Direct Costs In finance, direct costs are those costs that are associated with a specific project, department, or activity. Sometimes referred to as hard costs, expenses of this type are found with just about every type of business activity, beginning with research and development, moving through sales and marketing campaigns, and into the production of different types of goods and services. A direct cost is often some type of fixed expense, but there are some situations where a variable expense may also fall into this category. The key to understanding what does and does not constitute direct costs is to identify costs that apply only to a specific project, and have nothing to do with any other activity that is taking place concurrently. In order to be a true hard cost, the expense must be for resources that benefit that one project. For example, if the project is to construct Continue reading
Economics Basics
Measuring Depreciation – How to Calculate Depreciation
Economists consider depreciation as capital consumption. For them, there are two distinct ways of measuring depreciation either by assuming the value of depreciation of equipment to its opportunity cost or to its replacement cost that will produce comparable earning. Opportunity cost of equipment is the most profitable alternate use of that is foregone by putting it to its present use. The problem is to measure the opportunity cost. One method of measuring the opportunity cost, as suggested by Joel Dean, is to measure the fall in value during a year. By using this method cannot be applied when capital equipment has no alternative use, like a thermal-power project. In such cases, replacement cost is an appropriate measure of depreciation. Under this method, the cost of the new asset and the residual value of the old asset are taken as the depreciation of the asset. But depreciation is recorded only at Continue reading
Profit Maximization vs Shareholders Wealth Maximization
Profit is obtained by subtracting total cost (TC) from total revenue (TR). Under the assumption of the neo-classical theory, a firm will aim to produce a level of output where the difference between the total revenue and total cost is the greatest. The maximization of TR-TC is the equilibrium condition for a profit-maximizing firm. This is because once the firm is getting the most profit from a particular level of output and sales, it will not be incentivised to alter the level of output that is giving it the most yields in total investment performance. A firm which strictly follows the primary assumption of the neoclassical theory of the firm will make its decisions on inputs and outputs based on the marginal effects of the components in the profit equation. Thereby leading economists to arrive at the conclusion that the condition for profit maximization to be achieved is when marginal Continue reading
New Product Pricing Strategies
The new product may be either an entirely new one or it is one of the varieties of the existing products. If there are many substitutes for the new product in the market then competitive price will be charged. If the product is entirely new then through the process of trial and error the price will be fixed not only to cover the cost of production but also to cover the cost of promotional strategy. Two types of pricing methods are adopted in pricing of a new product. Skimming Price: In case of skimming price the producer makes an effort to fix the price in such a way to skim away the consumers’ surplus i.e. the firm learns about the maximum possible price which the consumer will be prepared to pay, rather than go without the commodity, and then quotes the price accordingly. This price may be much above the Continue reading
The Causes and Effects of Unemployment
The term unemployment is used to describe anyone who is able to work, but doesn’t have an occupation. Unemployment is one of the most common and chronic problems worldwide. It is a concern for individuals as well as global communities. Unemployment is expressed as percentage of the total available work force that is unemployed, but actively seeking employment and willing to work which is known as the unemployment rate. Basically there are five types of unemployment: frictional unemployment, cyclical unemployment, structural unemployment, real wage or classical unemployment, and seasonal unemployment. The level of unemployment varies with economic conditions and other circumstances. The causes of unemployment include increased population, rapid technological change, lack of education or skills and rising cost lead to financial, social and psychological problems. There are four main causes of unemployment. Firstly, the increased population which leads to higher unemployment rates. As the number of people who are Continue reading
Analysis of Joseph Schumpeter’s ‘Theories of Economic Development’
At the turn of the century, a period of strengthening the role of monopolies, increasing property differentiation of the population and the deepening of cyclical crises appeared the concept of an Austrian economist and sociologist Joseph Schumpeter. Joseph Schumpeter was an economist and sociologist, he came into the history of economic science as a profound scholar of theoretical problems of entrepreneurship and evolution of socio-economic systems, as the historian of economic theory. His broad vision of the evolution of socio-economic processes still has influence on modern economic thought. He presented his understanding of the subject of economics and tried to combine economic theory, economic sociology and the history of economic analysis. He tried to create a coherent system of believes that explains new phenomena and processes. According to his theoretical views, J. Schumpeter does not belong to any known economic schools. He was involved in many issues, focusing on the Continue reading