Tutor profile: Ayush M.
What is the relationship between economic activity and stock price movements expected?
There exists a clear and direct relationship between economic activity and stock price movements. To elaborate, the gross domestic product of a country is calculated as: GDP=Consumption spending+Investment spending+Government purchases+Net exports Overall, the economy consists of household sector, private sector and government sector. When economic activity declines, there is a decline in consumption spending. This triggers low investment spending. The implication is that revenue growth and revenue outlook for companies also declines. With potential change in earning outlook, the stock price trends lower. Similarly, when economic growth is robust, the is healthy consumption and investment spending in the economy. This triggers robust growth for companies and as earnings trends higher, the stock price also moves higher.
At what level does the producer reaches equilibrium?
A producer's main goal is to maximise the profits. So a producer is at equilibrium when he earns maximum profits. The only two ways of earning profits are: Decreasing the cost of production or Increasing the sales revenue. So the two terms derived here are: Marginal Cost(cost of producing one additional unit) and Marginal Revenue(revenue generated by selling one additional unit). Therefore, its quite clear that the producer will be at the stage of profit when MR exceeds MC. So the first condition for the producer to be at equilibrium is MR>MC. But the second condition is equally important. Second condition says that the MC curve should cut the MR curve from below and after that point, MC should rise and be greater than MR. Now remember, equilibrium means the stage where the producer is earning MAXIMUM profit which is only possible to the point where MC is lower than MR. Hence the point of equilibrium will be achieved when the MC curve cuts the MR curve from below because that is the point of maximum profit for the producer. That is the point of producer's equilibrium.
Why is financing decision so important for a business?
Financing decision involves deciding the source of raising the finance. Deciding how much to raise from which source is the main concern of financing decision. There are two categories namely: Owners fund and Borrowed fund. The borrowed funds have to be paid back and involve some degree of risk whereas in owners fund, there is no fix commitment of repayment and there is no risk involved. A finance manager prefers a perfect mix of both types which helps the company to raise funds without giving away too much of control/equity at minimal risk.
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