Economics 101 for Real World Business - AZ TRT S04 EP48 (211) 12-3-2023

Economics 101 for Real World Business

AZ TRT S04 EP48 (211) 12-3-2023

 

What We Learned This Week:

• Supply & Demand - Economics Simplified
• Capital Allocation - What is the Opportunity of your Business Investment?
• Gamblers Fallacy - What is the Probability of the Next Die Roll?
• Game Theory - Dr. Nash’s Plan to Pickup Women

 

 

Notes:

EK 101 – Economics Lessons

 

 

Seg. 1

Supply & Demand

Supply is the amount of a specific good or service that's available in the market. Demand is the amount of the good or service that customers want to buy. Supply and demand are both influenced by the price of goods and services.

If there was only one pizza restaurant in a town and then a new pizza place opened, the demand for pizza from the first restaurant would drop. The price of gasoline often changes with the demand throughout the year. As people drive more in the summer, gasoline prices tend to rise.

In professional football, owners sell entertainment (supply) and spectators buy the opportunity to view or display the game (demand). Meanwhile, owners also buy the services of athletes who wish to play (demand) and trained athletes make themselves available for a price (supply).

 

Marginal Utility

What Is Marginal Utility? Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service. The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase.

Sports David Beckham signed $250 mil contract in 2007 w LA Galaxy

Galaxy willing to overpay to get the attention, ticket and merchandize sales

What we will pay at the margin?

There is only 1 Beckham, rare commodity, like a diamond – subjective on the value

What is the value of a bottle of water in the desert?

 If only 1, then pay a lot, if there are 50 available, then pay less

 

 

Seg. 2

Capital Allocation –

Capital Allocation is the process of distributing financial resources to different areas of a business to increase efficiency and maximize profits.

 

A Sunk Cost refers to money that has already been spent and which cannot be recovered. In business, the axiom that one has to “spend money to make money” is reflected in the phenomenon of the sunk cost. A sunk cost differs from future (or regular) costs that a business may face, such as decisions about inventory purchase costs or product pricing. 

 

Sunk Costs also mean that the Money $ used on a bad investment is lost. Don’t try to ‘chase it’ to somehow recover and get even. Instead, just write it off, and move on.  It is better to use the New Money $ on better investments. Where to Invest your money $ is pivital to Capital Allocation. Simply put, learn to Control Your Capital and decide wisely what Opportunity (Cost)  it should go to be as efficient as possible. This is the intersection of scarcity and choice.

 

Opportunity Cost is the loss or gain of making a decision, the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Famous Phrase – “idle cash balances represent an opportunity cost in terms of lost interest”

 

Whether your time or money can be better spent on something else

 

Should you mow your own lawn, or hire someone and concentrate on your job to make more $

 

Division of Labor

We do not cut our own hair, or drill our own teeth – we go to a dental specialist, saves time & $ over long term

Concentrate on your specialties

Pencil example – one co make wood, one makes eraser, one mines the graphite, and one co assemblies – we all benefit as it would be harder and cost more if same company did it all, suppliers w/ specialty help keep costs down

 

 

In Stock Investing – Beware the Zombie Co.s in the S&P Index.

 

These are companies that are not profitable, or growing (may even need a Bailout). They are just treading water, and paying their interest on debt, but not their principal. In the current S&P index, it is estimated that about 20% of companies are Zombie Co’s whose main investment comes from people buying the whole Index.

 

Unfortunately another 30% of the Index are bad companies that are either are stagnant, or on their way to Zombie status. Maybe 10 – 15% of the Companies (Stocks) in the Index (50 – 75 Co’s) are really good to exceptional and should get your Capital. 

 

Do you want to own the best house on the block? Or all of them?

 

 

 

 

Seg. 3

 

Gamblers Fallacy each roll of the die is separate from the last, no effect

 

The gambler's fallacy, also known as the Monte Carlo fallacy, occurs when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events.

 

For example, the gambler's fallacy might cause someone to believe that if a coin just landed on heads twice in a row, then it's “due” to land on tails on the next toss.

 

 

Monte Carlo Simulation – use for modeling scenarios

 

One simple example of a Monte Carlo Simulation is to consider calculating the probability of rolling two standard dice. There are 36 combinations of dice rolls. Based on this, you can manually compute the probability of a particular outcome.

 

Monte Carlo Simulation is a mathematical method for calculating the odds of multiple possible outcomes occurring in an uncertain process through repeated random sampling. This computational algorithm makes assessing risks associated with a particular process convenient, thereby enabling better decision-making.

 

Probabilities

 

Probability is simply how likely something is to happen. Whenever we're unsure about the outcome of an event, we can talk about the probabilities of certain outcomes—how likely they are. The analysis of events governed by probability is called statistics.

 

Sports analytics is a more recent field that uses data to measure areas like athletic performance and business health to optimize the processes and success of a sports organization as a whole. On-field data metrics help teams decide how to improve in-game strategies, nutrition plans and other methods for raising their athletes’ level of performance. Off the field, organizations can leverage data to monitor ticket sales, craft marketing campaigns and reduce operational costs.

 

Data lets teams and organizations track performance, make predictions and make smarter decisions on the field. Want to figure out what play is best to run on fourth down in a football game? Check the analytics. Wondering whether or not your pitcher should throw another inning? Check the analytics. Players still win games, but data allows coaches to put them in the best position to succeed.

 

 

 

Seg. 4

Game Theory – science of human strategy, people behave differently in games

Dr. Nash – A Beautiful Mind

If they all go for the same girl in the bar, competition and no one gets her, but if they work together and pair off with the group of girls, they all may win

As Nash explains it, if all the men approach the blonde first, none of the men will pair off: The blonde will reject them all as a crowd, and her brunette friends will reject them all individually because none of the women will accept being second choice to her friend.

While used in several disciplines, game theory is most notably used as a tool within the study of business and economics. The "games" may involve how two competitor firms will react to price cuts by the other, whether a firm should acquire another, or how traders in a stock market may react to price changes.

 

Prisoners Dilemma

The prisoner's dilemma presents a situation where two parties, separated and unable to communicate, must each choose between cooperating with the other or not. The highest reward for each party occurs when both parties choose to co-operate.

Keep your mouth shut and tell the cops nothing, both walk

 

Cold War Example

If both combatants do nothing, everyone lives, or mutual destruction with nuclear war

War Games movie – no winner in hundreds of simulated games

 

 

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