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what is the goal of management by objectives mbo | management by objectives mbo uses a set of quantifiable or objective standards against which to measure the performance of a company and its employees by comparing actual productivity to a given set of standards managers can identify problem areas and improve efficiency both management and workers know and agree to these standards and their objectives | |
what is an example of mbo | a company can set various goals with its employees in the case of a call center an mbo could increase customer satisfaction say by 10 while reducing call times by one minute the onus is now on finding ways to achieve this goal once that s decided on it s important to get employees on board and then monitor their progress provide feedback and reward those who do a good job | |
what are some drawbacks of using mbo | as mbo is entirely focused on goals and targets it often ignores other parts of a company such as the corporate culture worker conduct a healthy work ethos environmental issues and areas for involvement and contribution to the community and social good | |
what is the difference between mbo and management by exception mbe | in management by exception mbe management only addresses instances where objectives or standards are transgressed thus workers are left alone unless productivity is not met the bottom lineas a theory mbo makes a lot of sense if employees are involved in setting company goals they are more likely to share management s objectives work harder and deliver however there s also a good reason why mbo is widely criticized like most things that look good on paper it doesn t always work in practice the key is to be aware of its drawbacks customize the plan according to your organization ensure that everyone is fully on board and identify objectives that are clear and reasonable before putting them into action | |
what is management discussion and analysis md a | management discussion and analysis md a is a section of a public company s annual report or quarterly filing the md a addresses the company s performance in this section the company s management and executives also known as the c suite present an analysis of the company s performance with qualitative and quantitative measures investopedia eliana rodgersunderstanding management discussion and analysis md a in the management discussion and analysis md a section of the annual report management provides commentary on financial statements systems and controls compliance with laws and regulations and actions it has planned or has taken to address any challenges the company is facing management also discusses the upcoming year by outlining future goals and approaches to new projects the md a is an important source of information for analysts and investors who want to review the company s financial fundamentals and management performance the md a is just one of many sections required by the securities and exchange commission sec and the financial accounting standards board fasb to be included in a public company s annual report to shareholders a company that issues stock or bonds to the public at large must register its offerings with the sec which oversees public companies compliance with u s securities laws and ensures investors are given adequate information about companies they invest in the sec mandates 14 items to be included in the 10 k report the md a section is item 7 the fasb is a nonprofit private regulatory organization which the sec has designated as the body responsible for promulgating accounting standards for public companies in the united states fasb outlines its requirements for the md a section of filings securities law dictates that companies must hire an independent auditor to verify a company s financial statements such as its balance sheet income statements and statement of cash flows auditors perform test work to determine if the financial statements are materially correct but these certified public accountants cpas do not audit the md a section the md a represents the thoughts and opinions of management and provides a forecast of future operations therefore these statements can t typically be authenticated the md a section is not audited and includes the opinions of management that said the md a section must meet certain standards according to fasb md a should provide a balanced presentation that includes both positive and negative information about the topics discussed even if management is giving its opinion on the state of its business competition and risks these statements must be based on fact and there must be an attempt to paint a balanced picture of the company s future prospects | |
what is covered in md a | the md a section often includes an overview and outlook section this part of the financial statement is used to explain what the future of the organization looks like it is also management s opportunity to explain why variances both positive or negative occurred and what they expect from the market next management also typically discusses liquidity solvency and capital resources management must identify trends demands or long term commitments that may strain capital this section also usually contains information about management s future plans for material major capital expenditures management uses this section to explain the results of operations management can explain unusual events material transactions or significant economic changes the company often uses this opportunity to explain why net revenues and expenses varied from expected or budgeted financial plans the company may also use this section to explain its successes such as how a specific product outperformed during its new launch or how new markets have beat expectations last this section is often used to shine light on management s estimates used for accounting practices some accounting rules require professional judgement management can explain why they valued capital assets inventory or other assets as a certain amount it can also explain how it arrived at estimates for other balance sheet or income statement amounts such as an allowance for bad debt and resulting bad debt expense the md a section is usually buried in the notes to the financial statements these notes are located after the financial statements limitations of md athe md a section of a 10 k primarily uses words to explain a financial position instead of numbers therefore management can use soft or hard language to manipulate how financial performance has been going or is expected to occur whereas financial reporting via generally accepted accounting principles gaap have strict rules a company can choose how to represent itself using the md a section | |
when management prepares this section they are aware that this information is going to be publicly available this means that competitors will be able to extract information on the company s strategy therefore in addition to wanting to paint a rosy picture the company wants to be as secretive as possible without revealing information that could take away its competitive advantage | last the md a section is entirely up to management interpretation this means a company may interpret data one way when in reality the markets will play out an entirely differently way even if management puts forth a projection to the best of its knowledge its analysis is still prone to error and may not materialize example of md athe images below are from amazon s 2021 10 k filing in item 7 of the notes to its financial statements the company provides a forward looking projection of what s to come for the company you ll note that to protect intellectual property and not reveal too many strategic plans the wording in this section is a bit vague next amazon provides an overview of operations this includes the primary sources of income its strategic financial focus and other means of success again the company provides some insights into operations without revealing too many strategies that companies can directly steal there are other sections after the critical accounting judgements section but this is the last example shown here this section confirms that the financial statements have been prepared in conformance with gaap and explains how management arrived at certain estimates | |
is management discussion and analysis part of the financial statements | yes the md a section is a part of a company s publicly issued financial statements this information is included in the notes to the financial statements often indicated as note 7 | |
is md a mandatory | yes the md a section is a standard piece to a set of financial statements the notes section of the financial statements must include certain pieces of information with the md a section being one of them | |
what is the purpose of management discussion and analysis | the purpose of management discussion and analysis is to shed more light on how the financial statements were prepared how the company performed and what the company expects for the future it s management s opportunity to explain in their own words about the financial position and strategy of the company it s purpose is usually not only to reassure investors of its financial health but to convey its financial strategy to promote confidence | |
why is the management discussion analysis section important | the md a section is important because it doesn t have as restrictive guidelines compared to the numerically prepared financial statements management can use its own wording to explain unusual events or material considerations it can also explain its future plans which are not conveyed in backwards looking financial statements the bottom linethe management discussion and analysis section of a set of financial statements is management s opportunity to explain how the company did and how it will perform the section is buried in the notes to the financial statements and it usually contains an overview forward looking projection and explanation of management s judgements | |
what is a management fee | a management fee is a charge levied by an investment manager for overseeing an investment fund the fee is intended to compensate managers for their time and expertise in selecting stocks and managing the portfolio it can also include other charges such as investor relations ir expenses and the administration costs of the fund | |
how management fees work | a management fee is the cost of having your assets professionally handled the fee compensates professional money managers as they select securities for a fund s portfolio and manage it based on the fund s investment objective management fee structures vary from fund to fund but they re typically based on a percentage of assets under management aum a mutual fund s management fee could be stated as 0 5 of assets under management wide disparity in management feesmanagement fees can range from as low as 0 10 to more than 2 of aum this disparity in the fee is generally attributed to the investment method used by the fund s manager the more actively managed a fund is the higher the management fees 1an aggressive stock fund that turns over its portfolio several times a year in search of profit opportunities costs much more to manage than a more passively managed fund such as an index fund that more or less sits on a basket of stocks without much trading actively managed funds generally result in higher management fees than those that are more passively managed but they don t necessarily see better returns than those of passively managed funds they might see worse returns in some cases | |
are high management fees worth the cost | active fund managers rely on inefficiencies and mispricing in the market to identify stocks that have the potential to outperform the market the efficient market hypothesis emh has shown that stock prices fully reflect all available information and expectations however so current prices are the best approximation of a company s intrinsic value this would preclude anyone from consistently exploiting mispriced stocks because price movements are largely random and driven by unforeseen events the emh therefore implies that no active investor can consistently beat the market over long periods except by chance higher cost actively managed funds do tend to underperform lower cost passively managed funds in all categories according to decades of morningstar research research by nobel laureate william sharpe has shown that after costs the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period 2sharpe concluded that active fund managers underperform passive fund managers not because of any flaw in their strategies but because of the laws of arithmetic active fund managers would have to achieve an excess return of more than 2 just to account for the average 1 19 management fee to beat the market by only 1 hedge fund management feeshedge funds charge notoriously high fees that have become controversial as performance has often lagged the market their fee structure is commonly referred to as two and twenty because it consists of a flat 2 of total asset value and 20 of all profits earned 3the plan is often criticized but it s been the norm since alfred winslow jones founded what is often considered to be the first hedge fund aw jones co in 1949 the standard has come under pressure as competition has increased and investors have become discontent causing managers to often implement lower fees performance hurdles and claw backs if performance isn t met | |
what fees may be payable in addition to management fees | the u s securities and exchange commission cites penalty fees for not maintaining a minimum balance in your account you might also have to pay inactivity fees and various additional maintenance fees 4 | |
what are 12b 1 fees | these fees are commonly charged to mutual funds they cover the costs of marketing and shareholder services and they can even pay for employee bonuses the good news is that they usually can t be more than 1 of the assets you hold 5 | |
do 401 k plans have fees | they do and they re commonly paid by the plan s participants the plan sponsor council of america estimates that they amount to about 30 billion annually but you can take a little heart because this number is spread over 60 million participants holding 3 trillion in assets erisa the employee retirement income securities act oversees 401 k plans but it has authority only over plan sponsors not their investment managers 6the bottom linefees and costs are common with all investment products at least to some degree and they can vary significantly among types of investments and brokerages your best bet is to inquire about them and pin down what and how much you ll be responsible for paying before you commit it can pay to shop around | |
what is managerial accounting | managerial accounting is the practice of identifying measuring analyzing interpreting and communicating financial information to managers for the pursuit of an organization s goals managerial accounting differs from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well informed business decisions investopedia jessica olah | |
how managerial accounting works | managerial accounting aims to improve the quality of information delivered to management about business operation metrics managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company cost accounting is a large subset of managerial accounting that specifically focuses on capturing a company s total costs of production by assessing the variable costs of each step of production as well as fixed costs it allows businesses to identify and reduce unnecessary spending and maximize profits the pillars of managerial accounting are planning decision making and controlling in addition forecasting and performance tracking are key components through this focus managerial accountants provide information that aims to help companies and departments in these key areas managerial accounting vs financial accountingthe key difference between managerial accounting and financial accounting relates to the intended users of the information managerial accounting information is aimed at helping managers within the organization make well informed business decisions while financial accounting is aimed at providing financial information to parties outside the organization financial accounting must conform to certain standards such as generally accepted accounting principles gaap all publicly held companies are required to complete their financial statements in accordance with gaap as a requisite for maintaining their publicly traded status most other companies in the u s conform to gaap in order to meet debt covenants often required by financial institutions offering lines of credit 1because managerial accounting is not for external users it can be modified to meet the needs of its intended users this may vary considerably by company or even by department within a company for example managers in the production department may want to see their financial information displayed as a percentage of units produced in the period the hr department manager may be interested in seeing a graph of salaries by employee over a period of time managerial accounting is able to meet the needs of both departments by offering information in whatever format is most beneficial to that specific need managerial accounting does not need to follow gaap standards because it is used for internal purposes and not for external reports types of managerial accountingproduct costing deals with determining the total costs involved in the production of a good or service costs may be broken down into subcategories such as variable fixed direct or indirect costs cost accounting is used to measure and identify those costs in addition to assigning overhead to each type of product created by the company managerial accountants calculate and allocate overhead charges to assess the full expense related to the production of a good the overhead expenses may be allocated based on the number of goods produced or other activity drivers related to production such as the square footage of the facility in conjunction with overhead costs managerial accountants use direct costs to properly value the cost of goods sold and inventory that may be in different stages of production marginal costing sometimes called cost volume profit analysis is the impact on the cost of a product by adding one additional unit into production it is useful for short term economic decisions the contribution margin of a specific product is its impact on the overall profit of the company margin analysis flows into break even analysis which involves calculating the contribution margin on the sales mix to determine the unit volume at which the business s gross sales equals total expenses break even point analysis is useful for determining price points for products and services managerial accountants perform cash flow analysis in order to determine the cash impact of business decisions most companies record their financial information on the accrual basis of accounting although accrual accounting provides a more accurate picture of a company s true financial position it also makes it harder to see the true cash impact of a single financial transaction a managerial accountant may implement working capital management strategies in order to optimize cash flow and ensure the company has enough liquid assets to cover short term obligations | |
when a managerial accountant performs cash flow analysis he will consider the cash inflow or outflow generated as a result of a specific business decision for example if a department manager is considering purchasing a company vehicle he may have the option to either buy the vehicle outright or get a loan a managerial accountant may run different scenarios by the department manager depicting the cash outlay required to purchase outright upfront versus the cash outlay over time with a loan at various interest rates | inventory turnover is a calculation of how many times a company has sold and replaced inventory in a given time period calculating inventory turnover can help businesses make better decisions on pricing manufacturing marketing and purchasing new inventory a managerial accountant may identify the carrying cost of inventory which is the amount of expense a company incurs to store unsold items if the company is carrying an excessive amount of inventory there could be efficiency improvements made to reduce storage costs and free up cash flow for other business purposes managerial accounting also involves reviewing the constraints within a production line or sales process managerial accountants help determine where bottlenecks occur and calculate the impact of these constraints on revenue profit and cash flow managers then can use this information to implement changes and improve efficiencies in the production or sales process financial leverage refers to a company s use of borrowed capital in order to acquire assets and increase its return on investments through balance sheet analysis managerial accountants can provide management with the tools they need to study the company s debt and equity mix in order to put leverage to its most optimal use performance measures such as return on equity debt to equity and return on invested capital help management identify key information about borrowed capital prior to relaying these statistics to outside sources it is important for management to review ratios and statistics regularly to be able to appropriately answer questions from its board of directors investors and creditors appropriately managing accounts receivable ar can have positive effects on a company s bottom line an accounts receivable aging report categorizes ar invoices by the length of time they have been outstanding for example an ar aging report may list all outstanding receivables less than 30 days 30 to 60 days 60 to 90 days and 90 days through a review of outstanding receivables managerial accountants can indicate to appropriate department managers if certain customers are becoming credit risks if a customer routinely pays late management may reconsider doing any future business on credit with that customer budgets are extensively used as a quantitative expression of the company s plan of operation managerial accountants utilize performance reports to note deviations of actual results from budgets the positive or negative deviations from a budget also referred to as budget to actual variances are analyzed in order to make appropriate changes going forward managerial accountants analyze and relay information related to capital expenditure decisions this includes the use of standard capital budgeting metrics such as net present value and internal rate of return to assist decision makers on whether to embark on capital intensive projects or purchases managerial accounting involves examining proposals deciding if the products or services are needed and finding the appropriate way to finance the purchase it also outlines payback periods so management is able to anticipate future economic benefits managerial accounting also involves reviewing the trendline for certain expenses and investigating unusual variances or deviations it is important to review this information regularly because expenses that vary considerably from what is typically expected are commonly questioned during external financial audits this field of accounting also utilizes previous period information to calculate and project future financial information this may include the use of historical pricing sales volumes geographical locations customer tendencies or financial information | |
is financial accounting the same as managerial accounting | while they often perform similar tasks financial accounting is the process of preparing and presenting official quarterly or annual financial information for external use such reports may include audited financial statements that help investors and analysts decide whether to buy or sell shares of the company managerial accounting in contrast uses pro forma measures that describe and measure the financial information tracked internally by corporate managers | |
do managerial accountants need to follow gaap | no managerial accountants are not legally obligated to follow gaap because the documents they produce are not regulated by gaap these documents focus on internal company metrics that focus on company performance 2 | |
what types of information does managerial accounting compute | managerial accounting is useful for companies to track and craft spending budgets reduce costs project sales figures and manage cash flows among other tasks the bottom linemanagerial accounting is important for drafting accurate and complete financial statements for internal use and crafting a company s long term strategy without good managerial accounting corporate leadership can struggle to make appropriate choices or misunderstand the firm s true financial picture because managerial accounting documents are not official they do not have to conform to gaap and can be used internally for a variety of purposes | |
what is the manufacturer s suggested retail price msrp | the manufacturer s suggested retail price msrp is the price that a product s manufacturer recommends it be sold for at the point of sale any retail product can have an msrp but the term is frequently used with automobiles an msrp is sometimes informally known as the sticker price the msrp is also referred to as the list price by some retailers other higher priced goods such as appliances and electronics may have an msrp as well the msrp is designed to keep prices at the same level from store to store however retailers are not required to use this price and consumers do not always pay the msrp when they make purchases items may be sold for a lower price so a company can reasonably move inventory off shelves especially in a sluggish economy investopedia sydney saporitounderstanding the manufacturer s suggested retail price msrp the manufacturer s suggested retail price is sometimes referred to as the recommended retail price rrp sticker price list price or suggested retail price of products this was developed to help standardize the price of goods throughout the various locations of a company s stores some retailers sell products at or just below the msrp they may set the price lower if the product is on sale or has been moved to clearance they may also reduce prices if they re trying to reduce their inventories or they re trying to attract more consumers conversely stores may set prices higher than the msrp if a product is in high demand and is likely to sell quickly the automotive industry frequently uses msrp to set the prices of new vehicles legally car dealerships must display the price on a sticker on the car s windshield or on a spec sheet buyers can use this price as a point to start negotiations before arriving at a fair price for the vehicle 1car dealers pay manufacturers an invoice price that is at or just below the msrp and knowing this price can help consumers better negotiate with a salesperson | |
how msrps are determined | because the msrp is set by a product s manufacturer it should remain constant across retailers the msrp is supposed to reflect all the costs incurred over the manufacturing and sales process as well as an average markup by retailers prices are set to allow all parties involved the manufacturer wholesaler and retailer to make a profit from the final sale retailers may frequently charge less than the msrp but the price charged depends on the wholesale cost whether purchased in bulk from the manufacturer or in smaller quantities through a distributor in many instances the msrp is manipulated to an unreasonably high figure retailers do this so they can deceptively advertise a product and list it at a much lower sale price indicating to consumers that they re getting a much better bargain problems with msrpusing suggested pricing methods often falls into direct conflict with competition theory the use of the msrp allows a manufacturer to set the price of a product often higher than usual with the potential for having an adverse effect on consumers and their wallets another suggested pricing method is resale price maintenance rpm where retailers are required to price products at or above a certain level this practice is frowned upon or illegal in many regions of the world 2msrp vs base price vs invoice pricean msrp is a recommended price by a manufacturer although it is intended to give a retailer a margin of profit there is no obligation for retailers to sell a car at the msrp retailers may set their official prices higher or lower than the msrp depending on inventory or market conditions the msrp is different from the invoice price the price that the dealer pays the manufacturer for each car this is typically lower than the msrp allowing the dealer to earn a profit on each sale since the dealer is required to pay the invoice price they will be losing money if they sell to the customer at a lower price the base price represents the cost of a car without any optional features many car models come with additional features such as cruise control internal cameras or optional safety features each of these features represents an additional charge which is added to the base price | |
how much below the msrp can i pay | although prices are negotiable the discount you can receive will depend on the dealer s inventory and market conditions for older vehicles you may be able to get a substantial discount from the msrp especially if the dealer is trying to free up inventory for the latest models for the most popular models you might end up paying even more than the msrp | |
how do you negotiate against the msrp | the best way to negotiate with a car dealer is to find out the invoice price of the car you are looking at this is the cost that the dealer pays to the manufacturer for each car you should also try to find out if there are any rebates subsidized lease deals or other breaks that can reduce the value of the car this allows you to bargain for a discount that still allows the dealer to make money | |
does the msrp include the destination fee | the destination fee or destination charge is a special charge for the cost of delivering a vehicle to a customer or dealer this fee is not included in the msrp of the vehicle and it is usually non negotiable even if the buyer takes delivery at the factory the bottom linethe manufacturer s suggested retail price also known as the window price or sticker price is the suggested price of buying a vehicle or other high priced item as the name implies the msrp is only a suggestion dealers are free to sell for higher or lower prices if they wish cautious buyers can negotiate for a better price especially if they do their research first | |
what is manufacturing | manufacturing is the creation of finished goods through the use of tools human labor machinery and chemical processing manufacturing allows businesses to sell finished products at a higher cost than the value of the raw materials used large scale manufacturing allows for goods to be mass produced using assembly line processes and advanced technologies as core assets efficient manufacturing techniques enable manufacturers to take advantage of economies of scale producing more units at a lower cost understanding manufacturingmanufacturing is an integral and huge part of the economy it involves processing and refining raw materials such as ore wood and foodstuffs into finished products such as metal goods furniture and processed foods converting these raw materials into something more useful adds value this added value increases the price of finished products making manufacturing a very profitable part of the business chain some people specialize in the skills required to manufacture goods while others provide the funds that businesses need to purchase the tools and materials as noted above efficiency in manufacturing can lead to higher productivity and cost savings manufacturers are able to accomplish this if they are able to manufacturing is often reported on by the conference board and is examined by economists types of manufacturing | |
how products are manufactured has changed over time people have historically manufactured goods using raw materials and in certain cases they still do hand manufacturing involves the use of basic tools through more traditional processes this form of manufacturing is often associated with decorative art textile production leatherwork carpentry and some metalwork | handmade goods are labor intensive and require a lot of time in some cases they can command a high price depending on the supplier and the type of goods for instance one of a kind handmade fashion items can be sold at a higher price compared to something mass produced there are cases though where people who make goods using these techniques can be exploited especially where labor laws are lax and demand for jobs is high larger businesses use mechanization to mass produce items on a much grander scale this process involves using machines which means that the manual manipulation of materials isn t necessarily required very little human capital is needed in the production process although highly skilled individuals may be required to operate and ensure that machinery is running properly this type of manufacturing is commonly referred to as 3d printing it involves the use of layers that are built up upon each other to create shapes and patterns in a three dimensional process using a special piece of equipment such as a 3d printer 2this method involves new forms of technology to improve the production process companies can add even more value to the raw materials they use to better serve their target markets newer technologies also help bring new products to market faster while increasing output 3this is common in the manufacturing industry companies will enter into partnerships and business relationships with other firms to outsource certain manufacturing processes for example an automotive company may hire a third party to make parts that it will use in its assembly lines to make cars 43d printing has been around since the 1980s 5types of manufacturing techniquesa traditional production technique is make to stock the manufacturing of a standard product based on forecast demand a company estimates how many units will be sold over a given period of time and plans in advance to manufacture that many goods goods are often held as inventory leading up to the release and broad distribution of the goods a company must have sufficient information in advance of a product release to understand how many goods it will need to manufacture this includes using historical data from similar goods understanding macroeconomic conditions and considering customer expectations for specific product features the advantage of mts is companies can often capitalize on the scales of the economy because a company sets a target level of manufacturing it can plan in advance how much raw materials labor or equipment it will need and can often build the most robust manufacturing plans on the downside not meeting expectations leaves a company with unusable products surplus inventory and committed yet underutilized fixed costs opposite of mts make to order manufacturing entails working directly with a customer to understand their need and desired product specifications manufacturing typically only starts after a signed contract or letter of intent in addition manufacturers may generate light prototypes but will often hold off on starting manufacturing until full product specifications have been delivered mto is most common in industries where specialized products are being made for a very specific purpose aerospace construction or technology to a lesser degree are examples of industries where manufacturers will often not manufacture a good until a government entity has agreed to purchase the aircraft or a tenant has signed a long term lease agreement on one hand mto manufacturers can often charge a premium for their products as the goods may not be easily acquired in a marketplace this is especially true for highly specified goods in addition mto manufacturers often only make a good if a sale is lined up therefore they often never carry inventory as a downside mto manufacturing often comes with uneven product demand that may result in slower periods of business the third type of manufacturing technique is a make to assemble process companies try to get a head start by starting production on component parts then as customers begin to place orders companies assemble previously manufactured components because the company had partially completed the manufacturing process the good can often be delivered faster to customers than under mto processes however there is still the risk of being stuck with an inventory of forecast demand that does not materialize in addition the company risks losing the benefits of mto and mts by trying to balance each type of process types of manufacturing processesfinally manufacturing can be divided into different production methods each method results in a uniquely different end product discrete manufacturing is aptly named because each product manufactured can be specifically identified the manufacturing process leverages a bill of materials to track what raw materials or components go into each specific unit in discrete manufacturing processes units are often made on a production line where assembly line workers follow a production schedule and record material usage there are two main types of process manufacturing first batch process manufacturing entails manufacturing a product based on a specific standard that uses a recipe or formula batch process manufacturing is often used in the food and beverage industry to make easily replicable goods of a specific quantity i e a specific vessel of teriyaki sauce alternatively continuous process manufacturing entails consistent ongoing operations that often manufacture a good around the clock for a long period then manufacturing is halted for a period of time before being resumed continuous process manufacturing is heavily used in the oil and gas industry when drilling for natural resources some goods may entail a combination of both discrete and manufacturing processes this is often the case for goods manufactured using batch processing before these standardized goods are converted to more specific individual packages the initial stage to generate a product uses process manufacturing while the unique specifics of the delivery method including any customer customizations are added in the second half an even more specific type of manufacturing process goods can be manufactured using job shop manufacturing this process is most often used when there is a batch to process yet the batch is different from a company s normal product for this specialized customized good a company must often perform unique set up and process steps including converting existing equipment to a more usable structure a potential subset of other manufacturing processes repetitive manufacturing often breaks long manufacturing processes into smaller parts each part often called a dedicated assembly line or manufacturing cell is intended to manufacture only a specific part of the unit then units are continuously transferred to the next subsequent dedicated assembly line any work in material resides within the manufacturing line as temporary storage areas are often not used as of march 2024 an estimated 12 95 million americans worked in the manufacturing sector 6history of modern manufacturinghandmade products dominated the market before the industrial revolution this period ushered in the industrial process where raw materials were made into finished products in high volumes the development of steam engines and newer technologies allowed companies to use machines in the manufacturing process this reduced the need for human capital while increasing the sheer volume of goods that could be produced mass production and assembly line manufacturing allowed companies to create parts that could be used interchangeably and allowed finished products to be easily made by reducing the need for part customization ford popularized mass production techniques in the early 20th century 78computers and precision electronic equipment have since allowed companies to pioneer high tech manufacturing methods companies that use these methods typically carry a higher price but also require more specialized labor and higher capital investment the skills required to operate machines and develop manufacturing processes have drastically changed over time many low skill manufacturing jobs have shifted from developed to developing countries because labor in developing countries tends to be less expensive as such high end products that require precision and skilled manufacturing are typically produced in developed economies measuring manufacturing in the economyeconomists and government statisticians use various ratios when evaluating the role manufacturing plays in the economy for example manufacturing value added mva is an indicator that compares an economy s manufacturing output to its overall size this metric is expressed as a percentage of gross domestic product gdp the institute for supply management ism surveys manufacturing firms to estimate employment inventories and new orders the ism publishes the ism manufacturing report each month to summarize its findings 9financial analysts and researchers eagerly await this report as they see it as a potential early indicator of the economy s health and a sign of where the stock market may be going manufacturing has always been a key contributor to the united states economy the industry s contribution to gdp was a little more than 2 85 trillion for the third quarter of 2023 about 10 3 of output 10steps of manufacturingthese seven steps following in sequential order encompass not only the physical manufacturing of a good but also the stages before and after it is made before any tangible good is made manufacturing begins with concept development and the growth of the product vision this product vision defines the product who the target audience is what the need for the good is and what competitors exist many of these types of questions may define the good and help refine what characteristics will go into the actual product though many believe manufacturing only entails the physical aspect of making a good the manufacturing process still incorporates researching the potential product to explore ways to make it better this includes understanding what raw materials can be used what equipment is needed what conditions the good must be made under and how the good will differentiate from competing goods with research considerations in hand it s time to design the product this should always be done in consideration of what the customer will need and use this also should incorporate any manufacturing limitations discovered during the research stage this also includes understanding the costs that will go into this product design so you can forecast your product profitability during this stage the manufacturing process is most deeply rooted in research and development with the design stage now complete it s time to make final decisions on the product this includes choosing what raw materials to use or how to define the manufacturing process these decisions are implemented by creating an initial prototype this means drafting a smaller scale test product that mirrors what the true manufacturing product will be once the prototype is complete it s time to test it this includes analyzing actual resources that went into the good to better understand how much the actual product will cost and its profit margin this also includes finding weaknesses or inefficiencies in the manufacturing process this is often the final stage before mass production begins however changes can be made in the future and this is the time for significant changes without major implications on the product or manufacturing process enough time testing and research has been done it s now time to make the good the company acquires the machinery and equipment necessary to make full scale processes to manufacture the goods the company also invests in the full amount of labor storage insurance and other capacity costs related to a full manufacturing line companies may choose to continually improve their processes instead of returning back to prototype stages they often review and implement smaller changes during the actual manufacturing step in order to continually improve the company must constantly evaluate how the process is going and whether expectations are being met it must analyze how much the goods cost to make and compare this against sales prices the company must also evaluate product demand and scale up or down based on consumer preference manufacturing vs productionthough sometimes referred to as the same thing there are subtle differences between manufacturing and production processes in manufacturing a company must often solicit raw materials from third party or external vendors to be processed into finished goods for production the company often has ownership of those raw materials the definition of each encompasses different processes production is broader and encompasses manufacturing as production is simply taking input and yielding an output manufacturing a more specific type of production is taking a raw material and transforming it into a tangible finished good the manufacturing process ends with a tangible good alternatively production can end with a tangible or intangible good consider the theatrical example that is aptly named a show or theater production literally ends with public entertainment to be consumed by the general public because the manufacturing process relies heavily on raw materials the manufacturing process often relies on heavy machinery or equipment it also relies on set up time and labor to establish the process during production machinery may not be required depending on the output often requires procurement of a raw materialoutput is physical tangible goodsmachinery and labor are essential to the process | |
is a more specific type of process | often entails previous ownership of the inputs for the processoutput may be tangible or intangible goodsmachinery may or may not be required | |
is a less specific type of process | example of manufacturingknown for its efficient manufacturing process toyota motor corporation is a historically well known and successful manufacturer the company uses a lean manufacturing system to produce customer vehicle orders in the quickest and most efficient way possible 11the company s manufacturing process is based on two core concepts under jidoka engineers design and build systems by hand to intricately understand the manufacturing process then they carefully simplify operations and transition to leveraging machines the goal is for the manufacturing process to leverage repetitive processes that make the manufacturing process more simple and less expensive under just in time toyota strives to eliminate waste inconsistencies and unreasonable requirements on the production line 11 | |
what is lean manufacturing | lean manufacturing is a form of production used by manufacturers that want to reduce production system time to increase efficiency implementing a lean manufacturing approach means that a company wants to boost productivity while eliminating as much waste as possible | |
how do you calculate manufacturing overhead | manufacturing overhead is the total indirect cost associated with manufacturing this includes expenses like employee wages asset depreciation rent leases and utilities costs like materials are not included to calculate your manufacturing overhead take your monthly overhead expenses and divide that total by your monthly sales you can multiply the result by 100 to get the total percent of monthly overhead | |
what is the purpose of manufacturing | manufacturing is the process of converting a raw material into a finished tangible product manufacturing entails making a process efficient as it converts specific resources into a different resource often to be sold to a customer | |
what are the steps of manufacturing | the manufacturing process often begins with an information gathering stage where engineers and management learn about a process prototypes are often created and evaluated then specific designs are implemented and commercial production begins as goods are made they are inspected shipped and delivered to the next user of the finished good the bottom linehumans have traditionally turned raw materials into finished goods for as long as we can remember this process which converts raw materials into finished goods is called manufacturing businesses can still use human labor to convert these materials by hand but they can now purchase machinery to mass produce goods on a much larger scale technology has helped the way we manufacture our goods and continues to evolve the advent of 3d printing is making it easier for individuals to produce finished goods themselves without ever leaving their own homes | |
what is manufacturing resource planning | manufacturing resource planning mrp ii is an integrated information system used by businesses manufacturing resource planning mrp ii evolved from early materials requirement planning mrp systems by including the integration of additional data such as employee and financial needs the system is designed to centralize integrate and process information for effective decision making in scheduling design engineering inventory management and cost control in manufacturing both mrp and mrp ii are seen as predecessors to enterprise resource planning erp which is a process whereby a company often a manufacturer manages and integrates the important parts of its business an erp management information system integrates areas such as planning purchasing inventory sales marketing finance and human resources erp is most frequently used in the context of software with many large applications having been developed to help companies implement erp understanding manufacturing resource planning mrp ii mrp ii is a computer based system that can create detailed production schedules using real time data to coordinate the arrival of component materials with machine and labor availability mrp ii is used widely by itself but it s also used as a module of more extensive enterprise resource planning erp systems mrp ii is an extension of the original materials requirements planning mrp i system materials requirements planning mrp is one of the first software based integrated information systems designed to improve productivity for businesses a materials requirements planning information system is a sales forecast based system used to schedule raw material deliveries and quantities given assumptions of machine and labor units required to fulfill a sales forecast by the 1980s manufacturers realized they needed software that could also tie into their accounting systems and forecast inventory requirements mrp ii was provided as a solution which included this functionality in addition to all the capabilities offered by mrp i the following are a small sampling of some popular mrp ii software providers as of early 2020 for all intents and purposes mrp ii has effectively replaced mrp i software most mrp ii systems deliver all of the functionality of an mrp system but in addition to offering master production scheduling bill of materials bom and inventory tracking mrp ii provides functionality within logistics marketing and general finance for example mrp ii is able to account for variables that mrp is not including machine and personnel capacity providing a more realistic and holistic representation of a company s operating capabilities many mrp ii solutions also offer simulation features that allow operators to enter variables and see the downstream effect because of its ability to provide feedback on a given operation mrp ii is sometimes referred to as a closed loop system mrp i included the following three major functionalities mrp ii includes those three plus the following mrp ii systems are still in wide use by manufacturing companies today and can either be found as stand alone solutions or as part of an enterprise resource planning erp system enterprise resources planning erp software systems are regarded as the successors of mrp ii software erp suites include applications well outside the scope of manufacturing these can include everything from human resources and customer relationship management to enterprise asset management | |
what is a maquiladora | the term maquiladora refers to a factory or manufacturing plant in mexico these corporations are approved for operation by the country s secretariat of commerce and industrial development under a decree established in 1989 and are owned by foreign entities maquiladoras were first developed in the 1960s as a way to encourage foreign investment and address unemployment as such they usually operate near the u s mexico border companies that operate under the maquiladora model are able to take advantage of numerous benefits the products manufactured by these factories are normally exported beyond the mexican border understanding a maquiladoraas noted above a maquiladora is a factory located in mexico but owned and run by a foreign entity 1 the first plants of this kind were established in 1961 to help stimulate the domestic market and attract foreign investment 2 many of these companies are located along the united states mexico border the structure of a maquiladora system is set up so that the parent company is located in the united states while the manufacturing operation or factory is located in mexico the mexican secretary of the economy determines whether a plant is officially considered a maquiladora this official designation is important because it qualifies the plant for unlimited foreign capital investment and duty free imports duty free imports apply to the raw and semi finished materials shipped after manufacture or assembly as well as to the machinery used in the manufacturing process the factories that participate in the maquila program which are also known as twin plants manufacture a variety of goods in fact there are thousands of maquiladoras that produce everything from clothing and consumer electronics to cars drones medical devices and aircraft components export may be direct or indirect whether that s through the sale of products or shipping through another factory or export company 2these factories have certain tax advantages that make them attractive to businesses companies can capitalize on a cheaper labor force in mexico and also receive the benefits of doing business in the u s the presence of maquiladoras contributed significantly to the industrialization of the mexican american border 23although maquilas can open anywhere in mexico they are not permitted to operate in highly congested parts of the country including guadalajara mexico city and the monterrey urban areas 3benefits of a maquiladoraas noted above there are a number of benefits that come with establishing a maquiladora we ve listed some of the most common ones below the first and obvious advantage is the economic benefit that comes with establishing maquiladoras for mexico as well as border cities and states where they may be located once these factories are set up they provide a source of labor for local residents and can help boost the local economy 4 maquilas effectively help industrialize border cities in mexico that may otherwise be characterized by high unemployment the economies of border cities and states also benefit because of the administrative centers that are set up on the u s side as well as the transport and customs services that result from import export operations 5companies can take advantage of lower costs and tax benefits by setting up maquilas labor costs are fairly low in mexico which makes production cheaper that s because there s a larger labor pool that may be looking for work 3maquilas also help companies cut down the costs associated with tariffs and duties for instance companies are exempt from the 16 value added tax vat on raw materials used for production they are also exempt from paying duties when they export goods marked made in mexico to canada and the u s this is because of the trade relationship that exists between the u s and mexico under the u s mexico canada agreement usmca 13border towns are commonly known for high unemployment rates where people are actively looking for work setting up a maquila in a mexican town gives companies access to a greater and cheaper labor pool although many of the people available for work may be unskilled it gives workers a chance to transition to the skilled category 6aside from a few exceptions maquilas can be set up anywhere in mexico but from a logistical standpoint it makes more sense to establish a presence along the border of mexico and the united states 3 many maquiladoras are also strategically located close to airports roads railroads and shipping ports proximity helps lower costs including transport expenses and improves supply chain management for instance a company may decide to locate the parent company in san diego and the plant in tijuana rather than setting up a shop in detroit and matamoros maquiladoras and labor exploitationalthough they may provide numerous economic benefits maquilas have come under fire for the way they may exploit the labor force although they provide competitive wages for those who work in these facilities the pay is still relatively low in fact the pay can be at or below the poverty line 4 wages are normally based on daily rather than hourly rates and workers are often contracted for 48 hour shifts each week 2this is compounded by american border and migrant policies as well as an increased military presence at the border migrants who want to enter the united states from central america often seek work in these facilities this demand for employment from non mexicans allows corporate management to take advantage of these workers by paying them drastically lower wages 7the conditions of employment may also be a big issue for plant workers for instance workers may experience health risks and unsafe working conditions housing conditions may be unsound or inadequate especially for migrant workers 47there is often a lack of representation for workers labor unions may exist on paper giving workers false hope that their needs and demands are met and employment contracts are often written in favor of plant owners rather than workers giving virtually no protection to workers rights 4history of maquiladorasthe creation of the maquiladora system was spurred by the end of the bracero program in 1964 the bracero program allowed mexican agricultural workers to be employed in the u s seasonally in order to address the high rates of unemployment that the ending of the bracero program created the mexican government created the maquiladora program this provided u s corporations with a vast supply of cheap labor 3the ratification of the north american free trade agreement nafta in 1994 ended tariffs that impacted the maquiladoras system mexican import duties were waived and these factories were able to take advantage of preferential duty rates for certain products this led to an explosion in the number of maquiladoras the second half of the 1990s saw the number of maquiladoras nearly doubled each year not to mention a boost in economic growth to the tune of 345 billion in 2014 3improvements were made to the maquiladora program through the immex program which was formerly known as the maquiladora program 1 this new program increased the benefits leading to a further reduction in costs increased operational efficiencies and the modernization of the establishment process under the program companies can register as one of the following entities the immex program has led to significant growth in the industry reports indicate that export increased between 2005 and 2017 from 210 billion to 419 billion 3maquiladoras faqsmaquiladoras have a significant impact on mexico s economy they employ millions of workers each year many of whom are unskilled by giving them access to employment these plants help the individuals make the leap from unskilled to skilled workers these facilities also make up a good portion of the goods exported to the united states while there may be cases of unsafe working conditions or unscrupulous maquila owners who take advantage of their employees by paying them low wages they don t have the same reputation as sweatshops sweatshops don t provide their workers with a living wage and the overall conditions are unsafe to the point where they may even be dangerous many of these establishments employ children and women don t provide any job security or guarantee of wages although there s no limitation to where maquiladoras can be located they are generally found along the border of the united states and mexico border cities and states tend to benefit the most from maquiladoras those in mexico benefit from the creation of plants and facilities and a boost in labor and employment american companies can benefit from cheaper labor costs a reduction in production costs import export tariffs and duties | |
what is margin | in finance the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange an investor can create credit risk if they borrow cash from the broker to buy financial instruments borrow financial instruments to sell them short or enter into a derivative contract buying on margin occurs when an investor buys an asset by borrowing the balance from a broker buying on margin refers to the initial payment made to the broker for the asset the investor uses the marginable securities in their brokerage account as collateral in a general business context the margin is the difference between a product or service s selling price and the cost of production or the ratio of profit to revenue margin can also refer to the portion of the interest rate on an adjustable rate mortgage arm added to the adjustment index rate investopedia theresa chiechiunderstanding margin and marging tradingmargin refers to the amount of equity an investor has in their brokerage account to buy on margin means to use the money borrowed from a broker to purchase securities you must have a margin account to do so rather than a standard brokerage account a margin account is a brokerage account in which the broker lends the investor money to buy more securities than what they could otherwise buy with the balance in their account using margin to purchase securities is effectively like using the current cash or securities already in your account as collateral for a loan the collateralized loan comes with a periodic interest rate that must be paid the investor is using borrowed money and therefore both the losses and gains will be magnified as a result margin investing can be advantageous in cases where the investor anticipates earning a higher rate of return on the investment than what they are paying in interest on the loan for example if you have an initial margin requirement of 60 for your margin account and you want to purchase 10 000 worth of securities then your margin would be 6 000 and you could borrow the rest from the broker the securities and exchange commission has stated that margin accounts can be very risky and they are not appropriate for everyone 1 | |
how the process works | buying on margin is borrowing money from a broker in order to purchase stock you can think of it as a loan from your brokerage margin trading allows you to buy more stock than you d be able to normally to trade on margin you need a margin account this is different from a regular cash account in which you trade using the money in the account with a margin account you deposit cash which serves as the collateral for a loan to purchase securities you can use this to borrow up to 50 of the purchase price of an investment so if you deposit 5 000 you could buy up to 10 000 in securities your broker will charge interest on this loan you re using which you ll need to repay if you sell your securities the proceeds will pay off your loan first and you can keep what s left the financial industry regulatory authority finra and the securities and exchange commission sec regulate margin trading with strict rules as to how much you must deposit how much you can borrow and how much you must keep in your account 2components of margin tradingby law your broker is required to obtain your consent to open a margin account the margin account may be part of your standard account opening agreement or may be a completely separate agreement an initial investment of at least 2 000 is required for a margin account though some brokerages require more this deposit is known as the minimum margin 2once the account is opened and operational you can borrow up to 50 of the purchase price of a stock this portion of the purchase price that you deposit is known as the initial margin it s essential to know that you don t have to margin all the way up to 50 you can borrow less say 10 or 25 be aware that some brokerages require you to deposit more than 50 of the purchase price 2you can keep your loan as long as you want provided you fulfill your obligations such as paying interest on time on the borrowed funds when you sell the stock in a margin account the proceeds go to your broker against the repayment of the loan until it is fully paid there is also a restriction called the maintenance margin which is the minimum account balance you must maintain before your broker will force you to deposit more funds or sell stock to pay down your loan when this happens it s known as a margin call a margin call is effectively a demand from your brokerage for you to add money to your account or close out positions to bring your account back to the required level if you do not meet the margin call your brokerage firm can close out any open positions in order to bring the account back up to the minimum value your brokerage firm can do this without your approval and can choose which position s to liquidate in addition your brokerage firm can charge you a commission for the transaction s you are responsible for any losses sustained during this process and your brokerage firm may liquidate enough shares or contracts to exceed the initial margin requirement special considerationsbecause using margin is a form of borrowing money it comes with costs and marginable securities in the account are collateral the primary cost is the interest you have to pay on your loan the interest charges are applied to your account unless you decide to make payments over time your debt level increases as interest charges accrue against you as debt increases the interest charges increase and so on therefore buying on margin is mainly used for short term investments the longer you hold an investment the greater the return that is needed to break even if you hold an investment on margin for a long period of time the odds that you will make a profit are stacked against you not all stocks etfs or other investment securities qualify to be bought on margin also not all exchanges or brokers allow margin on the investment products they handle cryptocurrency is an example of an investment where margin trading might be limited the federal reserve board regulates which stocks are marginable 3 as a rule of thumb brokers will not allow customers to purchase penny stocks or initial public offerings ipos on margin because of the day to day risks involved with these types of stocks individual brokerages can also decide not to margin certain stocks so check with them to see what restrictions exist on your margin account significant margin calls may have a domino effect on other investors should a single major investor face a significant margin call their forced liquidation may decrease the value of the securities held as collateral by other margin traders putting these investors at risk of a margin call of their own advantages and disadvantages of margin tradingmay result in greater gains due to leverageincreases purchasing poweroften has more flexibility than other types of loansmay be self fulfilling opportunity cycle where increases in collateral value further increase leverage opportunitiesmay result in greater losses due to leverageincurs account fees and interest chargesmay result in margin calls which require additional equity investmentsmay result in forced liquidations which result in the sale of securities often at a loss the primary reason investors margin trade is to capitalize on leverage margin trading centers increasing purchasing power by increasing the capital available to purchase securities instead of buying securities with money you own investors can buy more securities using their capital as collateral for loans greater than their capital on hand for this reason margin trading can amplify profits again with more securities in hand increases in value have greater consequential outcomes because you re more heavily invested using debt on the same note if the value of the securities posted as collateral also increase you may be able to further utilize leverage as your collateral basis has increased margin trading is also usually more flexible than other types of loans there may not be a fixed repayment schedule and your broker s maintenance margin requirements may be simple or automated for most margin accounts the loan is open until the securities are sold in which final payments are often due to the borrower if investors primarily enter into margin trading to amplify gains they must be aware that margin trading also amplifies losses should the value of securities bought on margin rapidly decline in value an investor may owe not only their initial equity investment but also additional capital to lenders margin trading also comes at a cost brokers often charge interest expense and these fees are assessed regardless of how well or poorly your margin account is performing because there are margin and equity requirements investors may face a margin call this is a requirement from the broker to deposit additional funds into their margin account due to the decrease in the equity value of securities being held investors must be mindful of needing this additional capital on hand to satisfy the margin call | 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should investors not be able to contribute additional equity or if the value of an account drops so fast it breaches certain margin requirements a forced liquidation may occur this forced liquidation will sell the securities purchased on margin and may result in losses to satisfy the broker s requirement | example of marginlet s say that you deposit 10 000 in your margin account because you put up 50 of the purchase price this means you have 20 000 worth of buying power then if you buy 5 000 worth of stock you still have 15 000 in buying power remaining you have enough cash to cover this transaction and haven t tapped into your margin you start borrowing the money only when you buy securities worth more than 10 000 note that the buying power of a margin account changes daily depending on the price movement of the marginable securities in the account other uses of marginin business accounting margin refers to the difference between revenue and expenses where businesses typically track their gross profit margins operating margins and net profit margins the gross profit margin measures the relationship between a company s revenues and the cost of goods sold cogs operating profit margin takes into account cogs and operating expenses and compares them with revenue and net profit margin takes all these expenses taxes and interest into account adjustable rate mortgages arm offer a fixed interest rate for an introductory period of time and then the rate adjusts to determine the new rate the bank adds a margin to an established index in most cases the margin stays the same throughout the life of the loan but the index rate changes to understand this more clearly imagine a mortgage with an adjustable rate that has a margin of 4 and is indexed to the treasury index if the treasury index is 6 the interest rate on the mortgage is the 6 index rate plus the 4 margin or 10 45 | |
what does it mean to trade on margin | trading on margin means borrowing money from a brokerage firm in order to carry out trades when trading on margin investors first deposit cash that serves as collateral for the loan and then pay ongoing interest payments on the money they borrow this loan increases the buying power of investors allowing them to buy a larger quantity of securities the securities purchased automatically serve as collateral for the margin loan | |
what is a margin call | a margin call is a scenario in which a broker who had previously extended a margin loan to an investor sends a notice to that investor asking them to increase the amount of collateral in their margin account when faced with a margin call investors often need to deposit additional cash into their account sometimes by selling other securities if the investor refuses to do so the broker has the right to forcefully sell the investor s positions in order to raise the necessary funds many investors fear margin calls because they can force investors to sell positions at unfavorable prices | |
what are some other meanings of the term margin | outside of margin lending the term margin also has other uses in finance for example it is used as a catch all term to refer to various profit margins such as the gross profit margin pre tax profit margin and net profit margin the term is also sometimes used to refer to interest rates or risk premiums | |
when investing on margin the investor is at risk of losing more money than what they deposited into the margin account this may occur when the value of the securities held declines requiring the investor to either provide additional funds or incur a forced sale of the securities | the bottom lineinvestors looking to amplify gain and loss potential on trades may consider trading on margin margin trading is the practice of borrowing money depositing cash to serve as collateral and entering into trades using borrowed funds through the use of debt and leverage margin may result in higher profits than what could have been invested should the investor have only used their personal money on the other hand should security values decline an investor may be faced owing more money than what they offered as collateral | |
what is a margin account | the term margin account refers to a brokerage account in which a trader s broker dealer lends them cash to purchase stocks or other financial products the margin account and the securities held within it are used as collateral for the loan it comes with a periodic interest rate that the investor must pay to keep it active borrowing money from a broker dealer through a margin account allows investors to increase their purchasing and trading power investing with margin accounts means using leverage which increases the chance of magnifying an investor s profits and losses | |
how a margin account works | if an investor purchases securities with margin funds and those securities appreciate in value beyond the interest rate charged on the funds the investor will earn a better total return than if they had only purchased securities with their own cash this is the advantage of using margin funds on the downside the brokerage firm charges interest on the margin funds for as long as the loan is outstanding increasing the investor s cost of buying the securities if the securities decline in value the investor will be underwater and will have to pay interest to the broker on top of that if a margin account s equity drops below the maintenance margin level the brokerage firm will make a margin call to the investor within a specified number of days typically within three days although in some situations it may be less the investor must deposit more cash or sell some stock to offset all or a portion of the difference between the security s price and the maintenance margin a brokerage firm has the right to ask a customer to increase the amount of capital they have in a margin account sell the investor s securities if the broker feels their own funds are at risk or sue the investor if they do not fulfill a margin call or if they are carrying a negative balance in their account the investor has the potential to lose more money than the funds deposited in the account for these reasons a margin account is only suitable for a sophisticated investor with a thorough understanding of the additional investment risks and requirements of trading with margin a margin account may not be used for buying stocks on margin in an individual retirement account a trust or other fiduciary accounts in addition a margin account cannot be used with stock trading accounts of less than 2 000 1margin on other financial productsfinancial products other than stocks can be purchased on margin futures traders also frequently use margin for example with other financial products the initial margin and maintenance margin will vary exchanges or other regulatory bodies set the minimum margin requirements although certain brokers may increase these margin requirements that means the margin may vary by broker the initial margin required for futures is typically much lower than for stocks while stock investors must put up 50 of the value of a trade futures traders may only be required to put up between 3 to 12 21margin accounts are required for most options trading strategies as well example of a margin accountassume an investor with 2 500 in a margin account wants to buy a stock for 5 per share the customer could use additional margin funds of up to 2 500 supplied by the broker to purchase 5 000 worth of stock or 1 000 shares if the stock appreciates to 10 per share the investor can sell the shares for 10 000 if they do so after repaying the broker s 2 500 and not counting the original 2 500 invested the trader profits 5 000 had they not borrowed funds they would have only made 2 500 when their stock doubled by taking double the position the potential profit was doubled had the stock dropped to 2 50 though all the customer s money would be gone since 1 000 shares 2 50 is 2 500 the broker would notify the client that the position is being closed unless the customer puts more capital in the account the customer has lost their funds and can no longer maintain the position this is a margin call the above scenarios assume there are no fees however interest is paid on the borrowed funds if the trade took one year and the interest rate is 10 the client would have paid 10 2 500 or 250 in interest their actual profit is 5 000 less 250 and commissions even if the client lost money on the trade their loss is increased by the 250 plus commissions can you lose all of your money on margin you can lose more than all of your money on margin for example if you made a trade by borrowing 50 on margin half of the trade is funded with borrowed capital now say the stock you invested in lost 50 you would have a loss of 100 in your portfolio add to this any commissions and fees and you ve lost more than the money you put in you ve lost money you may not have can stocks go to zero yes any stock can go to zero while it is highly unlikely that a stock will go to zero it is possible particularly if a company goes bankrupt if you owned the stock and it fell to zero you would lose the entire amount you invested in the stock | |
what are the disadvantages of margin | there are quite a few disadvantages when it comes to margin trading the first and foremost is the magnified losses when you trade on margin you are borrowing money to amplify your returns if the trade loses you are responsible for the amount of money you borrowed covering your losses and commissions and fees additional disadvantages include interest charges that eat away at your returns margin calls that require you to post additional capital and forced broker liquidations that may result in losses the bottom linemargin trading is extremely risky due to the magnified losses that can occur though margin trading is regulated with a significant amount of rules in place it should still only be done by experienced traders who understand the ins and outs requirements regulatory aspects and the potential for high losses | |
what is a margin call | a margin call occurs when the percentage of an investor s equity in a margin account falls below the broker s required amount an investor s margin account contains securities bought with a combination of the investor s own money and money that was borrowed from the investor s broker a margin call refers specifically to a broker s demand that an investor deposit additional money or securities into the account so the value of the investor s equity and the account value rise to a minimum value indicated by the maintenance requirement a margin call is usually an indicator that the securities held in the margin account have decreased in value the investor must choose to either deposit additional funds or marginable securities in the account or sell some of the assets held in their account when a margin call occurs investopedia michela buttignol | |
what triggers a margin call | an investor is buying on margin when they pay to buy and sell securities using a combination of their own funds and money borrowed from a broker an investor s equity in the investment is equal to the market value of the securities minus the borrowed amount 1a margin call is triggered when the investor s equity as a percentage of the total market value of securities falls below a certain required level called the maintenance margin the new york stock exchange nyse and the financial industry regulatory authority finra the regulatory body for the majority of securities firms operating in the united states both require that investors maintain an equity level of 25 of the total value of their securities when buying on margin 23 some brokerage firms require a higher maintenance requirement as much as 30 to 40 margin calls can occur at any time due to a drop in account value but they re more likely to happen during periods of market volatility example of a margin callhere s an example of how a change in the value of a margin account decreases an investor s equity to a level where a broker must issue a margin call | |
how to cover a margin call | the investor typically has two to five days to act if their account value drops to a level where a margin call is issued by their broker these are the options for doing so using the margin call example above a broker may close out any open positions to replenish the account to the minimum required value if an investor isn t able to meet the margin call they may be able to do this without the investor s approval the broker may also charge an investor a commission on these transaction s the investor is held responsible for any losses sustained during this process the amount of a margin loan depends on a security s purchase price and is therefore a fixed amount but the dollar amount determined by the maintenance margin requirement is based on the current account value not on the initial purchase price that s why it fluctuates | |
how to avoid a margin call | investors should carefully consider whether they need a margin account before opening one most long term investors don t have to buy on margin to earn solid returns and these loans aren t free brokerages charge interest on them but there are a few things you can do to manage your account avoid a margin call or be ready for it if you want to invest with margin a good way for an investor to avoid margin calls is to use protective stop orders to limit losses in any equity positions in addition to keeping adequate cash and securities in their account | |
is it risky to trade stocks on margin | it s certainly riskier to trade stocks with margin than without it because trading stocks on margin is trading with borrowed money leveraged trades are riskier than unleveraged ones the biggest risk with margin trading is that investors can lose more than they ve invested | |
how can a margin call be met | a margin call is issued by the broker when there s a margin deficiency in the trader s margin account the trader has to either deposit cash or marginable securities in the margin account or liquidate some securities in the account to rectify a margin deficiency can a trader delay meeting a margin call a margin call must be satisfied immediately and without any delay some brokers may give you two to five days to meet the margin call but the fine print of a standard margin account agreement will generally state that the broker has the right to liquidate any or all securities or other assets held in the margin account at its discretion and without prior notice 4it s best to meet a margin call and rectify the margin deficiency promptly to prevent such forced liquidation | |
how can i manage the risks associated with trading on margin | measures to manage the risks associated with trading on margin include | |
does the total level of margin debt have an impact on market volatility | a high level of margin debt can exacerbate market volatility clients are forced to sell stocks to meet margin calls during steep market declines this can lead to a vicious circle where intense selling pressure drives stock prices lower triggering more margin calls and more selling the bottom linebuying on margin isn t for everyone not all investors will have available funds to reach initial and maintenance margins on margin trading accounts it can give investors more bang for their buck but there are downsides it s only an advantage if your securities increase enough to repay the margin loan and the interest on it another headache can be the margin calls for funds that investors must meet a margin call may require you to deposit additional cash and securities you may even have to sell existing holdings or you may have to close out the margined position at a loss margin calls can occur when markets are volatile so you may have to sell securities to meet the call at lower than expected prices disclosure this article is not intended to provide investment advice investing in securities entails varying degrees of risk and can result in partial or total loss of principal the trading strategies discussed in this article are complex and should not be undertaken by novice investors readers seeking to engage in such trading strategies should seek out extensive education on the topic | |
what is margin debt | margin debt is the debt a brokerage customer takes on by trading on margin | |
when purchasing securities through a broker investors have the option of using a cash account and covering the entire cost of the investment themselves or using a margin account meaning they borrow part of the initial capital from their broker the portion that investors borrow is known as margin debt while the portion they fund themselves is the margin or equity | using margin debt has both risks and potential benefits | |
how margin debt works | as an example of using margin debt to buy securities suppose an investor who we ll call sheila wants to buy 1 000 shares of johnson johnson jnj for 100 per share she doesn t want to put down the entire 100 000 at this time but the federal reserve board s regulation t limits her broker to lending her 50 of the initial investment also called the initial margin 1she deposits 50 000 in initial margin while taking on 50 000 in margin debt the 1 000 shares of johnson johnson that she then purchases act as collateral for this loan not all brokers would allow sheila to borrow that much brokerages often have their own rules for buying on margin which can be stricter than those imposed by regulators excessive buying on margin is considered one of the causes of the famous u s stock market crash in 1929 at that time margin rules were much looser often allowing investors to borrow 90 of the money to buy stocks and putting down only 10 in cash we know today how that turned out 2advantages and disadvantages of margin debtbuying on margin has both risks and potential benefits for investors generally speaking it isn t for beginners or for those who can t afford to lose money two scenarios illustrate the potential risks and rewards of taking on margin debt in the first johnson johnson s price drops to 60 sheila s margin debt remains at 50 000 but her equity has fallen to 10 000 which is the value of the stock 1 000 60 60 000 minus her margin debt of 50 000 the financial industry regulation authority finra and the exchanges have a maintenance margin requirement of 25 meaning that customers equity must remain above that ratio in margin accounts 1falling below the maintenance margin requirement triggers a margin call unless sheila deposits another 5 000 in cash to bring her margin up to 25 of the securities 60 000 value or 15 000 the broker is entitled to sell her stock without notifying her until her account complies with the rules this is known as a margin call here again brokerages may have stricter rules than the law requires such as setting their maintenance margin requirement at 30 or 40 for example 3allows investor to buy stock with borrowed moneyinvesting on margin can magnify any gains because of leverage resulting in greater profitbuying on margin means taking on debt that must be repaidif stock loses value investor may face a margin call and have to come up with cash quicklya second scenario demonstrates the potential rewards of trading on margin say that in the example above johnson johnson s share price rises to 150 sheila s 1 000 shares are now worth 150 000 with 50 000 of that being margin debt and 100 000 equity if sheila sells commission and fee free she receives 100 000 after repaying her broker her return on investment roi is equal to 100 a 50 000 return on her 50 000 cash investment now let s assume that sheila had purchased the stock simply using a cash account meaning that she funded the entire initial investment of 100 000 so she does not need to repay her broker after selling her roi in this scenario is equal to 50 a 50 000 profit on her cash investment of 100 000 in both cases her profit was 50 000 but in the margin account scenario she made that money using half as much of her own capital as in the cash account scenario the capital she has freed up by trading on margin can now go toward other investments if she wishes these scenarios illustrate the basic tradeoff involved in taking on leverage the potential gains are greater but so are the risks | |
how long do you have to answer a margin call | brokerage firms typically give customers two to five days to come up with the cash after a margin call according to finra 4 | |
how much money do you need to trade on margin | finra rules require that investors deposit with your brokerage firm a minimum of 2 000 or 100 of the purchase price of the margin securities whichever is less according to the u s securities and exchange commission sec 5 however if the brokerage designates you as a pattern day trader then the cash requirement rises to a minimum of 25 000 6 | |
what is a pattern day trader | according to finra rules a pattern day trader is any customer who executes four or more day trades within five business days provided that the number of day trades represents more than 6 of the customer s total trades in the margin account for that same five business day period brokerage firms can also use a broader definition classifying more customers as pattern day traders 6the bottom linebuying on margin can allow investors to reap greater gains on a percentage basis if the stock they buy goes up in value if it goes down however they may have to scrape up additional cash quickly before the broker sells off their stock while buying on margin can work for savvy and lucky investors it is risky and shouldn t be entered into by anyone unless they have sufficient cash on hand and can afford to lose it | |
what is margin loan availability | margin loan availability describes the amount in a margin account that is currently available for purchasing securities on margin or the amount that is available for withdrawal a margin account makes loans available to the customer of a brokerage firm using the customer s securities in their account as collateral | |
how margin loan availability works | margin loan availability tells a brokerage customer how much money in their margin account is currently available for purchasing securities on margin and how much is available for withdrawal as the value of the securities in the account rises and falls the amount of money that becomes available for loan also changes since the securities have to cover the amount made available for the loan if the customer s securities drop in value so does the margin loan availability margin loan availability can be used in a couple of specific contexts margin loan availability will change daily as the value of margin debt which includes purchased securities changes but it may not reflect pending trades that fall in between the trade date and the settlement date brokerage firms are required to impose a maintenance requirement on margin accounts which is a percentage of the total market value of the securities purchased on margin if the margin loan availability amount essentially the equity in an investor s account falls below the maintenance margin the investor may be due for a margin call which is a formal request to sell some of the marginable securities or deposit additional cash into the account typically within three days the federal reserve board self regulatory organizations sros such as the financial industry regulatory authority finra and the securities exchanges have rules governing margin trading but brokerage firms can also set more restrictive requirements on their own margin loan availability rises and falls with the value of the securities in an investor s margin account if the account s equity drops too low the investor may face a margin call and have to sell securities to cover the shortfall example of margin loan availabilitylet s say that bert m is a client at ernie s brokerage firm bert has a margin account with some securities in it these securities are held as collateral by ernie s brokerage firm for any money bert borrows to buy securities or withdraw from the account the money borrowed from ernie s firm to buy these additional securities or for a withdrawal is called a margin loan the available amount that bert can take at any given time is called the margin loan availability and is based on the current value of his pledged securities | |
what is margin of safety | margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value in other words when the market price of a security is significantly below your estimation of its intrinsic value the difference is the margin of safety because investors may set a margin of safety in accordance with their own risk preferences buying securities when this difference is present allows an investment to be made with minimal downside risk alternatively in accounting the margin of safety or safety margin refers to the difference between actual sales and break even sales managers can utilize the margin of safety to know how much sales can decrease before the company or a project becomes unprofitable investopedia michela buttignolunderstanding margin of safetythe margin of safety principle was popularized by famed british born american investor benjamin graham known as the father of value investing and his followers most notably warren buffett investors utilize both qualitative and quantitative factors including firm management governance industry performance assets and earnings to determine a security s intrinsic value the market price is then used as the point of comparison to calculate the margin of safety buffett who is a staunch believer in the margin of safety and has declared it one of his cornerstones of investing has been known to apply as much as a 50 discount to the intrinsic value of a stock as his price target taking into account a margin of safety when investing provides a cushion against errors in analyst judgment or calculation it does not however guarantee a successful investment largely because determining a company s true worth or intrinsic value is highly subjective investors and analysts may have a different method for calculating intrinsic value and rarely are they exactly accurate and precise in addition it s notoriously difficult to predict a company s earnings or revenue example of investing and margin of safetyas scholarly as graham was his principle was based on simple truths he knew that a stock priced at 1 today could just as likely be valued at 50 cents or 1 50 in the future he also recognized that the current valuation of 1 could be off which means he would be subjecting himself to unnecessary risk he concluded that if he could buy a stock at a discount to its intrinsic value he would limit his losses substantially although there was no guarantee that the stock s price would increase the discount provided the margin of safety he needed to ensure that his losses would be minimal for example if he were to determine that the intrinsic value of xyz s stock is 162 which is well below its share price of 192 he might apply a discount of 20 for a target purchase price of 130 in this example he may feel xyz has a fair value at 192 but he would not consider buying it above its intrinsic value of 162 in order to absolutely limit his downside risk he sets his purchase price at 130 using this model he might not be able to purchase xyz stock anytime in the foreseeable future however if the stock price does decline to 130 for reasons other than a collapse of xyz s earnings outlook he could buy it with confidence margin of safety in accountingas a financial metric the margin of safety is equal to the difference between current or forecasted sales and sales at the break even point the margin of safety is sometimes reported as a ratio in which the aforementioned formula is divided by current or forecasted sales to yield a percentage value the figure is used in both break even analysis and forecasting to inform a firm s management of the existing cushion in actual sales or budgeted sales before the firm would incur a loss | |
what is marginal analysis | marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity companies use marginal analysis as a decision making tool to help them maximize their potential profits marginal refers to the focus on the cost or benefit of the next unit or individual for example the cost to produce one more widget or the profit earned by adding one more worker understanding marginal analysismarginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables in this sense marginal analysis focuses on examining the results of small changes as the effects cascade across the business as a whole marginal analysis is an examination of the associated costs and potential benefits of specific business activities or financial decisions the goal is to determine if the costs associated with the change in activity will result in a benefit that is sufficient enough to offset them instead of focusing on business output as a whole the impact on the cost of producing an individual unit is most often observed as a point of comparison marginal analysis can also help in the decision making process when two potential investments exist but there are only enough available funds for one by analyzing the associated costs and estimated benefits it can be determined if one option will result in higher profits than another from a microeconomic standpoint marginal analysis can also relate to observing the effects of small changes within the standard operating procedure or total outputs for example a business may attempt to increase output by 1 and analyze the positive and negative effects that occur because of the change such as changes in overall product quality or how the change impacts the use of resources if the results of the change are positive the business may choose to raise production by 1 again and reexamine the results these small shifts and the associated changes can help a production facility determine an optimal production rate managers should also understand the concept of opportunity cost suppose a manager knows that there is room in the budget to hire an additional worker marginal analysis tells the manager that an additional factory worker provides net marginal benefit this does not necessarily make the hire the right decision suppose the manager also knows that hiring an additional salesperson yields an even larger net marginal benefit in this case hiring a factory worker is the wrong decision because it is sub optimal because marginal analysis is only interested in the effect of the very next instance it pays little attention to fixed start up costs including those costs in a marginal analysis is incorrect and produces the so called sunk cost fallacy | |
how to perform a marginal analysis | marginal analysis is as simple as taking the margin benefit of an outcome and subtracting the marginal cost however this analysis may be difficult to assess as there are many variables and moving parts to consider to perform a marginal analysis you should first understand the fixed and variable costs of an activity because the fixed costs are not likely to change your marginal cost will often be equal to your variable expenses next you can begin marginal analysis by finding the marginal cost and the marginal expense of an activity each will simply be the change in cost or benefit for every unit consumed or acquired note that while one aspect may remain the same either the benefit or the cost may be constant one aspect will often be variable consider the example of consuming pizza at 2 slice in this example marginal cost is easy to quantify as every additional slice of pizza has a marginal cost equivalent to 2 on the other hand marginal benefit may be more difficult to quantify if you haven t eaten all day and are hungry you may state that the first slice of pizza you eat is worth 10 to you if this is the case marginal analysis has led you the net benefit equal to the value of 8 to continue performing marginal analysis consider how both the benefit and the cost will change with each slice of pizza consumed if each slice costs 2 your marginal cost will always be 2 however as you eat more pizza you ll become full in fact there will be a point where you may get sick and begin to have negative marginal benefit for each additional slice eaten rules of marginal analysis | |
do not confuse the many marginal terms used in economics be mindful that the best quantity to operate at is when marginal revenue equals cost | the overarching rule of marginal analysis is that it is usually in a company s best interest to perform an activity as long as the marginal revenue is greater than the marginal cost when marginal revenue and marginal cost are equal there is theoretically no financial incentive for the company to continue the activity though there may be non financial factors to consider consider a manufacturing example where it costs 2 to make a good whose marginal revenue is 5 for this unit the company makes 3 if the next unit costs 4 to make the company still earns a marginal profit because marginal revenue of 5 is greater than the marginal cost if the next unit were to cost 6 to make it would no longer be financially feasible to make and sell the good the point at which marginal revenue and marginal cost intersect is often called marginal equilibrium it is the point at which total company profit is maximized even if unit profit is not at its highest in more simple terms using the pizza example above you should continue to consume pizza as long as you think the marginal benefit you receive of each slice is worth at least the 2 you re paying per piece another important rule related to marginal analysis relates to companies that have different products if a company chooses to only dedicate resources to one product the potential marginal revenue of the other products is foregone in favor of a product likely with a diminishing marginal profit to avoid this every product should have an equal marginal revenue to maximize the amount of benefit obtained especially if there are resource constraints at play consider the table below outlining the marginal return received from two products if one unit of product a is consumed the consumer receives a marginal benefit of 100 if a third unit of product b is consumed the consumer receives a marginal benefit of 30 for that third unit based on the table above this second rule would dictate that the first unit consumed should be one unit of product a however we now know the marginal return of a second unit of product a only yields a return of 25 this second rule would call for the consumer to consume units of product b until the marginal revenue of the two products meet in this example the highest return would occur after 1 unit of product a and 3 units of product b have been consumed let s return once more to our pizza example instead of only consuming pizza imagine the marginal benefit of having a refreshing drink in between bites or slices the argument here is instead of trying to maximize your benefit received consuming one good you should try to have the marginal benefit received from the pizza considering its price equal to the marginal benefit received from a drink also considering its price marginal cost vs marginal benefita marginal benefit or marginal product is an incremental increase in a consumer s benefit in using an additional unit of something a marginal cost is an incremental increase in the expense a company incurs to produce one additional unit of something marginal benefits normally decline as a consumer decides to consume more and more of a single good for example imagine a consumer decides that she needs a new piece of jewelry for her right hand and she heads to the mall to purchase a ring she spends 100 for the perfect ring and then she spots another since she has no need for two rings she would be unwilling to spend another 100 on a second one she might however be convinced to purchase that second ring at 50 therefore her marginal benefit reduces from 100 to 50 from the first to the second good if a company has captured economies of scale the marginal costs decline as the company produces more and more of a good for example a company is making fancy widgets that are in high demand due to this demand the company can afford machinery that reduces the average cost to produce each widget the more they make the cheaper they become on average it costs 5 to produce a single widget but because of the new machinery producing the 101st widget only costs 1 therefore the marginal cost of producing the 101st widget is 1 there are many considerations to make regarding what defines marginal benefit for example that extra slice of pizza may not be physically healthy to consume but it may provide emotional comfort or allow for alimitations of marginal analysismarginal analysis derives from the economic theory of marginalism the idea that human actors make decisions on the margin underlying marginalism is another concept the subjective theory of value marginalism is sometimes criticized as one of the fuzzier areas of economics as much of what is proposed is hard to accurately measure such as an individual consumers marginal utility also marginalism relies on the assumption of near perfect markets which do not exist in the practical world still the core ideas of marginalism are generally accepted by most economic schools of thought and are still used by businesses and consumers to make choices and substitute goods modern marginalism approaches now include the effects of psychology or those areas that now encompass behavioral economics reconciling neoclassic economic principles and marginalism with the evolving body of behavioral economics is one of the exciting emerging areas of contemporary economics since marginalism implies subjectivity in valuation economic actors make marginal decisions based on how valuable they are in the ex ante sense this means marginal decisions might later be deemed regrettable or mistaken ex post this can be demonstrated in a cost benefit scenario a company might make the decision to build a new plant because it anticipates ex ante the future revenues provided by the new plant to exceed the costs of building it if the company later discovers that the plant operates at a loss then it mistakenly calculated the cost benefit analysis that said inaccurate calculations reflect inaccuracies in cost benefit assumptions and measurements predictive marginal analysis is limited to human understanding and reason when marginal analysis is applied reflectively however it can be more reliable and accurate example of marginal analysis in manufacturing | |
when a manufacturer wishes to expand its operations either by adding new product lines or increasing the volume of goods produced from the current product line a marginal analysis of the costs and benefits is necessary some of the costs to be examined include but are not limited to the cost of additional manufacturing equipment any additional employees needed to support an increase in output large facilities for manufacturing or storage of completed products and as the cost of additional raw materials to produce the goods | once all of the costs are identified and estimated these amounts are compared to the estimated increase in sales attributed to the additional production this analysis takes the estimated increase in income and subtracts the estimated increase in costs if the increase in income outweighs the increase in cost the expansion may be a wise investment for example consider a hat manufacturer each hat produced requires seventy five cents of plastic and fabric your hat factory incurs 100 dollars of fixed costs per month if you make 50 hats per month then each hat incurs 2 of fixed costs in this simple example the total cost per hat including the plastic and fabric would be 2 75 2 75 0 75 100 50 but if you cranked up production volume and produced 100 hats per month then each hat would incur 1 dollar of fixed costs because fixed costs are spread out across units of output the total cost per hat would then drop to 1 75 1 75 0 75 100 100 in this situation increasing production volume causes marginal costs to go down | |
why is marginal analysis important | marginal analysis is important because it identifies the most efficient use of resources an activity should only be performed until the marginal revenue equals the marginal cost beyond this point it will cost more for every unit than the benefit received for every unit | |
what is the first step to performing marginal analysis | though not required a first step to performing marginal analysis is often to consider the fixed and variable components of an activity if all costs are fixed there will be little to no marginal costs as expenses will not change as units produced changed on the other hand if all costs are variable there will be considerable expenses to factor in the same though less applicable can be said about the benefit received because benefit often varies from the units consumed it is hardly ever fixed however you can slowly advance to a full marginal analysis by considering how marginal benefit and cost change from one unit to the next | |
what is the golden rule for marginal analysis | the golden rule of marginal analysis is that an activity should be performed as long as marginal revenue equals marginal cost activities that have marginal costs higher than marginal revenue provide negative net benefit to a company | |
what is marginal principle theory | marginal principle theory is a very closely related topic that states that individuals make decisions on purchases based on the additional utility they will receive from each unit in the example throughout this page this related to the consumption of pizza when you decide whether or not to reach for that one final slice you are performing a marginal analysis and will ultimately make a decision that aligns with what is best for you which upholds the marginal principle theory the bottom linemarginal analysis is a critical part of a business and life that dictates what level of activity to operate at marginal analysis discovers the point at which marginal revenue equals marginal cost if someone operates below this point they may not be taking advantage of business opportunities if someone operates above this point they may lose resources every unit marginal analysis drives how many units a company produces and often decides what and how much consumers buy | |
what is marginal benefit | a marginal benefit is a maximum amount a consumer is willing to pay for an additional good or service it is also the additional satisfaction or utility that a consumer receives when the additional good or service is purchased the marginal benefit for a consumer tends to decrease as consumption of the good or service increases in the business world the marginal benefit for producers is often referred to as marginal revenue investopedia xiaojie liuunderstanding marginal benefitsimilar to marginal utility a marginal benefit applies to any additional unit purchased for consumption after the first unit has been acquired the term utility is used to describe the level of satisfaction a consumer has assigned to the unit being consumed marginal benefit may be expressed as the number of dollars a consumer is willing to spend for additional units or with imaginary units such as utils this assumes a consumer finds a minimum amount of intrinsic value equal to the dollar amount paid for the item for example if a person purchases a burger for 10 it is assumed the consumer is obtaining at least 10 worth of perceived value from the item if they are willing to purchase a second burger for 5 but not 6 then the marginal benefit from a second burger must be valued somewhere between 5 and 6 dollars not all products are subject to change when it comes to their perceived value for example prescription medication can retain its utility over the long term as long as it continues to perform as needed additionally the marginal benefits of certain staple goods such as bread or milk also remain relatively consistent over time law of diminishing marginal benefitas units are consumed the consumer often receives less utility or satisfaction from consumption to demonstrate this consider the example above assume there is a consumer who wants to purchase an additional burger if this consumer is willing to pay 10 for that additional burger the marginal benefit of consuming that burger is equal to the initial 10 purchase however if the consumer decides they are only willing to spend 9 on the second burger the marginal benefit is 9 the more burgers the consumer has the less they want to pay for the next one this is because the benefit decreases as the quantity consumed increases formula for marginal benefitmarginal benefit can be determined using the slope of the demand curve or the following formula marginal benefit total additional benefit total number of additional goods consumed begin aligned text marginal benefit frac text total additional benefit text total number of additional goods consumed end aligned marginal benefit total number of additional goods consumedtotal additional benefit types of marginal benefitsthere are three possible value ranges for marginal benefits most goods have a positive marginal benefit meaning that the consumer feels a net benefit from consuming each additional unit of that good although the marginal benefit may diminish over time the consumer still feels better off with additional consumption a negative marginal benefit means that the consumer is worse off if they consume an additional unit of the good examples include alcoholic drinks or unhealthy snacks where additional consumption causes reduced satisfaction a good with zero marginal benefits is one where a consumer feels no change in satisfaction with additional consumption this may be the case if a good has separate qualites that both improve and reduce satisfaction resulting in no net benefit marginal benefit and unit pricingeven though the consumer is willing to pay 10 for the burger 10 is not necessarily the burger s price the price is determined by market forces the difference between the market price and the price the consumer is willing to pay when the perceived value is higher than the market price is called consumer surplus this is not to be confused with economic surplus in cases where the consumer perceives the value of an item to be less than the market price a consumer may end up not proceeding with the transaction marginal benefits for businessesmarginal benefits have applications for businesses especially when it comes to marketing and research companies need to consider that a customer may compare the marginal cost of an additional purchase to the marginal benefit a marginal cost is an additional cost incurred when producing a subsequent unit going back to the example above if a customer buys the first burger for 10 and a second at 9 they may place a marginal benefit of 9 on the second burger and may buy it given the marginal cost of 9 but if the customer gets full after only one burger the marginal cost of 9 will outweigh the benefit and they may not buy it companies can use the research they conduct into marginal benefits for the best possible price point for any deal companies can also use this research to find out what the additional expenses are for selling a second item relative to the first marginal benefit vs marginal costmarginal benefit is similar to the concept of marginal cost the incremental cost for producers of creating additional units of a good as with marginal benefits marginal costs tend to decrease as the total number of units rises for example imagine a hypothetical factory that produces paper cups the production process requires 1 million of machinery capable of producing up to 100 000 paper cups per day in addition the production process requires 1 in paper and glue as the materials for each paper cup if the factory currently produces less than 100 000 cups per day the marginal cost for each additional cup is only 1 fixed costs such as machinery and facilities are not included however if the factory is already working at full capacity the marginal cost of producing more cups may be well over 1 reflecting the costs of additional machinery or changes to the production process | |
how do you calculate marginal benefit | the marginal benefit can be calculated from the slope of the demand curve at that point for example if you want to know the marginal benefit of the nth unit of a certain product you would take the slope of the demand curve at the point where current consumption is equal to n | |
what does marginal benefit mean for producers | for manufacturers and other suppliers the marginal benefit for a good represents the incremental profit that they can make by selling additional units of a certain good this is not necessarily the same as the expected per unit profit for example if a company decides to sell an additional 1 000 bottles of a soft drink but expects half of them to go unsold the marginal benefit would be half of the per unit profit margin | |
what is the principle of diminishing marginal benefits | the principle of diminishing marginal benefit also known as the law of diminishing utility states that the benefits of consuming a good decrease with additional consumption although each additional unit represents a net benefit from the consumer the benefit is lower than the satisfaction received from prior consumption the bottom linemarginal benefit represents one of the most basic concepts of microeconomics this is the value or satisfaction that an economic actor gains from consuming additional units of a particular good marginal benefit also determines how much the consumer is willing to pay to consume more of a particular good | |
what is marginal cost | in economics marginal cost is the change in total production cost that comes from making or producing one additional unit to calculate marginal cost divide the change in production costs by the change in quantity the purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale to optimize production and overall operations if the marginal cost of producing one additional unit is lower than the per unit price the producer has the potential to gain a profit madelyn goodnight investopediaformula and calculation of marginal costmarginal cost is calculated as the total expenses required to manufacture one additional good therefore it can be measured by changes to what expenses are incurred for any given additional unit marginal cost change in total expenses change in quantity of units producedthe change in total expenses is the difference between the cost of manufacturing at one level and the cost of manufacturing at another for example management may be incurring 1 000 000 in its current process should management increase production and costs increase to 1 050 000 the change in total expenses is 50 000 1 050 000 1 000 000 the change in the quantity of units is the difference between the number of units produced at two varying levels of production marginal cost strives to be based on a per unit assumption so the formula should be used when it is possible for a single additional unit to be produced for example the company above manufactured 24 pieces of heavy machinery for 1 000 000 the increased production will yield 25 total units so the change in the quantity of units produced is one 25 24 the formula above can be used when more than one additional unit is being manufactured however management must be mindful that groups of production units may have materially varying levels of marginal cost | |
what marginal cost can tell you | marginal cost is an economics and managerial accounting concept most often used among manufacturers as a means of isolating an optimum production level manufacturers often examine the cost of adding one more unit to their production schedules at a certain level of production the benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down the key to optimizing manufacturing costs is to find that point or level as quickly as possible marginal cost includes all of the costs that vary with that level of production for example if a company needs to build an entirely new factory in order to produce more goods the cost of building the factory is a marginal cost the amount of marginal cost varies according to the volume of the good being produced marginal cost is an important factor in economic theory because a company that is looking to maximize its profits will produce up to the point where marginal cost mc equals marginal revenue mr beyond that point the cost of producing an additional unit will exceed the revenue generated economic factors that may impact marginal cost include information asymmetries positive and negative externalities transaction costs and price discrimination benefits of marginal cost | |
when a company knows both its marginal cost and marginal revenue for various product lines it can concentrate resources on items where the difference is the greatest instead of investing in minimally successful goods it can focus on making individual units that maximize returns | marginal cost is also essential in knowing when it is no longer profitable to manufacture additional goods when marginal cost exceeds marginal revenue it is no longer financially profitable for a company to make that additional unit as the cost for that single quantity exceeds the revenue it will collect from it using this information a company can decide whether it is worth investing in additional capital assets marginal cost is also beneficial in helping a company take on additional or custom orders consider a company that sells a good for 50 it has additional capacity to manufacture more goods and is approached with an offer to buy 1 000 units for 40 each marginal cost is one component needed in analyzing whether it makes sense for the company to accept this order at a special price example of how to use marginal costproduction costs consist of both fixed costs and variable costs fixed costs do not change with an increase or decrease in production levels so the same value can be spread out over more units of output with increased production variable costs refer to costs that change with varying levels of output therefore variable costs will increase when more units are produced for example consider a company that makes hats each hat produced requires 0 75 of plastic and fabric plastic and fabric are variable costs the hat factory also incurs 1 000 of fixed costs per month if the company makes 500 hats per month then each hat incurs 2 of fixed costs 1 000 total fixed costs 500 hats in this simple example the total cost per hat would be 2 75 2 fixed cost per unit 0 75 variable costs if the company boosted production volume and produced 1 000 hats per month then each hat would incur 1 of fixed costs 1 000 total fixed costs 1 000 hats because fixed costs are spread out over an increased number of units of output the total cost per hat would then drop to 1 75 1 fixed cost per unit 0 75 variable costs in this situation increasing production volume causes marginal costs to go down if the hat factory was unable to handle any more units of production on the current machinery then the cost of adding a machine would need to be included in the marginal cost assume the machinery could only handle 1 499 units the 1 500th unit would require purchasing an additional 500 machine in this case the cost of the new machine would need to be considered in the marginal cost of production calculation as well marginal cost also has an impact on average cost when the marginal cost is less than the average cost the production of additional units will decrease the average cost when the marginal cost is higher producing more units will increase the average cost per unit special considerationsmarginal cost is often graphically depicted as a relationship between marginal revenue and average cost the marginal cost slope will vary across company and product but it is often a u shaped curve that initially decreases as efficiency is realized only to later potentially exponentially increase marginal cost is strictly an internal reporting calculation that is not required for external financial reporting public facing financial statements are not required to disclose marginal cost figures and the calculations are simply used by internal management to devise strategies in many ways a company may be at a disadvantage by disclosing its marginal cost competitors would gain the advantage of knowing the company s cost structure and the market could attempt to apply pressure to a company knowing the specific manufacturing levels where operations become unprofitable for other companies marginal cost highlights the premise that one incremental unit will be much less expensive if it remains within the current relevant range however additional step costs or burdens to the existing relevant range will result in materially higher marginal costs that management must be aware of consider the warehouse for a manufacturer of landscaping equipment the warehouse has the capacity to store 100 extra large riding lawn mowers the margin cost to manufacture the 98th 99th or 100th riding lawn mower may not vary too widely however manufacturing the 101st riding lawn mower means the company has exceeded the relevant range of its existing storage capabilities that 101st riding lawn mower will require an investment in new storage space a marginal cost not incurred by any of the other recently manufactured goods marginal cost figures significantly into the marginal cost pricing doctrine aka marginal cost theory an economic principle that dictates that prices for products or rates for services should be predicated upon marginal costs for the purpose of economic efficiency the doctrine stems from political economist and professor alfred e kahn s seminal work the economics of regulation 1 under pure competition the price will be set at marginal cost the marginal price will equal the marginal cost kahn wrote and this results in the use of society s limited resources in such a way as to maximize consumer satisfaction 1 | |
what is marginal cost | marginal cost is the cost to produce one additional unit of production it is an important concept in cost accounting as marginal cost helps determine the most efficient level of production for a manufacturing process it is calculated by determining what expenses are incurred if only one additional unit is manufactured | |
what is an example of marginal cost | imagine a company that manufactures high quality exercise equipment the company incurs both fixed costs and variable costs and has additional capacity to manufacture more goods let s say it has cost the company 500 000 to manufacture 1 000 exercise bikes the company has determined it will cost an additional 400 to manufacture one additional bike although the average unit cost is 500 the marginal cost for the 1 001st unit is 400 the average and marginal costs may differ because some additional costs i e fixed expenses may not be incurred as additional units are manufactured | |
what is the formula for marginal cost | marginal cost is calculated by dividing the change in costs by the change in quantity for example suppose that a factory is currently producing 5 000 units and wishes to increase its production to 10 000 units if the factory s current cost of production is 100 000 and if increasing its production level would raise its costs to 150 000 then the marginal cost of production is 10 or 150 000 100 000 10 000 5 000 | |
why is marginal cost important | marginal cost is an economic concept that plays an important role in business management since it can help businesses optimize their production levels it refers to the incremental cost of adding one more unit of production such as producing one more product or delivering one more service to customers it is generally associated with manufacturing businesses although the concept can be applied to other types of businesses as well | |
what is the difference between marginal cost and average cost | marginal cost is the expenses needed to manufacture one incremental good as a manufacturing process becomes more efficient or economies of scale are recognized the marginal cost often declines over time however there is often a point in time where it may become incrementally more expensive to produce one additional unit on the other hand the average cost is the total cost of manufacturing divided by the total units produced the average cost may be different from marginal cost as marginal cost is often not consistent from one unit to the next marginal cost is reflective of only one unit while average cost often reflects all units produced the bottom lineduring the manufacturing process a company may become more or less efficient as additional units are produced this concept of efficiency through production is reflected through marginal cost the incremental cost to produce units to maximize efficiency companies should strive to continue producing goods as long as the marginal cost is less than the marginal revenue | |
what is marginal profit | marginal profit is the profit earned by a firm or individual when one additional or marginal unit is produced and sold marginal refers to the added cost or profit earned with producing the next unit marginal product is the additional revenue earned while the marginal cost is the added cost for producing one additional unit marginal profit is the difference between marginal cost and marginal product also known as marginal revenue marginal profit analysis is useful for managers because it aids in deciding whether to expand production or to slow down stop production altogether a moment known as a shutdown point under mainstream economic theory a company will maximize its overall profits when marginal cost equals marginal revenue or when marginal profit is exactly zero understanding marginal profitmarginal profit is different from average profit net profit and other measures of profitability in that it looks at the money to be made on producing one additional unit it accounts for the scale of production because as a firm gets larger its cost structure changes and depending on economies of scale profitability can either increase or decrease as production ramps up economies of scale refer to the situation where marginal profit increases as the scale of production is increased at a certain point the marginal profit will become zero and then turn negative as scale increases beyond its intended capacity at this point the firm experiences diseconomies of scale companies will thus tend to increase production until marginal cost equals marginal product which is when marginal profit equals zero in other words when marginal cost and marginal product revenue is zero there s no additional profit earned for producing an added unit if the marginal profit of a firm turns negative its management may decide to scale back production halt production temporarily or abandon the business altogether if it appears that positive marginal profits will not return | |
how to calculate marginal profit | marginal cost mcmc is the cost to produce one additional unit and marginal revenue mr is the revenue earned to produce one additional unit in modern microeconomics firms in competition with each other will tend to produce units until marginal cost equals marginal revenue mcmc mr leaving effectively zero marginal profit for the producer in fact in perfect competition there is no room for marginal profits because competition will always push the selling price down to marginal cost and a firm will operate until marginal revenue equals marginal cost therefore not only does mc mp but also mc mp price if a firm cannot compete on cost and operates at a marginal loss negative marginal profit it will eventually cease production profit maximization for a firm occurs therefore when it produces up to a level where marginal cost equals marginal revenue and the marginal profit is zero special considerationsit is important to note that marginal profit only provides the profit earned from producing one additional item and not the overall profitability of a firm in other words a firm should stop production at the level where producing one more unit begins to reduce overall profitability variables that contribute to marginal cost include fixed costs or sunk costs should not be included in the calculation of marginal profit since these one time expenses do not change or alter the profitability of producing the very next unit sunk costs are costs that are unrecoverable such as building a manufacturing plant or buying a piece of equipment marginal profit analysis does not include sunk costs since it only looks at the profit from one more unit produced and not the money that has been spent on unrecoverable costs such as plant and equipment however psychologically the tendency to include fixed costs is hard to overcome and analysts can fall victim to the sunk cost fallacy leading to misguided and often costly management decisions of course in reality many firms do operate with marginal profits maximized so that they always equal zero this is because very few markets actually approach perfect competition due to technical frictions regulatory and legal environments and lags and asymmetries of information managers of a firm may not know in real time their marginal costs and revenues which means they often must make decisions on production in hindsight and estimate the future additionally many firms operate below their maximum capacity utilization in order to be able to ramp up production when demand spikes without interruption | |
why do firms care about their marginal profit | in order to maximize profits a firm should produce as many units as possible but the costs of production are also likely to increase as production ramps up when marginal profit is zero i e when the marginal cost of producing one more unit equals the marginal revenue it will bring in that level of production is optimal if the marginal profit turns negative due to costs production should be scaled back | |
when should a business shut down when considering marginal profit | if marginal profit is negative at all levels of production the firm s best course of action is probably to cease all production for the time being rather than keep producing units at a loss | |
what are economies of scale | economies of scale refer to situations where ramping up production decreases the marginal cost in such cases the marginal profit will increase as more and more units are made | |
what is marginal propensity to consume mpc | in economics the marginal propensity to consume mpc is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services as opposed to saving it marginal propensity to consume is a component of keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income mpc is depicted by a consumption line which is a sloped line created by plotting the change in consumption on the vertical y axis and the change in income on the horizontal x axis 1investopedia madelyn goodnightunderstanding marginal propensity to consume mpc the marginal propensity to consume is equal to c y where c is the change in consumption and y is the change in income 2 if consumption increases by 80 cents for each additional dollar of income then mpc is equal to 0 8 1 0 8 suppose you receive a 500 bonus on top of your normal annual earnings you suddenly have 500 more in income than you did before if you decide to spend 400 of this marginal increase in income on a new suit and save the remaining 100 your marginal propensity to consume will be 0 8 400 divided by 500 the other side of the marginal propensity to consume is the marginal propensity to save which shows how much a change in income affects saving levels the calculation assumes that marginal propensity to consume marginal propensity to save 1 in the suit example your marginal propensity to save will be 0 2 100 divided by 500 if you decide to save the entire 500 your marginal propensity to consume will be 0 0 divided by 500 and your calculated marginal propensity to save will be 1 500 divided by 500 2mpc and economic policygiven data on household income and household spending economists can calculate households mpc by income level this calculation is important because mpc is not constant it varies by income level typically the higher the income the lower the mpc because as income increases more of a person s wants and needs become satisfied as a result they save more instead at low income levels mpc tends to be much higher as most or all of the person s income must be devoted to subsistence consumption according to keynesian theory an increase in investment or government spending increases consumers income and they will then spend more if we know what their marginal propensity to consume is then we can calculate how much an increase in production will affect spending this additional spending will generate additional production creating a continuous cycle via a process known as the keynesian multiplier the larger the proportion of the additional income that gets devoted to spending rather than saving the greater the effect the higher the mpc the higher the multiplier the more the increase in consumption from the increase in investment so if economists can estimate the mpc then they can use it to estimate the total impact of a prospective increase in incomes 34 | |
what is marginal propensity to consume in simple terms | the marginal propensity to consume measures the degree to which a consumer will spend or save in relation to an aggregate raise in pay or to put it another way if a person gets a boost in income what percentage of this new income will they spend often higher incomes express lower levels of marginal propensity to consume because consumption needs are satisfied which allows for higher savings by contrast lower income levels experience a higher marginal propensity to consume since a higher percentage of income may be directed to daily living expenses | |
how do you calculate marginal propensity to consume | to calculate the marginal propensity to consume the change in consumption is divided by the change in income for instance if a person s spending increases 90 cents more for each new dollar of earnings it would be expressed as 0 9 1 0 9 on the other hand consider a person receives a bonus of 1 000 and spends 100 of this while saving 900 the marginal propensity to consume would equal 100 1 000 or 0 1 | |
what role does the marginal propensity to consume have in economics | in keynesian macroeconomic theory the marginal propensity to consume is a key variable in showing the multiplier effect of economic stimulus spending specifically it suggests that a boost in government spending will increase consumer income and in turn consumer spending will rise on a macro level this increase in investment will lead to a higher aggregate level of demand 5 | |
what is marginal propensity to import mpm | the marginal propensity to import mpm is the amount imports increase or decrease with each unit rise or decline in disposable income the idea is that rising income for businesses and households spurs greater demand for goods from abroad and vice versa | |
how marginal propensity to import mpm works | mpm is a component of keynesian macroeconomic theory it is calculated as dim dy meaning the derivative of the import function im with respect to the derivative of the income function y the mpm indicates the extent to which imports are subject to changes in income or production if for example a country s mpm is 0 3 then each dollar of extra income in that economy induces 30 cents of imports 1 x 0 3 countries that consume more imports as the income of their population rises have a significant impact on global trade if a country that purchases a substantial amount of goods from overseas runs into a financial crisis the extent to which that nation s economic woes will impact exporting countries depends on its mpm and the makeup of the goods imported an economy with a positive marginal propensity to consume mpc is likely to have a positive mpm because a portion of goods consumed is likely to come from abroad the level of negative impact on imports from falling income is greater when a country has a mpm greater than its average propensity to import this gap results in a higher income elasticity of demand for imports leading to a drop in income resulting in a more than proportional drop in imports special considerationscountries with developed economies and sufficient natural resources within their borders typically have a lower mpm in contrast nations that are dependent on purchasing goods from abroad generally have a higher mpm the mpm is important to the study of keynesian economics first the mpm reflects induced imports second the mpm is the slope of the imports line which means it is the negative of the slope of the net exports line and makes it important to the slope of the aggregate expenditures line as well the mpm also affects the multiplier process and the magnitude of the expenditures and tax multipliers advantages and disadvantages of marginal propensity to import mpm mpm is easy to measure and functions as a useful tool to predict changes in imports based on expected changes in output the problem is that a country s mpm will unlikely remain consistently stable the relative prices of domestic and foreign goods change and exchange rates fluctuate these factors impact purchasing power for goods shipped in from overseas and as a consequence the size of a country s mpm | |
what is marginal propensity to save mps | in keynesian economics theory marginal propensity to save mps refers to the proportion of an aggregate raise in income that a consumer saves rather than spends on the consumption of goods and services put differently mps is the proportion of each added dollar of income that is saved rather than spent mps is a component of keynesian macroeconomics theory and is calculated as the change in savings divided by the change in income 1mps is depicted by a savings line a sloped line created by plotting change in savings on the vertical y axis and change in income on the horizontal x axis d3sign getty imagesexample of marginal propensity to save mps suppose you receive a 500 bonus with your paycheck you suddenly have 500 more in income than you did before if you decide to spend 400 of this marginal increase on a new business suit and save the remaining 100 your marginal propensity to save is 0 2 this is calculated by dividing the 100 change in saving by the 500 change in income understanding marginal propensity to save mps given data on household income and household savings economists can calculate households mps by income level this calculation is important because mps is not constant it can vary by income level typically the higher the income the higher the mps because as wealth increases so does the ability to satisfy needs and wants thus each additional dollar is less likely to go toward additional spending however the possibility remains that a consumer might alter savings and consumption habits with an increase in pay naturally with an increase in salary comes the ability to cover household expenses more easily allowing for more leeway to save a higher salary also brings access to goods and services that require greater expenditures this may include the procurement of higher end or luxury vehicles or relocation to a new pricier residence if economists know what consumers mps is they can determine how increases in government spending or investment spending will influence saving mps is used to calculate the expenditures multiplier using the following formula the expenditures multiplier tells us how changes in consumers mps influences the rest of the economy the smaller the mps the larger the multiplier and the more economic impact that a change in government spending or investment will have the marginal propensity to consume mpc is the complement to mps added together they should always equal one marginal propensity to consume mpc the other side of mps is marginal propensity to consume mpc which shows how much a change in income affects purchasing levels using the above example where you spent 400 of your 500 bonus the mpc is 0 8 this is calculated by dividing 400 by 500 if you add mpc and mps the result should always equal one making mpc the complement to mps | |
what does marginal propensity to save mps describe | marginal propensity to save mps refers to the amount of a raise in income that a person saves rather than spends | |
what is marginal propensity to consume mpc | marginal propensity to consume mpc refers to the amount of a raise in income that a person spends as opposed to saves this makes it the complement to mps added together they should always equal one | |
what is the purpose of determining mps | mps can be used to understand how government spending and investment may influence saving and what the economic impact of the spending and investment might be the bottom linemarginal propensity to save mps is an economic theory that calculates how much of a raise a person would save the number is different at different income levels and helps economists make theories about how individual incomes impact the broader economy |
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