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Flashcard 1425412853004

Tags
#rules-of-formulating-knowledge
Question

[...] works like cloze deletion but instead of a missing phrase it uses a missing image component.

Answer
Graphic deletion

For example, when learning anatomy, you might present a complex illustration. Only a small part of it would be missing. The student's job is to name the missing area. The same illustration can be used to formulate 10-20 items! Each item can ask about a specific subcomponent of the image. Graphic deletion works great in learning geography!


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8. Graphic deletion is as good as cloze deletion
Graphic deletion works like cloze deletion but instead of a missing phrase it uses a missing image component. For example, when learning anatomy, you might present a complex illustration. Only a small p







#connections-are-key-to-memory #six-tips-for-working-with-the-brain
Tip #3: Connections are the key to memory

As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this.

Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them.

Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family.

Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas.

Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy.

So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?"

Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models.

For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully.

I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting.

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Unknown title
ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th




Tip #5: Build in sleep between learning
#build-in-sleep #six-tips-for-working-with-the-brain

It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways.

It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while.

The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents.

So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning.

I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.com. They can do this at their own pace and it frees me up from teaching some of that content so that I can use our in-person time for more focused work.

When we come together, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills.

This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate.

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Unknown title
benefit seems to be better at three, so I focus on that number of retrievals in my own learning design. You can certainly build three retrievals into one learning event, but retention will be even more powerful if you add sleep to the mix. <span>Tip #5: Build in sleep between learning It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while. The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents. So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning. I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.com. They can do this at their own pace and it frees me up from teaching some of that content so that I can use our in-person time for more focused work. When we come together, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner




Flashcard 1432396893452

Tags
#italian #italian-grammar
Question
The word conjugation is also used to mean the regular patterns of verbs ending in [...] , [...] , [...] to which verbs belong.
Answer
-are, -ere, -ire


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(io) vado ‘I go’; (noi) andremo ‘we will go’; le ragazze sono andate ‘the girls went’; voleva che io andassi a casa sua ‘he wanted me to go to his house’; etc. The word conjugation is also used to mean the regular patterns of verbs ending in <span>-are, -ere, -ire to which verbs belong.<span><body><html>

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Flashcard 1432400301324

Tags
#conjunction #italian #italian-grammar
Question
What is a conjunction
Answer
A linking or joining word, usually linking two words, phrases or clauses within a sentence.


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A linking or joining word, usually linking two words, phrases or clauses within a sentence: Marco e Davide ‘Marco and Davide’; con amore ma con disciplina ‘with love but with discipline’; sono andata a letto perché ero stanca ‘I went to bed because I was tired’; i giudici dicono che bisogna

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Flashcard 1432414457100

Tags
#italian #italian-grammar
Question
A demonstrative [...] or [...] is one which demonstrates or indicates the person or object being talked about.
Answer
adjective or a pronoun

questo carrello ‘this trolley’; quel professore ‘that teacher’; quelle tagliatelle ‘those tagliatelle’.


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A demonstrative adjective or a pronoun is one which demonstrates or indicates the person or object being talked about: questo carrello ‘this trolley’; quel professore ‘that teacher’; quelle tagliatelle ‘those tagliatelle’.</

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Flashcard 1438025911564

Tags
#citychef #munchery
Question
The company is in [...] cities
Answer
four

—San Francisco, Los Angeles, New York, and Seattle—operating industrial kitchens in each.


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The company is in four cities—San Francisco, Los Angeles, New York, and Seattle—operating industrial kitchens in each.

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How an immigrant motherfucker made munchery
ct Internet users with restaurants and their takeout menus. Critics derisively call the proliferation of these businesses the “lazy food economy,” but Munchery is different. It cooks and delivers its own rela-tively healthy fare. <span>The company is in four cities—San Francisco, Los Angeles, New York, and Seattle—operating industrial kitchens in each. One recent afternoon in San Francisco, chefs and their assistants, wearing white caps and long-sleeved smocks, toiled over trays of grilled salmon atop brown rice with edamame and sweet







Flashcard 1438404971788

Tags
#italian #italian-grammar
Question
Invariable nouns are nouns that have the same form for [...)
Answer
both singular and plural

un film, dei film ‘a film, some films’, or for both masculine and feminine, un artista, un’artista ‘an artist’.


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Invariable nouns are nouns that have the same form for both singular and plural, un film, dei film ‘a film, some films’, or for both masculine and feminine, un artista, un’artista ‘an artist’. An invariable adjective is one that does not change form to agree with t

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Flashcard 1438407331084

Tags
#italian #italian-grammar
Question
An invariable adjective is one that [...], whether masculine or feminine, singular or plural
Answer
does not change form to agree with the noun

un vestito rosa ‘a pink dress’, una giacca rosa ‘a pink jacket’; dei pantaloni rosa ‘some pink trousers’; delle calze rosa ‘some pink stockings’.


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y>Invariable nouns are nouns that have the same form for both singular and plural, un film, dei film ‘a film, some films’, or for both masculine and feminine, un artista, un’artista ‘an artist’. An invariable adjective is one that does not change form to agree with the noun, whether masculine or feminine, singular or plural: un vestito rosa ‘a pink dress’, una giacca rosa ‘a pink jacket’; dei pantaloni rosa ‘some pink trousers’; delle calze rosa ‘some pink

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Flashcard 1438555704588

Tags
#analyst-notes #cfa-level-1 #corporate-finance #introduction #reading-35-capital-budgeting
Question
In monitoring and post-auditing decision-makers can:​


Improve forecasts (based on which good [...]).

Answer

capital budgeting decisions can be made


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he post-audit is a follow-up of capital budgeting decisions. It is a key element of capital budgeting. By comparing actual results with predicted results and then determining why differences occurred, decision-makers can: <span>Improve forecasts (based on which good capital budgeting decisions can be made). Otherwise, you will have the GIGO (garbage in, garbage out) problem. Improve operations, thus making capital decisions well-implemented. <span><body><html>

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Subject 1. Capital Budgeting: Introduction
include in the capital budget. "Capital" refers to long-term assets. The "budget" is a plan which details projected cash inflows and outflows during a future period. <span>The typical steps in the capital budgeting process: Generating good investment ideas to consider. Analyzing individual proposals (forecasting cash flows, evaluating profitability, etc.). Planning the capital budget. How does the project fit within the company's overall strategies? What's the timeline and priority? Monitoring and post-auditing. The post-audit is a follow-up of capital budgeting decisions. It is a key element of capital budgeting. By comparing actual results with predicted results and then determining why differences occurred, decision-makers can: Improve forecasts (based on which good capital budgeting decisions can be made). Otherwise, you will have the GIGO (garbage in, garbage out) problem. Improve operations, thus making capital decisions well-implemented. Project classifications: Replacement projects. There are two types of replacement d







Regulatory, safety, and environmental projects.
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Regulatory, safety, and environmental projects are often required by a governmental agency, an insurance company, or some other external party.

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2. THE CAPITAL BUDGETING PROCESS
New products and services. These investments expose the company to even more uncertainties than expansion projects. These decisions are more complex and will involve more people in the decision-making process. <span>Regulatory, safety, and environmental projects. These projects are frequently required by a governmental agency, an insurance company, or some other external party. They may generate no revenue and might not be undertaken by a company maximizing its own private interests. Often, the company will accept the required investment and continue to operate. Occasionally, however, the cost of the regulatory/safety/environmental project is sufficiently high that the company would do better to cease operating altogether or to shut down any part of the business that is related to the project. Other. The projects above are all susceptible to capital budgeting analysis, and they can be accepted or rejected using the net present value (NPV) or some other criteri




Flashcard 1439231773964

Tags
#italian #italian-grammar
Question
A subordinate clause is one that [...]
Answer
depends on another clause

usually the main clause in a sentence.


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A subordinate clause is one that depends on another clause, usually the main clause in a sentence. It can be introduced by a conjunction such as che ‘what’ or perché ‘because’, or a relative pronoun such as che ‘who, which’. See Clauses.

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Flashcard 1439266639116

Tags
#eximbank #octopus #usa
Question
Ex-Im Bank does not compete with commercial lenders but provides products that fill gaps in trade financing by assuming [...] that the private sector is unable or unwilling to accept.
Answer
country and credit risks


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Ex-Im Bank does not compete with commercial lenders but provides products that fill gaps in trade financing by assuming country and credit risks that the private sector is unable or unwilling to accept.

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Government-Assisted Foreign Buyer Financing (Eximbank USA)
Bank (Ex-Im Bank). As the official U.S. export credit agency, Ex-Im Bank supports the purchases of U.S. goods and services by creditworthy foreign buyers who are unable to obtain the financing they need through traditional commercial sources. <span>Ex-Im Bank does not compete with commercial lenders but provides products that fill gaps in trade financing by assuming country and credit risks that the private sector is unable or unwilling to accept. With Ex-Im Bank’s foreign buyer financing, U.S. exporters can turn their business opportunities into real transactions and get paid cash on delivery and acceptance of the goods or servi







Flashcard 1439277124876

Tags
#eximbank #fees #octopus #usa
Question

Letter of interest

[...]

Guarantee commitment

[...]

Exposure fee

Answer
Preliminary commitment

Direct loan commitment


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Letter of interest: $50 for online application; $100 for paper application via mail and fax. Preliminary commitment: 0.1 of 1 percent of the financed amount up to $25,000. Guarantee commitment: 0.125 percent per year on the undisbursed balance of the loan. Direct loan commit

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Government-Assisted Foreign Buyer Financing (Eximbank USA)
disbursement of a loan to the foreign buyers. Generally, goods shipped by sea must be carried exclusively on U.S. vessels. Direct loans are best used when the buyer insists on a fixed rate. <span>Fees and Ex-Im Bank Contact Information Letter of interest: $50 for online application; $100 for paper application via mail and fax. Preliminary commitment: 0.1 of 1 percent of the financed amount up to $25,000. Guarantee commitment: 0.125 percent per year on the undisbursed balance of the loan. Direct loan commitment: 0.5 percent per year on the undisbursed balance of the loan. Exposure fee: varies, depending upon tenor, country risk, and buyer credit risk. For more information about loans from Ex-Im Bank, visit its Web site at www.exim.gov or call 1-800-565-EXIM (3946). <span><body><html>







Flashcard 1439300979980

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
Which of the following amounts is closest to the net present value of a project that contributes $5,000 at the end of the first year and $8,000 at the end of the second year? The initial cost is $3,000. The appropriate interest rate is 8% for the first year and 9% for the second year.

A. $8,585
B. $8,426
C. $8,363
Answer
Correct Answer: B

NPV = -3000 + (5000/1.08) + 8000/[(1.08)(1.09)] = $8,425.52


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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

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Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439304649996

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
Tom and Erdal are planning on forming the Top-Torque Company. The company is to specialize in diesel engine rebuilding for extractive industries. The investment cost is expected to be $1.5 million and have after-tax cash flows of $100,000 in year 1, $250,000 in year 2, and $300,000 thereafter indefinitely. The two owners estimate that this is a risky venture and requires a 17% rate of return. What is the value of Top-Torque, and should the investment be made?

A. $57,240; yes
B. $1,557,240; yes
C. -$57,240; no
Answer
Correct Answer: A

NPV = -1,500,000 + 100,000/1.17 + 250,000/1.172 + (300,000/.17)/1.172 = -1,500,000 + 1,557,240.04 = $57,240.04


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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439308844300

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
An investment with an initial cost of $16,000 produces cash flows of $5000 annually. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the payback period is ______ years.

A. 3.20
B. 2.91
C. 3.33
Answer
Correct Answer: A

PP = 16000/5000 = 3.20


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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439311203596

Tags
#python #sicp
Question
An important feature of lexically scoped programming languages is that [locally defined functions maintain...environment] when they are returned.
Answer
locally defined functions maintain their parent environment


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An important feature of lexically scoped programming languages is that locally defined functions maintain their parent environment when they are returned.

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1.6 Higher-Order Functions
ocally defined functions are often called closures. 1.6.4 Functions as Returned Values Video: Show Hide We can achieve even more expressive power in our programs by creating functions whose returned values are themselves functions. <span>An important feature of lexically scoped programming languages is that locally defined functions maintain their parent environment when they are returned. The following example illustrates the utility of this feature. Once many simple functions are defined, function composition is a natural method of combination to include in our progr







Flashcard 1439323262220

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
An investment costs $77,500 and pays $27,500 a year for four years. What is the IRR of this investment?

A. 22.3%
B. 24.4%
C. 15.6%
Answer
Correct Answer: C


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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439325097228

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
Michael undertakes an investment with an initial investment of $10,000, and he expects to receive $3,500 a year for the next four years. If the required return is 15%, what is the NPV?

A. $5.49
B. $4.63
C. -$7.58
Answer
Correct Answer: C


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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439339777292

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
Saline Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the IRR for the project.

A. 14.5%
B. 18.6%
C. 23.4%
Answer
Correct Answer: C


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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439350787340

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
You have been asked to evaluate two machines. The benefits from ownership are identical. Machine A costs $150 to buy and install, lasts for 5 years, and costs $80 per year to operate. Machine B costs $250, lasts for 7 years, and costs $60 per year to operate. Both machines have zero salvage value. Assuming that this is a one-time acquisition, which machine do you recommend if the cost of capital is 10%?

A. Machine A, because the PV of its costs is $88.85 less than Machine B.
B. Machine B, because the PV of its costs is $20 less than Machine A.
C. Machine A, even though the PV of its costs is equal to that of Machine B.
Answer
Correct Answer: A

PVA = 150 + 80(3.7908) = 150 + 303.26 = 453.26
PVB = 250 + 60(4.8684) = 250 + 292.10 = 542.10
PVB > PVA


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Open it
dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1439356030220

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
HC Ltd. purchased a machine 4 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of the purchase and an expected market value of $5,000 at the end of the 10 years. It is being depreciated by the straight-line method toward a salvage value of $25,000; that is, depreciation is $7,500 per year. The machine can be sold now for $25,000. A new machine can be purchased for $150,000 including installation costs. During its 6-year life, it will reduce pre-tax cash operating expenses by $30,000 per year. Sales are not expected to change. At the end of its useful life, this machine is estimated to be worth $50,000. Straight-line depreciation will be used to depreciate the machine to a salvage value of $30,000; that is depreciation is $20,000 per year. The firm's tax rate is 30%. The appropriate discount rate is 13%.

What is the NPV of the investment?

A. $1,892
B. $2,573
C. $3,290
Answer
Correct Answer: C

The initial investment outlay is $111,500. The net operating cash flows are $24,750 (years 1-6) and the total termination cash flow is $33,000 in year 6. The NPV of these cash flows discounted at 13% is $3,290.


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Open it
dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







Flashcard 1441670499596

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on [...] and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market.
Answer
the strength of the barriers to entry


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The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







Flashcard 1441672858892

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
Barriers to entry can result from [...] requirements, as in the case of petroleum refining.
Answer
very large capital investment


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ons depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from <span>very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is t

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







Flashcard 1441675218188

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
Barriers to entry may also result from [...], as in the case of some electronic products and drug formulas.
Answer
patents


statusnot learnedmeasured difficulty37% [default]last interval [days]               
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costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from <span>patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







Flashcard 1441677577484

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
Another entry consideration is the possibility of [...].
Answer
high exit costs

For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets.


statusnot learnedmeasured difficulty37% [default]last interval [days]               
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sult from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of <span>high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for th

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







Flashcard 1441679936780

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#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
[...] deter entry and are therefore also considered barriers to entry.
Answer
High exit costs


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on is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. <span>High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets.

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o a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. <span>In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets.<span><body><html>

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy.

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nsidered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. <span>Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price C

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




Article 1441685966092

The Planning Cycle
#has-images

The Planning Cycle A Planning Process for Medium-Sized Projects © iStockphoto RonTech2000 Planning is an iterative process. The Planning Cycle brings together all aspects of planning into a coherent, unified process. By planning within this structure, you will help to ensure that your plans are fully considered, well focused, resilient, practical and cost-effective. You will also ensure that you learn from any mistakes you make, and feed this back into future planning and Decision Making. Planning using this cycle will help you to plan and manage ongoing projects up to a certain level of complexity – this will depend on the circumstance. For projects involving many people over a long period of time, more formal methodologies and approaches are necessary (see Managing Large Projects and Programs ). How to Use the Tool It is best to think of planning as a cycle, not a straight-through process. Once you have devised a plan you should evaluate whether it is likely to



Article 1441712966924

The Planning Cycle
#has-images

The Planning Cycle brings together all aspects of planning into a coherent, unified process. By planning within this structure, you will help to ensure that your plans are fully considered, well focused, resilient, practical and cost-effective. You will also ensure that you learn from any mistakes you make, and feed this back into future planning and Decision Making. Planning using this cycle will help you to plan and manage ongoing projects up to a certain level of complexity – this will depend on the circumstance. For projects involving many people over a long period of time, more formal methodologies and approaches are necessary (see Managing Large Projects and Programs ). How to Use the Tool It is best to think of planning as a cycle, not a straight-through process. Once you have devised a plan you should evaluate whether it is likely to succeed. This evaluation may be cost or number based, or may use other analytical tools. This analysis may show that your plan may cause unwanted



Flashcard 1441737870604

Question
his structure, you will help to ensure that your plans are fully considered, well focused, resilient, practical and cost-effective. You will also ensure that you learn from an
Answer
[default - edit me]


statusnot learnedmeasured difficulty37% [default]last interval [days]               
repetition number in this series0memorised on               scheduled repetition               
scheduled repetition interval               last repetition or drill
The Planning Cycle
The Planning Cycle brings together all aspects of planning into a coherent, unified process. By planning within this structure, you will help to ensure that your plans are fully considered, well focused, resilient, practical and cost-effective. You will also ensure that you learn from any mistakes you make, and feed this back into future planning and Decision Making. Planning using this cycle will help you to plan and manage ongoing projects up to a certain







Flashcard 1441739443468

Question
[default - edit me]
Answer
u should evaluate whether it is likely to succeed. This evaluation may be cost or number based, or may use other analytical tools. This analysis may show that your pl


statusnot learnedmeasured difficulty37% [default]last interval [days]               
repetition number in this series0memorised on               scheduled repetition               
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The Planning Cycle
es and approaches are necessary (see Managing Large Projects and Programs ). How to Use the Tool It is best to think of planning as a cycle, not a straight-through process. Once you have devised a plan yo<span>u should evaluate whether it is likely to succeed. This evaluation may be cost or number based, or may use other analytical tools. This analysis may show that your plan may cause unwanted consequences, may cost too much, or may simply not work. In this case you should cycle back to an earlier stage. Alternatively you may have to abandon







Flashcard 1441742327052

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#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
Non-price competition dominates those market structures where [...] is critical.
Answer
product differentiation


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Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation th

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes.

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Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel depend

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




Flashcard 1441746259212

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
An example of non-price competition is product differentiation through [...].
Answer
marketing


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ose market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through <span>marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce to

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy.

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differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, <span>non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy.<span><body><html>

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Exhibit 1. Characteristics of Market Structure
Market StructureNumber of SellersDegree of Product DifferentiationBarriers to EntryPricing Power of FirmNon-price Competition
Perfect competitionManyHomogeneous/ StandardizedVery LowNoneNone
Monopolistic competitionManyDifferentiatedLowSomeAdvertising and Product Differentiation
OligopolyFewHomogeneous/ StandardizedHighSome or ConsiderableAdvertising and Product Differentiation
MonopolyOneUnique ProductVery HighConsiderableAdvertising

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ld reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. <span>Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profi

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets.

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rentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising <span>From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more in

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control.

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From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower.

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can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. <span>From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets.<span><body><html>

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets.

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e, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. <span>As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with t

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




Flashcard 1441759366412

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
While perfect competition offers the lowest price, other market forms may [...].
Answer
spur more innovation


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As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







#cfa-level-1 #factors-that-determine-market-structures #microeconomics #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment.

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As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may b

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#cfa-level-1 #factors-that-determine-market-structures #microeconomics #porter-5-forces #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
PORTER’S FIVE FORCES AND MARKET STRUCTURE

A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants.

This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as:

  • Threat of entry;

  • Power of suppliers;

  • Power of buyers (customers);

  • Threat of substitutes; and

  • Rivalry among existing competitors.

It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability.

Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs.

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Parent (intermediate) annotation

Open it
of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. <span>PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




Flashcard 1441765657868

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #porter-5-forces #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question

A financial analyst aiming to establish market conditions should start with the questions:

...]

Is the product differentiated?


[...]

What is the pricing power of the firm

[...]

Answer
How many sellers are there?

​Are there barriers to entry?

What is the non-price competition


statusnot learnedmeasured difficulty37% [default]last interval [days]               
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Parent (intermediate) annotation

Open it
html>PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







Flashcard 1441768017164

Tags
#cfa-level-1 #factors-that-determine-market-structures #microeconomics #porter-5-forces #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Question
PORTER’S FIVE FORCES

  • Threat of entry;

  • [...]
  • Power of buyers (customers);
  • [...]

  • Rivalry among existing competitors.

Answer
Power of suppliers;

Threat of substitutes;


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usiness School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; <span>Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the p

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>







#cfa-level-1 #factors-that-determine-market-structures #microeconomics #porter-5-forces #reading-16-the-firm-and-market-structures #section-2-analysis-of-mkt-structures #study-session-4
Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs.

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in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. <span>Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>

Original toplevel document

2. ANALYSIS OF MARKET STRUCTURES
d monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return. <span>2.2. Factors That Determine Market Structure Five factors determine market structure: The number and relative size of firms supplying the product; The degree of product differentiation; The power of the seller over pricing decisions; The relative strength of the barriers to market entry and exit; and The degree of non-price competition. The number and relative size of firms in a market influence market structure. If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Škoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns; frequent styling changes; the linking of its product with other, complementary products; or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers . That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price. In the case of oligopoly, there are so few firms in the market that price control becomes possible. However, the small number of firms in an oligopoly market invites complex pricing strategies. Collusion, price leadership by dominant firms, and other pricing strategies can result. The degree to which one market structure can evolve into another and the difference between potential short-run outcomes and long-run equilibrium conditions depend on the strength of the barriers to entry and the possibility that firms fail to recoup their original costs or lose money for an extended period of time and are therefore forced to exit the market. Barriers to entry can result from very large capital investment requirements, as in the case of petroleum refining. Barriers may also result from patents, as in the case of some electronic products and drug formulas. Another entry consideration is the possibility of high exit costs. For example, plants that are specific to a special line of products, such as aluminum smelting plants, are non-redeployable, and exit costs would be high without a liquid market for the firm’s assets. High exit costs deter entry and are therefore also considered barriers to entry. In the case of farming, the barriers to entry are low. Production of corn, soybeans, wheat, tomatoes, and other produce is an easy process to replicate; therefore, those are highly competitive markets. Non-price competition dominates those market structures where product differentiation is critical. Therefore, monopolistic competition relies on competitive strategies that may not include pricing changes. An example of non-price competition is product differentiation through marketing. In other circumstances, non-price competition may occur because the few firms in the market feel dependent on each other. Each firm fears retaliatory price changes that would reduce total revenue for all of the firms in the market. Because oligopoly industries have so few firms, each firm feels dependent on the pricing strategies of the others. Therefore, non-price competition becomes a dominant strategy. Exhibit 1. Characteristics of Market Structure Market Structure Number of Sellers Degree of Product Differentiation Barriers to Entry Pricing Power of Firm Non-price Competition Perfect competition Many Homogeneous/ Standardized Very Low None None Monopolistic competition Many Differentiated Low Some Advertising and Product Differentiation Oligopoly Few Homogeneous/ Standardized High Some or Considerable Advertising and Product Differentiation Monopoly One Unique Product Very High Considerable Advertising From the perspective of the owners of the firm, the most desirable market structure is that with the most control over price, because this control can lead to large profits. Monopoly and oligopoly markets offer the greatest potential control over price; monopolistic competition offers less control. Firms operating under perfectly competitive market conditions have no control over price. From the consumers’ perspective, the most desirable market structure is that with the greatest degree of competition, because prices are generally lower. Thus, consumers would prefer as many goods and services as possible to be offered in competitive markets. As often happens in economics, there is a trade-off. While perfect competition gives the largest quantity of a good at the lowest price, other market forms may spur more innovation. Specifically, there may be high costs in researching a new product, and firms will incur such costs only if they expect to earn an attractive return on their research investment. This is the case often made for medical innovations, for example—the cost of clinical trials and experiments to create new medicines would bankrupt perfectly competitive firms but may be acceptable in an oligopoly market structure. Therefore, consumers can benefit from less-than-perfectly-competitive markets. PORTER’S FIVE FORCES AND MARKET STRUCTURE A financial analyst aiming to establish market conditions and consequent profitability of incumbent firms should start with the questions framed by Exhibit 1: How many sellers are there? Is the product differentiated? and so on. Moreover, in the case of monopolies and quasi monopolies, the analyst should evaluate the legislative and regulatory framework: Can the company set prices freely, or are there governmental controls? Finally, the analyst should consider the threat of competition from potential entrants. This analysis is often summarized by students of corporate strategy as “Porter’s five forces,” named after Harvard Business School professor Michael E. Porter. His book, Competitive Strategy, presented a systematic analysis of the practice of market strategy. Porter (2008) identified the five forces as: Threat of entry; Power of suppliers; Power of buyers (customers); Threat of substitutes; and Rivalry among existing competitors. It is easy to note the parallels between four of these five forces and the columns in Exhibit 1. The only “orphan” is the power of suppliers, which is not at the core of the theoretical economic analysis of competition, but which has substantial weight in the practical analysis of competition and profitability. Some stock analysts (e.g., Dorsey 2004) use the term “economic moat” to suggest that there are factors protecting the profitability of a firm that are similar to the moats (ditches full of water) that used to protect some medieval castles. A deep moat means that there is little or no threat of entry by invaders, i.e. competitors. It also means that customers are locked in because of high switching costs. <span><body><html>




#six-tips-for-working-with-the-brain
The brain structures that are involved in learning include the hippocampus, the amygdala, and the basal ganglia. To design the best learning experiences, we need to understand and respect the neuroscience of learning.

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run. It is imperative that talent development professionals keep their finger on the pulse of brain science. As researchers learn more about how the brain and nervous system work, it will only enhance the quality of our learning products. <span>The brain structures that are involved in learning include the hippocampus, the amygdala, and the basal ganglia. To design the best learning experiences, we need to understand and respect the neuroscience of learning.<span><body><html>

Original toplevel document

Unknown title
what I learned really changed how I approach training design and delivery. Some of the studies confirmed things I had learned through trial and error long ago, and others completely shifted how I approached my craft. Here are six takeaways. <span>Tip #1: Work with the brain Different parts of the brain play core roles in how a person first learns information, then stores that information into memory, and finally uses that learning to create real and lasting behavior change. If we don't work with the brain and its natural processes, even the most popular or highly rated programs won't deliver in the long run. It is imperative that talent development professionals keep their finger on the pulse of brain science. As researchers learn more about how the brain and nervous system work, it will only enhance the quality of our learning products. The brain structures that are involved in learning include the hippocampus, the amygdala, and the basal ganglia. To design the best learning experiences, we need to understand and respect the neuroscience of learning. Tip #2: Focus is the starting point of learning The hippocampus is the part of the brain that takes in information and moves it to our memory. When it's damaged, people lose access




#six-tips-for-working-with-the-brain
Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them.

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ry As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. <span>Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with

Original toplevel document

Unknown title
ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th




#six-tips-for-working-with-the-brain
Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family.

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omething we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. <span>Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instincti

Original toplevel document

Unknown title
ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th




Flashcard 1441776667916

Tags
#six-tips-for-working-with-the-brain
Question
Schemas are [...] and they get bigger and stronger as we add to them.
Answer
neural networks


statusnot learnedmeasured difficulty37% [default]last interval [days]               
repetition number in this series0memorised on               scheduled repetition               
scheduled repetition interval               last repetition or drill

Parent (intermediate) annotation

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Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with

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ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th







#six-tips-for-working-with-the-brain
Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas.

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g with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. <span>Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to sc

Original toplevel document

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ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th




#six-tips-for-working-with-the-brain
So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with

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ced that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. <span>So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should star

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ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th




#six-tips-for-working-with-the-brain
Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models.

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that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" <span>Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and B

Original toplevel document

Unknown title
ehavior change. Learning is not the only activity that benefits from focus. Daniel Goleman's latest book, Focus: The Hidden Ingredient in Excellence, details the positive impact focusing has on leadership, decision making, and creativity. <span>Tip #3: Connections are the key to memory As soon as the hippocampus captures learning, it first moves that learning into short-term memory and then eventually to long-term memory. Again, our knowledge of the brain can help us tap into the body's natural process for doing this. Studies have shown that learning is the most likely to be retained and remembered when it can be connected to something we already know. Knowledge is stored in the brain as schemas, which are built up over time through experience. For example, think of bananas and you will recall instantly their color, shape, taste, smell, and whether you like them. Schemas are neural networks and they get bigger and stronger as we add to them. Because I traveled in Venezuela, my schema for bananas includes the smaller, sweeter cambur, along with fond memories of baking with family. Talent development professionals can take advantage of this natural process by attaching new learning to schemas that already exist in the learner's brain. The best teachers instinctively do this. Whether they are teaching calculus, software, or leadership, they explain the abstract in concrete ways that connect to learners' existing schemas. Having been a dean at a major research university, I noticed that this was what distinguished the best math and science instructors from the rest. They were gifted at connecting to schemas that existed in the minds of young adults in a way that made the complex not only accessible, but even easy. So how do you activate your learners' schemas? First, you must step into the perspective of your learners. Knowing your audience will help you know what is there to play with. Many of us have faced this with multigenerational groups when an example that works for Boomers generated blank stares with Millennials. Any learning design or facilitation should start with asking yourself, "Who is in the room and how can I make meaningful connections to something they already know?" Another shift I have made is to share a few different models or examples instead of just one. This broad approach allows me to activate the schemas of more people in the room because I know that at least one is likely to hit the target. And this approach creates the added benefit of connecting the dots between those models. For example, when I teach change management, I share a model of organizational development, research on how humans respond psychologically to change (known as the change curve), and Brené Brown's work on vulnerability. Together, these models provide the why and how change is both inevitable and difficult. It also shows the complex intersections that are at play, which provides insight about how to navigate them successfully. I ask my learners to remember two times they experienced change, one that went smoothly and one that was difficult. This activates not only those specific memories, but also their individual schemas of change. When I pair this with hands-on activities for leading change effectively, the result is powerful and lasting. Advertisement Tip #4: Aim for three retrievals One of the biggest insights from brain science has to do with how our memories are made. For conceptual learning, th




#six-tips-for-working-with-the-brain
It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways.

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sleep between learning It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. <span>It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retain

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benefit seems to be better at three, so I focus on that number of retrievals in my own learning design. You can certainly build three retrievals into one learning event, but retention will be even more powerful if you add sleep to the mix. <span>Tip #5: Build in sleep between learning It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while. The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents. So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning. I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.com. They can do this at their own pace and it frees me up from teaching some of that content so that I can use our in-person time for more focused work. When we come together, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner




#six-tips-for-working-with-the-brain
Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while.

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rned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. <span>Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while. The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U

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benefit seems to be better at three, so I focus on that number of retrievals in my own learning design. You can certainly build three retrievals into one learning event, but retention will be even more powerful if you add sleep to the mix. <span>Tip #5: Build in sleep between learning It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while. The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents. So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning. I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.com. They can do this at their own pace and it frees me up from teaching some of that content so that I can use our in-person time for more focused work. When we come together, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner




#build-in-sleep #six-tips-for-working-with-the-brain
I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application.

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ey is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents. So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning. <span>I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.c

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benefit seems to be better at three, so I focus on that number of retrievals in my own learning design. You can certainly build three retrievals into one learning event, but retention will be even more powerful if you add sleep to the mix. <span>Tip #5: Build in sleep between learning It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while. The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents. So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning. I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.com. They can do this at their own pace and it frees me up from teaching some of that content so that I can use our in-person time for more focused work. When we come together, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner




#build-in-sleep #six-tips-for-working-with-the-brain
This blended approach (Pre-learn, teaching -or getting tought- and TED talks and stuff afterwards) allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate.

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gether, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills. <span>This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. <span><body><html>

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benefit seems to be better at three, so I focus on that number of retrievals in my own learning design. You can certainly build three retrievals into one learning event, but retention will be even more powerful if you add sleep to the mix. <span>Tip #5: Build in sleep between learning It turns out that the sleeping brain plays a large role in how long-term memories are formed. While we sleep, the brain pushes information that we learned that day from our short-term memory into our long-term memory. It's when we sleep that our brain adds the day's learning onto existing schemas, and physically builds and strengthens neural pathways. It also does a little housecleaning. Every day, we take in thousands of bits of information and it is during sleep that our brain chooses which of those bits is worthy of being retained. It even revisits items already in long-term memory and deletes the information that has not been activated in a while. The animated movie Inside Out does a great job of depicting this process. While Riley is sleeping, the minion-like workers in her brain decide to vacuum out most of the names of the U.S. presidents. So how can we use sleep to enhance our learning events? Flip the classroom and use blended learning. I now have learners do some pre-learning a few days prior, then we take a deeper dive in the classroom through hands-on application. I extend their learning with post-event opportunities and resources. For example, when I design leadership training, learners are asked to watch a corresponding online course at lynda.com. They can do this at their own pace and it frees me up from teaching some of that content so that I can use our in-person time for more focused work. When we come together, we do in-depth hands-on practice of the skills I want them to use. And after the event, I provide them with additional learning materials such as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner




#six-tips-for-working-with-the-brain
Charles Duhigg's The Power of Habit changed the way I see my work. He shares the science of how the basal ganglia in the brain builds habit loops that include a cue or trigger, the routine of behavior, and the reward for completing that routine.

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Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner. Charles Duhigg's The Power of Habit changed the way I see my work. He shares the science of how the basal ganglia in the brain builds habit loops that include a cue or trigger, the routine of behavior, and the reward for completing that routine. Over time, habits become well-grooved neural pathways that almost happen on autopilot, for example how you currently log in to your computer or how you get to work. When we are tryi

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as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. <span>Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner. Charles Duhigg's The Power of Habit changed the way I see my work. He shares the science of how the basal ganglia in the brain builds habit loops that include a cue or trigger, the routine of behavior, and the reward for completing that routine. Over time, habits become well-grooved neural pathways that almost happen on autopilot, for example how you currently log in to your computer or how you get to work. When we are trying to create behavior change, we need to think about the habits that are currently in place and how to design new, better habits that will be more compelling than the comfort of the current ones. I now think of myself as a habit designer. All of my learning design starts with identifying the habit loop I hope to instill, and I work backward from there. Although retrievals are the key to moving conceptual learning into memory, repetition is the key for habit design. The more we fire neurons together, the stronger that neural pathway becomes, to the point that researchers can measure the neurons growing thicker. As talent development professionals, we are in the business of cultivating potential. Your organization as a whole—as well as every person in it—have unrealized ability, and your job is to cultivate that potential through the learning experiences you create. Work with the natural processes of the brain and nervous system to maximize the impact of your great work. Brain Science Resources Brain science is a burgeoning field and, within it, you will find a wide range of defined specialties from neurology to psychology to biology. This is a lis




#six-tips-for-working-with-the-brain
When we are trying to create behavior change, we need to think about the habits that are currently in place and how to design new, better habits that will be more compelling than the comfort of the current ones.

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ger, the routine of behavior, and the reward for completing that routine. Over time, habits become well-grooved neural pathways that almost happen on autopilot, for example how you currently log in to your computer or how you get to work. <span>When we are trying to create behavior change, we need to think about the habits that are currently in place and how to design new, better habits that will be more compelling than the comfort of the current ones. I now think of myself as a habit designer. All of my learning design starts with identifying the habit loop I hope to instill, and I work backward from there. Although retrievals are

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as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. <span>Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner. Charles Duhigg's The Power of Habit changed the way I see my work. He shares the science of how the basal ganglia in the brain builds habit loops that include a cue or trigger, the routine of behavior, and the reward for completing that routine. Over time, habits become well-grooved neural pathways that almost happen on autopilot, for example how you currently log in to your computer or how you get to work. When we are trying to create behavior change, we need to think about the habits that are currently in place and how to design new, better habits that will be more compelling than the comfort of the current ones. I now think of myself as a habit designer. All of my learning design starts with identifying the habit loop I hope to instill, and I work backward from there. Although retrievals are the key to moving conceptual learning into memory, repetition is the key for habit design. The more we fire neurons together, the stronger that neural pathway becomes, to the point that researchers can measure the neurons growing thicker. As talent development professionals, we are in the business of cultivating potential. Your organization as a whole—as well as every person in it—have unrealized ability, and your job is to cultivate that potential through the learning experiences you create. Work with the natural processes of the brain and nervous system to maximize the impact of your great work. Brain Science Resources Brain science is a burgeoning field and, within it, you will find a wide range of defined specialties from neurology to psychology to biology. This is a lis




#six-tips-for-working-with-the-brain
Although retrievals are the key to moving conceptual learning into memory, repetition is the key for habit design.

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better habits that will be more compelling than the comfort of the current ones. I now think of myself as a habit designer. All of my learning design starts with identifying the habit loop I hope to instill, and I work backward from there. <span>Although retrievals are the key to moving conceptual learning into memory, repetition is the key for habit design. The more we fire neurons together, the stronger that neural pathway becomes, to the point that researchers can measure the neurons growing thicker. As talent development professionals

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as links to TED Talks, articles, and assignments to further hone their skills. This blended approach allows me to create three retrievals spaced with sleep, and it also starts to build the habits of the behaviors I am trying to cultivate. <span>Tip #6: Be a habit designer Ultimately, the goal of most learning activities is behavior change. No matter the topic, we are trying to elicit new and better behaviors in the learner. Charles Duhigg's The Power of Habit changed the way I see my work. He shares the science of how the basal ganglia in the brain builds habit loops that include a cue or trigger, the routine of behavior, and the reward for completing that routine. Over time, habits become well-grooved neural pathways that almost happen on autopilot, for example how you currently log in to your computer or how you get to work. When we are trying to create behavior change, we need to think about the habits that are currently in place and how to design new, better habits that will be more compelling than the comfort of the current ones. I now think of myself as a habit designer. All of my learning design starts with identifying the habit loop I hope to instill, and I work backward from there. Although retrievals are the key to moving conceptual learning into memory, repetition is the key for habit design. The more we fire neurons together, the stronger that neural pathway becomes, to the point that researchers can measure the neurons growing thicker. As talent development professionals, we are in the business of cultivating potential. Your organization as a whole—as well as every person in it—have unrealized ability, and your job is to cultivate that potential through the learning experiences you create. Work with the natural processes of the brain and nervous system to maximize the impact of your great work. Brain Science Resources Brain science is a burgeoning field and, within it, you will find a wide range of defined specialties from neurology to psychology to biology. This is a lis




Flashcard 1441797115148

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#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
Economic income is based on the changes in the market value of the company, not [...]
Answer
changes in its book value (accounting depreciation).


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Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation).

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
net income. (No subtraction is made for the cost of equity financing in arriving at accounting net income.) Accounting net income also differs from economic income, which is the cash inflow plus the change in the market value of the company. <span>Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation). In assumption 5 above, we referred to the rate used in discounting the cash flows as the “required rate of return.” The required rate of return is the discount rate







#investopedia
Because EBITDA excludes interest, depreciation, amortization and taxes, EBITDA margin can provide an investor, business owner or financial professional with a clear view of a company's operating profitability and cash flow.

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EBITDA Margin
EBITDA margin is a measurement of a company's operating profitability as a percentage of its total revenue. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. <span>Because EBITDA excludes interest, depreciation, amortization and taxes, EBITDA margin can provide an investor, business owner or financial professional with a clear view of a company's operating profitability and cash flow. <span><body><html>




Flashcard 1441803144460

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
The shorter the payback period, the greater the project's [...] the lower the risk, and the better the project.
Answer
liquidity,


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The shorter the payback period, the greater the project's liquidity, the lower the risk, and the better the project.

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Subject 3. Investment Decision Criteria
y to recover the initial investment, not how much money you can make during the life of the project. It does not consider the time value of money. Therefore, the cost of capital is not reflected in the cash flows or calculations. <span>Discounted Payback Period This is similar to the regular payback method except that it discounts cash flows at the project's cost of capital. It considers the time value of money, but it ignores cash flows beyond the payback period. Again, assume the cost of capital for the firm is 10%: Discounted PaybackA = 2 + (1000 - 682 - 289)/113 = 2.26 years Discounted PaybackB = 3 + (1000 - 91 - 207 - 338)/512 = 3.71 years The payback provides an indication of a project's risk and liquidity because it shows how long the invested capital will be tied up in a project and "at risk." The shorter the payback period, the greater the project's liquidity, the lower the risk, and the better the project. The payback is often used as one indicator of a project's risk. Average Accounting Rate of Return (not required) This is a very simple rate of return: Its only advantage is that







Flashcard 1441804717324

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#analyst-notes #cfa-level-1 #reading-35-capital-budgeting #study-session-10
Question
A NPV profile is a graph showing the relationship between a project's [...]
Answer
NPV and the firm's cost of capital.


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A NPV profile is a graph showing the relationship between a project's NPV and the firm's cost of capital.

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Subject 4. NPV Profiles
A NPV profile is a graph showing the relationship between a project's NPV and the firm's cost of capital. The point where a project's net present value profile crosses the horizontal axis indicates a project's internal rate of return. Some observations: &#13







#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value.

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although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are no

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1. INTRODUCTION
security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, <span>although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti




#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex.

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although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic

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1. INTRODUCTION
security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, <span>although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti




Regulatory, safety, and environmental projects.
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Regulatory, safety, and environmental projects may generate no revenue and might not be undertaken by a company maximizing its own private interests. Often, the company will accept the required investment and continue to operate.

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2. THE CAPITAL BUDGETING PROCESS
New products and services. These investments expose the company to even more uncertainties than expansion projects. These decisions are more complex and will involve more people in the decision-making process. <span>Regulatory, safety, and environmental projects. These projects are frequently required by a governmental agency, an insurance company, or some other external party. They may generate no revenue and might not be undertaken by a company maximizing its own private interests. Often, the company will accept the required investment and continue to operate. Occasionally, however, the cost of the regulatory/safety/environmental project is sufficiently high that the company would do better to cease operating altogether or to shut down any part of the business that is related to the project. Other. The projects above are all susceptible to capital budgeting analysis, and they can be accepted or rejected using the net present value (NPV) or some other criteri




Regulatory, safety, and environmental projects.
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Occasionally the cost of the regulatory/safety/environmental project is sufficiently high that the company would do better to cease operating altogether or to shut down any part of the business that is related to the project.

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2. THE CAPITAL BUDGETING PROCESS
New products and services. These investments expose the company to even more uncertainties than expansion projects. These decisions are more complex and will involve more people in the decision-making process. <span>Regulatory, safety, and environmental projects. These projects are frequently required by a governmental agency, an insurance company, or some other external party. They may generate no revenue and might not be undertaken by a company maximizing its own private interests. Often, the company will accept the required investment and continue to operate. Occasionally, however, the cost of the regulatory/safety/environmental project is sufficiently high that the company would do better to cease operating altogether or to shut down any part of the business that is related to the project. Other. The projects above are all susceptible to capital budgeting analysis, and they can be accepted or rejected using the net present value (NPV) or some other criteri




Flashcard 1441819659532

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#rules-of-formulating-knowledge
Question
[...] does not have to contradict the minimum information principle and may even be welcome.
Answer
Redundancy


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Redundancy does not have to contradict the minimum information principle and may even be welcome.

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17. Redundancy does not contradict minimum information principle
Redundancy in simple terms is more information than needed or duplicate information, etc. Redundancy does not have to contradict the minimum information principle and may even be welcome. The problem of redundancy is too wide for this short text. Here are some examples that are only to illustrate that minimum information principle cannot be understood as minimum number o







Flashcard 1441821756684

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#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
If the company can invest elsewhere and earn a return of r, then r is the company’s [...]
Answer
opportunity cost of funds.


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If the company can invest elsewhere and earn a return of r, or if the company can repay its sources of capital and save a cost of r, then r is the company’s opportunity cost of funds.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
he “required rate of return.” The required rate of return is the discount rate that investors should require given the riskiness of the project. This discount rate is frequently called the “opportunity cost of funds” or the “cost of capital.” <span>If the company can invest elsewhere and earn a return of r, or if the company can repay its sources of capital and save a cost of r, then r is the company’s opportunity cost of funds. If the company cannot earn more than its opportunity cost of funds on an investment, it should not undertake that investment. Unless an investment earns more than the cost of funds from







Flashcard 1441823329548

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#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
An incremental cash flow is the cash flow that is realized because of a decision: the cash flow [...] minus [...] .
Answer
with a decision

the cash flow without that decision


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An incremental cash flow is the cash flow that is realized because of a decision: the cash flow with a decision minus the cash flow without that decision. If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting.</htm

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
st $10 million, what is the opportunity cost? The answers to these three questions are, respectively: the current market value, the cash flows the old machine would generate, and $10 million (which you could invest elsewhere). <span>An incremental cash flow is the cash flow that is realized because of a decision: the cash flow with a decision minus the cash flow without that decision. If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting. An externality is the effect of an investment on other things besides the investment itself. Frequently, an investment affects the cash flows of other parts of the com







#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting.

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An incremental cash flow is the cash flow that is realized because of a decision: the cash flow with a decision minus the cash flow without that decision. If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
st $10 million, what is the opportunity cost? The answers to these three questions are, respectively: the current market value, the cash flows the old machine would generate, and $10 million (which you could invest elsewhere). <span>An incremental cash flow is the cash flow that is realized because of a decision: the cash flow with a decision minus the cash flow without that decision. If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting. An externality is the effect of an investment on other things besides the investment itself. Frequently, an investment affects the cash flows of other parts of the com




Flashcard 1441827261708

Tags
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
If cash flows change signs once, the pattern is [...]. If cash flows change signs two or more times, the pattern is [...]
Answer
conventional

nonconventional.


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If cash flows change signs once, the pattern is conventional. If cash flows change signs two or more times, the pattern is nonconventional.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
to negative again (or even change signs several times). An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have a conventional pattern. <span>If cash flows change signs once, the pattern is conventional. If cash flows change signs two or more times, the pattern is nonconventional. Several types of project interactions make the incremental cash flow analysis challenging. The following are some of these interactions: Indepe







Flashcard 1441829621004

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#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
An [...] environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return.
Answer
unlimited funds


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An unlimited funds environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
the first project or new economic conditions are favorable. If the results of the first project or new economic conditions are not favorable, you do not invest in the second project. Unlimited funds versus capital rationing —<span>An unlimited funds environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return. Capital rationing exists when the company has a fixed amount of funds to invest. If the company has more profitable projects than it has funds for, it must allocate the funds to achieve







Flashcard 1441831193868

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
NPV measures the dollar benefit of the project to shareholders. However, it does not measure the [...] of the project, and thus cannot provide "safety margin" information.
Answer
rate of return


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NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested cap

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Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.

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NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.

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Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.




Flashcard 1441835126028

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
Safety margin refers to how much the [...] before the invested capital is at risk.
Answer
project return could fall in percentage terms


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Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.

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Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.







#rules-of-formulating-knowledge
For more on boosting creativity and intelligence read: Roots of genius and creativity, as well as more specific: Derivation, reasoning and intelligence

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ems to solve, memorizing individual derivation steps is always highly recommended (e.g. solving complex mathematical problems). It is not cramming! It is making sure that the brain can always follow the fastest path while solving the problem. <span>For more on boosting creativity and intelligence read: Roots of genius and creativity, as well as more specific: Derivation, reasoning and intelligence<span><body><html>

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17. Redundancy does not contradict minimum information principle
ly follow the reasoning steps (e.g. solve a simple mathematical equation) and generate the answer. In such a case, providing the hint on the reasoning steps in the answer will only serve helping you always follow the right path at repetitions <span>derivation steps : in more complex problems to solve, memorizing individual derivation steps is always highly recommended (e.g. solving complex mathematical problems). It is not cramming! It is making sure that the brain can always follow the fastest path while solving the problem. For more on boosting creativity and intelligence read: Roots of genius and creativity, as well as more specific: Derivation, reasoning and intelligence multiple semantic representation : very often the same knowledge can be represented and viewed from different angles. Memorizing different representations of the same fact or rule is re




#rules-of-formulating-knowledge
derivation steps: in more complex problems to solve, memorizing individual derivation steps is always highly recommended (e.g. solving complex mathematical problems). It is not cramming! It is making sure that the brain can always follow the fastest path while solving the problem.

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derivation steps : in more complex problems to solve, memorizing individual derivation steps is always highly recommended (e.g. solving complex mathematical problems). It is not cramming! It is making sure that the brain can always follow the fastest path while solving the problem. For more on boosting creativity and intelligence read: Roots of genius and creativity, as well as more specific: Derivation, reasoning and intelligence

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17. Redundancy does not contradict minimum information principle
ly follow the reasoning steps (e.g. solve a simple mathematical equation) and generate the answer. In such a case, providing the hint on the reasoning steps in the answer will only serve helping you always follow the right path at repetitions <span>derivation steps : in more complex problems to solve, memorizing individual derivation steps is always highly recommended (e.g. solving complex mathematical problems). It is not cramming! It is making sure that the brain can always follow the fastest path while solving the problem. For more on boosting creativity and intelligence read: Roots of genius and creativity, as well as more specific: Derivation, reasoning and intelligence multiple semantic representation : very often the same knowledge can be represented and viewed from different angles. Memorizing different representations of the same fact or rule is re




Flashcard 1441840631052

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
Payback occurs when [...]
Answer
the cumulative net cash flow equals 0.


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Payback occurs when the cumulative net cash flow equals 0.

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Subject 3. Investment Decision Criteria
ancial calculator is needed to solve for IRR. The IRR for Project A is 18.32% and for Project B is 15.03%. Payback Period This is the expected number of years required to recover the original investment. <span>Payback occurs when the cumulative net cash flow equals 0. Decision rules: The shorter the payback period, the better. A firm should establish a benchmark payback period. Reject if payback is greater than benchmark. &#







Flashcard 1441842466060

Tags
#analyst-notes #cfa-level-1 #reading-35-capital-budgeting #study-session-10
Question
The point where a project's net present value profile crosses the horizontal axis indicates a project's

[...]
Answer
internal rate of return.


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The point where a project's net present value profile crosses the horizontal axis indicates a project's internal rate of return.

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Subject 4. NPV Profiles
A NPV profile is a graph showing the relationship between a project's NPV and the firm's cost of capital. The point where a project's net present value profile crosses the horizontal axis indicates a project's internal rate of return. Some observations: The IRR is the discount rate that sets the NPV to 0. The NPV profile declines as the discount rate increases. Project A







Flashcard 1441844563212

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
Capital budgeting decisions are based on [...]
Answer
incremental after-tax cash flows discounted at the opportunity cost of capital.


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Capital budgeting decisions are based on incremental after-tax cash flows discounted at the opportunity cost of capital.

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Subject 2. Basic Principles of Capital Budgeting
Capital budgeting decisions are based on incremental after-tax cash flows discounted at the opportunity cost of capital. Assumptions of capital budgeting are: Capital budgeting decisions must be based on cash flows, not accounting income. Accounting profits only measure the return on t







Flashcard 1441846136076

Tags
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have [...]
Answer
a conventional pattern


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An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have a conventional pattern

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
an initial outflow followed by a series of inflows. In a nonconventional cash flow pattern, the initial outflow is not followed by inflows only, but the cash flows can flip from positive to negative again (or even change signs several times). <span>An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have a conventional pattern. If cash flows change signs once, the pattern is conventional. If cash flows change signs two or more times, the pattern is nonconventional. Several types of projec







Flashcard 1441884671244

Tags
#matter-and-form #nature-of-language #sister-miriam-joseph #trivium
Question
What is the matter in water?
Answer
hydrogen and oxygen


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In water, the matter consists of hydrogen and oxygen; the form is the precise mode of their union in a molecule of water and may be expressed by the chemical formula H 2 O.

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Flashcard 1441886506252

Tags
#matter-and-form #nature-of-language #sister-miriam-joseph #trivium
Question
What is the form in water?
Answer
the precise mode of their union in a molecule of water and may be expressed by the chemical formula H 2 O.


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In water, the matter consists of hydrogen and oxygen; the form is the precise mode of their union in a molecule of water and may be expressed by the chemical formula H 2 O.

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Flashcard 1441919798540

Tags
#python #scip
Question
What is an "enviroment?"
Answer
memory that keeps track of the names, values, and bindings.


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memory that keeps track of the names, values, and bindings. This memory is called an environment.

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1.2 Elements of Programming
x programs are constructed by building, step by step, computational objects of increasing complexity. The possibility of binding names to values and later retrieving those values by name means that the interpreter must maintain some sort of <span>memory that keeps track of the names, values, and bindings. This memory is called an environment. Names can also be bound to functions. For instance, the name max is bound to the max function we have been using. Functions, unlike numbers, are tricky to render as text, so Python







Flashcard 1441922157836

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#python #scip
Question
If a value has been given a name, we say that the name [...] to the value
Answer
binds


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If a value has been given a name, we say that the name binds to the value

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1.2 Elements of Programming
y, this documentation will become a valuable reference source. 1.2.4 Names and the Environment Video: Show Hide A critical aspect of a programming language is the means it provides for using names to refer to computational objects. <span>If a value has been given a name, we say that the name binds to the value. In Python, we can establish new bindings using the assignment statement, which contains a name to the left of = and a value to the right: >>> radius = 10 >>> ra







Flashcard 1441923992844

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#python #scip
Question
the [...] is an expression that precedes parentheses, which enclose a comma-delimited list of operand expressions.
Answer
operator


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the operator is an expression that precedes parentheses, which enclose a comma-delimited list of operand expressions.

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1.2 Elements of Programming
s inputs to a single output, which is the largest of the inputs. The way in which Python expresses function application is the same as in conventional mathematics. >>> max(7.5, 9.5) 9.5 This call expression has subexpressions: <span>the operator is an expression that precedes parentheses, which enclose a comma-delimited list of operand expressions. The operator specifies a function. When this call expression is evaluated, we say that the function max is called with arguments 7.5 and 9.5, and returns a value of 9.5. The







Flashcard 1441925565708

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#python #scip
Question
the operator is an expression that precedes parentheses, which enclose a comma-delimited list of [...] expressions.
Answer
operand


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the operator is an expression that precedes parentheses, which enclose a comma-delimited list of operand expressions.

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1.2 Elements of Programming
s inputs to a single output, which is the largest of the inputs. The way in which Python expresses function application is the same as in conventional mathematics. >>> max(7.5, 9.5) 9.5 This call expression has subexpressions: <span>the operator is an expression that precedes parentheses, which enclose a comma-delimited list of operand expressions. The operator specifies a function. When this call expression is evaluated, we say that the function max is called with arguments 7.5 and 9.5, and returns a value of 9.5. The







Flashcard 1441927138572

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#python #scip
Question
The most important kind of compound expression is a [...] which applies a function to some arguments.
Answer
call expression,


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The most important kind of compound expression is a call expression, which applies a function to some arguments.

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1.2 Elements of Programming
ways to form compound expressions. Rather than attempt to enumerate them all immediately, we will introduce new expression forms as we go, along with the language features that they support. 1.2.2 Call Expressions Video: Show Hide <span>The most important kind of compound expression is a call expression, which applies a function to some arguments. Recall from algebra that the mathematical notion of a function is a mapping from some input arguments to an output value. For instance, the max function maps its inputs to a single ou







Flashcard 1441928711436

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#python #scip
Question
What do primitives (expressions and elements) do? What is their purpose?
Answer
represent the simplest building blocks that the language provides,


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Every powerful language has three such mechanisms: primitive expressions and statements , which represent the simplest building blocks that the language provides, means of combination , by which compound elements are built from simpler ones, and means of abstraction , by which compound elements can be named and manipulated as units.

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1.2 Elements of Programming
ust be written for people to read, and only incidentally for machines to execute. When we describe a language, we should pay particular attention to the means that the language provides for combining simple ideas to form more complex ideas. <span>Every powerful language has three such mechanisms: primitive expressions and statements , which represent the simplest building blocks that the language provides, means of combination , by which compound elements are built from simpler ones, and means of abstraction , by which compound elements can be named and manipulated as units. In programming, we deal with two kinds of elements: functions and data. (Soon we will discover that they are really not so distinct.) Informally, data is stuff that we want to manipul







Flashcard 1441931070732

Tags
#python #scip
Question
What are "means of combination?"
Answer
A term for how compound elements are built from simpler ones


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Every powerful language has three such mechanisms: primitive expressions and statements , which represent the simplest building blocks that the language provides, means of combination , by which compound elements are built from simpler ones, and means of abstraction , by which compound elements can be named and manipulated as units.

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1.2 Elements of Programming
ust be written for people to read, and only incidentally for machines to execute. When we describe a language, we should pay particular attention to the means that the language provides for combining simple ideas to form more complex ideas. <span>Every powerful language has three such mechanisms: primitive expressions and statements , which represent the simplest building blocks that the language provides, means of combination , by which compound elements are built from simpler ones, and means of abstraction , by which compound elements can be named and manipulated as units. In programming, we deal with two kinds of elements: functions and data. (Soon we will discover that they are really not so distinct.) Informally, data is stuff that we want to manipul







Flashcard 1441933430028

Tags
#python #scip
Question
What is meant by "means of abstraction?"
Answer
compound elements can be named and manipulated as units.


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h mechanisms: primitive expressions and statements , which represent the simplest building blocks that the language provides, means of combination , by which compound elements are built from simpler ones, and means of abstraction , by which <span>compound elements can be named and manipulated as units.<span><body><html>

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1.2 Elements of Programming
ust be written for people to read, and only incidentally for machines to execute. When we describe a language, we should pay particular attention to the means that the language provides for combining simple ideas to form more complex ideas. <span>Every powerful language has three such mechanisms: primitive expressions and statements , which represent the simplest building blocks that the language provides, means of combination , by which compound elements are built from simpler ones, and means of abstraction , by which compound elements can be named and manipulated as units. In programming, we deal with two kinds of elements: functions and data. (Soon we will discover that they are really not so distinct.) Informally, data is stuff that we want to manipul







Flashcard 1441936051468

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#biochem
Question
When was myoglobin (the first protein) discovered?
Answer
In 1958, fi ve years after the discovery of the structure of DNA, the fi rst three-dimen- sional structure of a protein was determined—that of myoglobin, an oxygen-bind- ing protein


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In 1958, fi ve years after the discovery of the structure of DNA, the fi rst three-dimen- sional structure of a protein was determined—that of myoglobin, an oxygen-bind- ing protein

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Flashcard 1441938410764

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#biochem
Question
Not all water-soluble proteins have a hydrophobic core (T/F)?
Answer
All water-soluble proteins, have a hydrophobic core


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All water-soluble proteins, not just myoglobin, have a hydrophobic core

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Flashcard 1441941032204

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#python #sicp
Question
An environment in which an expression is evaluated consists of
Answer
a sequence of frames


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An environment in which an expression is evaluated consists of a sequence of frames, depicted as boxes. Each frame contains bindings, each of which associates a name with its corresponding value. There is a single global frame. Assignment and impor

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1.3 Defining New Functions
gh that the meaning of programs is non-obvious. What if a formal parameter has the same name as a built-in function? Can two functions share names without confusion? To resolve such questions, we must describe environments in more detail. <span>An environment in which an expression is evaluated consists of a sequence of frames, depicted as boxes. Each frame contains bindings, each of which associates a name with its corresponding value. There is a single global frame. Assignment and import statements add entries to the first frame of the current environment. So far, our environment consists only of the global frame. 1 from math import pi 2 tau = 2 * pi Edit code in Online Python Tutor







Flashcard 1441943391500

Question
Each frame contains [...], each of which associates a name with its corresponding value.
Answer
bindings


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An environment in which an expression is evaluated consists of a sequence of frames, depicted as boxes. Each frame contains bindings, each of which associates a name with its corresponding value. There is a single global frame. Assignment and import statements add entries to the first frame of the current environment

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1.3 Defining New Functions
gh that the meaning of programs is non-obvious. What if a formal parameter has the same name as a built-in function? Can two functions share names without confusion? To resolve such questions, we must describe environments in more detail. <span>An environment in which an expression is evaluated consists of a sequence of frames, depicted as boxes. Each frame contains bindings, each of which associates a name with its corresponding value. There is a single global frame. Assignment and import statements add entries to the first frame of the current environment. So far, our environment consists only of the global frame. 1 from math import pi 2 tau = 2 * pi Edit code in Online Python Tutor







Flashcard 1441949158668

Question

We have identified in Python some of the elements that must appear in any powerful programming language:

  1. [...] operations are primitive built-in data values and functions.
  2. Nested function application provides a means of combining operations.
  3. Binding names to values provides a limited means of abstraction.
Answer
Numbers and arithmetic


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We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of ab

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1.3 Defining New Functions
1.7.1 The Anatomy of Recursive Functions 1.7.2 Mutual Recursion 1.7.3 Printing in Recursive Functions 1.7.4 Tree Recursion 1.7.5 Example: Partitions 1.3 Defining New Functions Video: Show Hide <span>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction. Now we will learn about function definitions, a much more powerful abstraction technique by which a name can be bound to compound operation, which can then be referred to as a unit.







Flashcard 1441950993676

Question

We have identified in Python some of the elements that must appear in any powerful programming language:

  1. Numbers and arithmetic operations are primitive built-in data values and functions.
  2. [...] provides a means of combining operations.
  3. Binding names to values provides a limited means of abstraction.
Answer
Nested function application


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We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction.

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1.3 Defining New Functions
1.7.1 The Anatomy of Recursive Functions 1.7.2 Mutual Recursion 1.7.3 Printing in Recursive Functions 1.7.4 Tree Recursion 1.7.5 Example: Partitions 1.3 Defining New Functions Video: Show Hide <span>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction. Now we will learn about function definitions, a much more powerful abstraction technique by which a name can be bound to compound operation, which can then be referred to as a unit.







Flashcard 1441953090828

Question

We have identified in Python some of the elements that must appear in any powerful programming language:

  1. Numbers and arithmetic operations are primitive built-in data values and functions.
  2. Nested function application provides a means of combining operations.
  3. [...] provides a limited means of abstraction.
Answer
Binding names to values


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in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. <span>Binding names to values provides a limited means of abstraction.<span><body><html>

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1.3 Defining New Functions
1.7.1 The Anatomy of Recursive Functions 1.7.2 Mutual Recursion 1.7.3 Printing in Recursive Functions 1.7.4 Tree Recursion 1.7.5 Example: Partitions 1.3 Defining New Functions Video: Show Hide <span>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction. Now we will learn about function definitions, a much more powerful abstraction technique by which a name can be bound to compound operation, which can then be referred to as a unit.







Flashcard 1441954663692

Question

We have identified in Python some of the elements that must appear in any powerful programming language:

  1. Numbers and arithmetic operations are [...] built-in data values and functions.
  2. Nested function application provides a means of combining operations.
  3. Binding names to values provides a limited means of abstraction.
Answer
primitive


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We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction.<

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1.3 Defining New Functions
1.7.1 The Anatomy of Recursive Functions 1.7.2 Mutual Recursion 1.7.3 Printing in Recursive Functions 1.7.4 Tree Recursion 1.7.5 Example: Partitions 1.3 Defining New Functions Video: Show Hide <span>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction. Now we will learn about function definitions, a much more powerful abstraction technique by which a name can be bound to compound operation, which can then be referred to as a unit.







Flashcard 1441956236556

Question

We have identified in Python some of the elements that must appear in any powerful programming language:

  1. Numbers and arithmetic operations are primitive built-in data values and functions.
  2. Nested function application provides a [...].
  3. Binding names to values provides a limited means of abstraction.
Answer
means of combining operations


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>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction.<body><html>

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1.3 Defining New Functions
1.7.1 The Anatomy of Recursive Functions 1.7.2 Mutual Recursion 1.7.3 Printing in Recursive Functions 1.7.4 Tree Recursion 1.7.5 Example: Partitions 1.3 Defining New Functions Video: Show Hide <span>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction. Now we will learn about function definitions, a much more powerful abstraction technique by which a name can be bound to compound operation, which can then be referred to as a unit.







Flashcard 1441957809420

Question

We have identified in Python some of the elements that must appear in any powerful programming language:

  1. Numbers and arithmetic operations are primitive built-in data values and functions.
  2. Nested function application provides a means of combining operations.
  3. Binding names to values provides a limited [...].
Answer
means of abstraction


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ppear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited <span>means of abstraction.<span><body><html>

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1.3 Defining New Functions
1.7.1 The Anatomy of Recursive Functions 1.7.2 Mutual Recursion 1.7.3 Printing in Recursive Functions 1.7.4 Tree Recursion 1.7.5 Example: Partitions 1.3 Defining New Functions Video: Show Hide <span>We have identified in Python some of the elements that must appear in any powerful programming language: Numbers and arithmetic operations are primitive built-in data values and functions. Nested function application provides a means of combining operations. Binding names to values provides a limited means of abstraction. Now we will learn about function definitions, a much more powerful abstraction technique by which a name can be bound to compound operation, which can then be referred to as a unit.







Flashcard 1441959906572

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#python #scip
Question
What is a concurrent program?
Answer
A program in which multiple call expressions may be evaluated simultaneously.


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Third, Chapter 4 will illustrate that pure functions are essential for writing concurrent programs, in which multiple call expressions may be evaluated simultaneously.

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1.2 Elements of Programming
expressions. Second, pure functions tend to be simpler to test. A list of arguments will always lead to the same return value, which can be compared to the expected return value. Testing is discussed in more detail later in this chapter. <span>Third, Chapter 4 will illustrate that pure functions are essential for writing concurrent programs, in which multiple call expressions may be evaluated simultaneously. By contrast, Chapter 2 investigates a range of non-pure functions and describes their uses. For these reasons, we concentrate heavily on creating and using pure functions in the rem







Flashcard 1441963052300

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#python #scip
Question
What are ways that pure functions are restricted?
Answer
Pure functions are restricted in that they cannot have side effects or change behavior over time.


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Pure functions are restricted in that they cannot have side effects or change behavior over time.

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1.2 Elements of Programming
this expression produces this peculiar output. Be careful with print ! The fact that it returns None means that it should not be the expression in an assignment statement. >>> two = print(2) 2 >>> print(two) None <span>Pure functions are restricted in that they cannot have side effects or change behavior over time. Imposing these restrictions yields substantial benefits. First, pure functions can be composed more reliably into compound call expressions. We can see in the non-pure function example







Flashcard 1441966722316

Tags
#python #scip
Question
Non-pure functions. In addition to returning a value, applying a non-pure function can generate [...], which make some change to the state of the interpreter or computer.
Answer
side effects


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Non-pure functions. In addition to returning a value, applying a non-pure function can generate side effects, which make some change to the state of the interpreter or computer. A common side effect is to generate additional output beyond the return value, using the print function.</spa

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1.2 Elements of Programming
s output. The function abs is pure. Pure functions have the property that applying them has no effects beyond returning a value. Moreover, a pure function must always return the same value when called twice with the same arguments. <span>Non-pure functions. In addition to returning a value, applying a non-pure function can generate side effects, which make some change to the state of the interpreter or computer. A common side effect is to generate additional output beyond the return value, using the print function. >>> print(1, 2, 3) 1 2 3 While print and abs may appear to be similar in these examples, they work in fundamentally different ways. The value that print returns is







Flashcard 1441969868044

Tags
#python #scip
Question
Pure functions have the property that applying them has [...]. Moreover, a pure function must always return the same value when called twice with the same arguments.
Answer
no effects beyond returning a value


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Pure functions have the property that applying them has no effects beyond returning a value. Moreover, a pure function must always return the same value when called twice with the same arguments.

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1.2 Elements of Programming
some input (their arguments) and return some output (the result of applying them). The built-in function >>> abs(-2) 2 can be depicted as a small machine that takes input and produces output. The function abs is pure. <span>Pure functions have the property that applying them has no effects beyond returning a value. Moreover, a pure function must always return the same value when called twice with the same arguments. Non-pure functions. In addition to returning a value, applying a non-pure function can generate side effects, which make some change to the state of the interpreter or computer. A co







Flashcard 1441971440908

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#python #scip
Question
Pure functions have the property that applying them has no effects beyond returning a value. Moreover, a pure function must always [...] when called twice with the same arguments.
Answer
return the same value


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Pure functions have the property that applying them has no effects beyond returning a value. Moreover, a pure function must always return the same value when called twice with the same arguments.

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1.2 Elements of Programming
some input (their arguments) and return some output (the result of applying them). The built-in function >>> abs(-2) 2 can be depicted as a small machine that takes input and produces output. The function abs is pure. <span>Pure functions have the property that applying them has no effects beyond returning a value. Moreover, a pure function must always return the same value when called twice with the same arguments. Non-pure functions. In addition to returning a value, applying a non-pure function can generate side effects, which make some change to the state of the interpreter or computer. A co







Flashcard 1441974062348

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#python #scip
Question

To evaluate a call expression, Python will do the following:

  1. [...]
Answer
Evaluate the operator and operand subexpressions, thenApply the function that is the value of the operator subexpression to the arguments that are the values of the operand subexpressions.


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To evaluate a call expression, Python will do the following: Evaluate the operator and operand subexpressions, then Apply the function that is the value of the operator subexpression to the arguments that are the values of the operand subexpressions.

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1.2 Elements of Programming
uating Nested Expressions One of our goals in this chapter is to isolate issues about thinking procedurally. As a case in point, let us consider that, in evaluating nested call expressions, the interpreter is itself following a procedure. <span>To evaluate a call expression, Python will do the following: Evaluate the operator and operand subexpressions, then Apply the function that is the value of the operator subexpression to the arguments that are the values of the operand subexpressions. Even this simple procedure illustrates some important points about processes in general. The first step dictates that in order to accomplish the evaluation process for a call expressi







Flashcard 1441975635212

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#biochem
Question
Water and ions can weaken electrostatic interactions, reducing both their strength and the distance over which they operate. If the same two ions are separated by [...] in water, the interaction energy is reduced by a factor of 80, to about −6 kJ•mol −1
Answer
3 Å


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Water and ions can weaken electrostatic interactions, reducing both their strength and the distance over which they operate. If the same two ions are separated by 3 Å in water, the interaction energy is reduced by a factor of 80, to about −6 kJ•mol −1

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Flashcard 1441977208076

Tags
#biochem
Question
Water and ions can weaken electrostatic interactions, reducing both their strength and the distance over which they operate. If the same two ions are separated by 3 Å in water, the interaction energy is reduced by a factor of [...], to about −6 kJ•mol −1
Answer
80


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y>Water and ions can weaken electrostatic interactions, reducing both their strength and the distance over which they operate. If the same two ions are separated by 3 Å in water, the interaction energy is reduced by a factor of 80, to about −6 kJ•mol −1<body><html>

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Question
Water and ions can weaken electrostatic interactions, reducing both their strength and the distance over which they operate. If the same two ions are separated by 3 Å in water, the interaction energy is reduced by a factor of 80, to about [...] kJ•mol −1
Answer
−6


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>Water and ions can weaken electrostatic interactions, reducing both their strength and the distance over which they operate. If the same two ions are separated by 3 Å in water, the interaction energy is reduced by a factor of 80, to about <span>−6 kJ•mol −1<span><body><html>

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Question
two charges separated by 3 Å in the interior of a protein can be very large, reduced by only a factor of [...] compared with the energy in vacuum
Answer
two


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two charges separated by 3 Å in the interior of a protein can be very large, reduced by only a factor of two compared with the energy in vacuum

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Why are charged groups so rarely found in the interior of proteins?
Answer
because there is an energetic penalty associated with separating them from strongly bound water molecules


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however, that fully charged groups are very rarely found in the interior of proteins because there is an energetic penalty associated with separating them from strongly bound water molecules

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Th e interaction energy depends on the extent to which they are exposed to water and, for a 3 Å separation, is expected to be in the range of [...] kJ•mol −1 .
Answer
−6 to −20


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Th e interaction energy depends on the extent to which they are exposed to water and, for a 3 Å separation, is expected to be in the range of −6 to −20 kJ•mol −1 .

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Question
Hydrogen bonds between polar groups that are net neutral are typically [...] stronger than van der Waals attractions, after accounting for attenuation by water
Answer
5–20 times


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Hydrogen bonds between polar groups that are net neutral are typically 5–20 times stronger than van der Waals attractions, after accounting for attenuation by water

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Question
a nucleotide consists of a [...] covalently bonded to a phosphate group and to a heterocyclic aromatic ring system.
Answer
sugar


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a nucleotide consists of a sugar covalently bonded to a phosphate group and to a heterocyclic aromatic ring system.

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a nucleotide consists of a sugar [...] bonded to a phosphate group and to a heterocyclic aromatic ring system.
Answer
covalently


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a nucleotide consists of a sugar covalently bonded to a phosphate group and to a heterocyclic aromatic ring system.

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a nucleotide consists of a sugar covalently bonded to a [...] and to a heterocyclic aromatic ring system.
Answer
phosphate group


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a nucleotide consists of a sugar covalently bonded to a phosphate group and to a heterocyclic aromatic ring system.

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Question
a nucleotide consists of a sugar covalently bonded to a phosphate group and to a [...]
Answer
heterocyclic aromatic ring system.


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a nucleotide consists of a sugar covalently bonded to a phosphate group and to a heterocyclic aromatic ring system.

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Why is DNA more chemically stable than RNA?
Answer
Th e 2ʹ-OH group in an RNA nucleotide can attack and break the phosphodiester linkage at the 3ʹ position. DNA lacks the 2ʹ-OH group,


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Th e 2ʹ-OH group in an RNA nucleotide can attack and break the phosphodiester linkage at the 3ʹ position, as shown in Figure 1.26. DNA lacks the 2ʹ-OH group, and so DNA is more chemically stable

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Question
The [...] of a function is the set of arguments it can take.
Answer
domain


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Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs an

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1.3 Defining New Functions
uot;black box". A programmer should not need to know how the function is implemented in order to use it. The Python Library has this property. Many developers use the functions defined there, but few ever inspect their implementation. <span>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate). Understanding functional abstractions via their domain, range, and intent is critical to using them correctly in a complex program. For example, any square function that we use to i







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Question
The [...] of a function is the set of values it can return.
Answer
range


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ml>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate).</sp

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1.3 Defining New Functions
uot;black box". A programmer should not need to know how the function is implemented in order to use it. The Python Library has this property. Many developers use the functions defined there, but few ever inspect their implementation. <span>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate). Understanding functional abstractions via their domain, range, and intent is critical to using them correctly in a complex program. For example, any square function that we use to i







Flashcard 1442001325324

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Question
The [...] of a function is the relationship it computes between inputs and output (as well as any side effects it might generate).
Answer
intent


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straction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The <span>intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate).<span><body><html>

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1.3 Defining New Functions
uot;black box". A programmer should not need to know how the function is implemented in order to use it. The Python Library has this property. Many developers use the functions defined there, but few ever inspect their implementation. <span>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate). Understanding functional abstractions via their domain, range, and intent is critical to using them correctly in a complex program. For example, any square function that we use to i







Flashcard 1442003684620

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Question
The domain of a function is the [...].
Answer
set of arguments it can take


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Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might gen

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1.3 Defining New Functions
uot;black box". A programmer should not need to know how the function is implemented in order to use it. The Python Library has this property. Many developers use the functions defined there, but few ever inspect their implementation. <span>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate). Understanding functional abstractions via their domain, range, and intent is critical to using them correctly in a complex program. For example, any square function that we use to i







Flashcard 1442006043916

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Question
The range of a function is the [...].
Answer
set of values it can return


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>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate).<span><body><html>

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1.3 Defining New Functions
uot;black box". A programmer should not need to know how the function is implemented in order to use it. The Python Library has this property. Many developers use the functions defined there, but few ever inspect their implementation. <span>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate). Understanding functional abstractions via their domain, range, and intent is critical to using them correctly in a complex program. For example, any square function that we use to i







Flashcard 1442008403212

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Question
The intent of a function is the [...]
Answer
relationship it computes between inputs and output (as well as any side effects it might generate).


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e of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the <span>relationship it computes between inputs and output (as well as any side effects it might generate).<span><body><html>

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1.3 Defining New Functions
uot;black box". A programmer should not need to know how the function is implemented in order to use it. The Python Library has this property. Many developers use the functions defined there, but few ever inspect their implementation. <span>Aspects of a functional abstraction. To master the use of a functional abstraction, it is often useful to consider its three core attributes. The domain of a function is the set of arguments it can take. The range of a function is the set of values it can return. The intent of a function is the relationship it computes between inputs and output (as well as any side effects it might generate). Understanding functional abstractions via their domain, range, and intent is critical to using them correctly in a complex program. For example, any square function that we use to i







Flashcard 1442011024652

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Question
What does it mean to be "out of scope"?
Answer
the scope of a local name is limited to the body of the user-defined function that defines it. When a name is no longer accessible, it is out of scope.


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the scope of a local name is limited to the body of the user-defined function that defines it. When a name is no longer accessible, it is out of scope.

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1.3 Defining New Functions
ould be confused with the parameter x in sum_squares . Critically, this is not the case: the binding for x in different local frames are unrelated. The model of computation is carefully designed to ensure this independence. We say that <span>the scope of a local name is limited to the body of the user-defined function that defines it. When a name is no longer accessible, it is out of scope. This scoping behavior isn't a new fact about our model; it is a consequence of the way environments work. 1.3.5 Choosing Names The interchangeability of names does not imply t







Flashcard 1442013383948

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Question
Why can the parameter names of a function be something outside the environment of the function?
Answer
the meaning of a function should be independent of the parameter names chosen by its author


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This principle -- that the meaning of a function should be independent of the parameter names chosen by its author -- has important consequences for programming languages. The simplest consequence is that the parameter names of a function must remain local to the body of the function.<

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1.3 Defining New Functions
mplementer's choice of names for the function's formal parameters. Thus, the following functions should provide the same behavior: >>> def square(x): return mul(x, x) >>> def square(y): return mul(y, y) <span>This principle -- that the meaning of a function should be independent of the parameter names chosen by its author -- has important consequences for programming languages. The simplest consequence is that the parameter names of a function must remain local to the body of the function. If the parameters were not local to the bodies of their respective functions, then the parameter x in square could be confused with the parameter x in sum_squares . Critically,







Flashcard 1442015743244

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Question
What is the difference between an intrinsic and bound name of a function?
Answer
different bound names may refer to the same function, but that function itself has only one intrinsic name.


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The name of a function is repeated twice, once in the frame and again as part of the function itself. The name appearing in the function is called the intrinsic name. The name in a frame is a bound name. There is a difference between the two: <span>different names may refer to the same function, but that function itself has only one intrinsic name.<span><body><html>

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1.3 Defining New Functions
nc square(x) Each function is a line that starts with func , followed by the function name and formal parameters. Built-in functions such as mul do not have formal parameter names, and so ... is always used instead. <span>The name of a function is repeated twice, once in the frame and again as part of the function itself. The name appearing in the function is called the intrinsic name. The name in a frame is a bound name. There is a difference between the two: different names may refer to the same function, but that function itself has only one intrinsic name. The name bound to a function in a frame is the one used during evaluation. The intrinsic name of a function does not play a role in evaluation. Step through the example below using th







Flashcard 1442019413260

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For the atoms commonly found in biological molecules, van der Waals attractions are optimal at distances between [...] Å. Th ey are of negligible strength beyond 5 Å
Answer
3 and 4


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For the atoms commonly found in biological molecules, van der Waals attractions are optimal at distances between 3 and 4 Å. Th ey are of negligible strength beyond 5 Å

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For the atoms commonly found in biological molecules, van der Waals attractions are optimal at distances between 3 and 4 Å. Th ey are of negligible strength beyond [...]
Answer
5 Å


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For the atoms commonly found in biological molecules, van der Waals attractions are optimal at distances between 3 and 4 Å. Th ey are of negligible strength beyond 5 Å

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Question
What is the van der Waals radius?
Answer
The van der Waals radius is a measure of the size of an atom.


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The van der Waals radius is a measure of the size of an atom. The energy due to the van der Waals attraction between two atoms is optimal when they are separated from each other by the sum of their van der Waals radii. If they move closer, t

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The energy due to the van der Waals attraction between two atoms is optimal when they are separated from each other by the [qualitative notion not quantatiive]. If they move closer, the energy increases sharply
Answer
sum of their van der Waals radii


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The van der Waals radius is a measure of the size of an atom. The energy due to the van der Waals attraction between two atoms is optimal when they are separated from each other by the sum of their van der Waals radii. If they move closer, the energy increases sharply

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when two atoms are in van der Waals contact, the stabilization energy is about [...] kJ•mol −1 .
Answer
−1


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when two atoms are in van der Waals contact, the stabilization energy is about −1 kJ•mol −1 . Th e stabilization energy is the amount by which the energy at the optimal distance is lower than when the atoms are far apart

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Question
when two atoms are in van der Waals contact, the stabilization energy is about −1 kJ•mol −1 . Th e stabilization energy is the [...]
Answer
amount by which the energy at the optimal distance is lower than when the atoms are far apart


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when two atoms are in van der Waals contact, the stabilization energy is about −1 kJ•mol −1 . Th e stabilization energy is the amount by which the energy at the optimal distance is lower than when the atoms are far apart

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At room temperature (which we shall take to be ~300 K), the value of the thermal energy is [...] kJ•mol −1 .
Answer
~2.5


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At room temperature (which we shall take to be ~300 K), the value of the thermal energy is ~2.5 kJ•mol −1 . Th is means that if an interaction between two atoms is stabilized by less than ~2.5 kJ•mol −1 , then this interaction is very easily disrupted by collisions at room tem-

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Question
Why is van der Waals interaction considered weak?
Answer
if an interaction between two atoms is stabilized by less than ~2.5 kJ•mol −1 , then this interaction is very easily disrupted by collisions at room tem- perature. It is by this criterion that the van der Waals attraction is very weak


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At room temperature (which we shall take to be ~300 K), the value of the thermal energy is ~2.5 kJ•mol −1 . Th is means that if an interaction between two atoms is stabilized by less than ~2.5 kJ•mol −1 , then this interaction is very easily disrupted by collisions at room tem- perature. It is by this criterion that the van der Waals attraction is very weak

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