business being done.  If a business has to pay extra hours of staff time, that is a variable cost, when doing a conference budget, food is a variable cost - in increases based on the number of people who eat and drink. 

Marginal cost, is the cost of adding another unit of business.  For a membership organization, if it has 100 members, what is the increase in actual cost, if they have 101 members.  It is essential to know this when pricing product, or seeking to add new units of business. I have been have astounded at CEOs that had no idea what this was or how to calculate it. 

The rule of supply, the higher the price the greater the supply.  Below a certain price point, there is no supply of available product, the higher the price, the greater the supply.  I can sell you all of the houses you want to buy, for $1-billion dollars each.  

The law of demand, the lower the price the greater the demand, the higher the price the lower the demand.  At $1 each there are no new cars available to purchase, at $100,000 there is less demand for cars, reaching a point where no one is willing to buy beyond a given price point.  

A market is in balance at the point that the supply curve, meets the demand curve.  There is great demand below that point, but lower profit.  There is lower demand, but greater profit above that point.  

This gets more complicated when you introduce leverage, or borrowed money.  Someone would buy your house for a billion dollars, if the terms were no money down, 0% interest and payments of $1 a month, with the balance due in 500 years.  

If there is no demand, price does not matter.  

If demand meets supply at a price that is below cost, the business will go broke.  

Yes, the things I learned in that class have helped me understand the world of for profit and not-for-profit business.  In many ways it was one of the most important classes I took in school.  The class was 40 years ago, and the adjunct professor who taught that class was probably in his 50's, odds are he is not out there to read this, but THANK YOU, you made a real difference in this life.