Peter Zhang


Lecture Notes

Operations Research

Operations management is about the design, direction, and control of processes that transform inputs into goods and services. Processes are clustered in operations and linked together in a supply chain. Supply chain management is about aligning a firm’s processes with those of suppliers and consumers.

  • Customers can be external (end users or intermediaries) and internal (e.g. employees in the firm).
  • Suppliers can be external (other business who provide inputs) and internal (employees or processes).

Classifications of processes:

  • A nested process is a process within a process.
  • Processes can be closer to manufacturing processes or service processes.
  • A core process delivers value to external customers. A support process provides resources and inputs to core processes (e.g. HR, Accounting, Information Systems).

Corporate strategy provides an overall direction for an organization. It involves 1) environmental scanning, 2) developing core competencies, 3) developing core processes, and 4) developing global strategies. Market analysis segments customers based on demographics and identifies their needs.

Competitive priorities are dimensions that a process or supply chian must poseess to satisfy customers. Competitive capabilities are the dimensions that a process or supply chain actually possess. An effective operations strategy closes the gap between a competitive priority and a firm’s capbility.

An order qualifier is the minimum level required of a good or service to do business, while an order winner is a criterion that differentiates a good or service

Trends in operations management include:

  1. Productivity improvement - The output per input ratio is increasing because of cross-border investment and technology. Divided into machine productivity and labor productivity.
  2. Global competition - Globalization has provided favorable tax laws and presence, driven by 1) transportation adn communication technology, 2) loosened financial regulations, 3) import demand, 4) fewer quotas, 5) cost advantages. Disadvantages include IP loss, nationalization,a nd instability.
  3. Ethical, workforce diversity, and environmental issues - Firms have more care about social needs. Operations must address these.

Process strategy involves 1) strategic fit, 2) individuals processes as building blocks, 3) management of process interfaces.

Four common decisions that managers make are:

  1. Process structure

For services, customer contact is the extent to which a customer is involved. The customer-contact matrix brings together degree of contact, customization, and process characteristics. The x-axis represents customer contact, while the y-axis represents process divergence (how much processes are customized) and flow (the movement of customers, materials, or information). Three process structures are front office, hybrid office, and back office.

For manufacturing, the product-process matrix combines volume, product customization, and process characteristics. The x-axis represents volume and customization, the y-axis represents process divergence and flow. Four process choices are job process, batch process, line process, and continuous-flow process.

  1. Customer involvement

Customer involvement can lead to better quality, faster delivery, greater flexibility and lower cost, but it can also cause disuprtion, inefficiencies, quality reduction, training expenses, and a need for decentralized facilities.

  1. Resource flexibilitiy

Flexibility is the ease with which employees and equipment can handle a variety of products, output levels, duties, and functions.

For a workforce, flexible workforces can do many tasks at the cost of greater training and education. Sometimes, changes in volume demanded across products requires workers to adjust to different types and volumes.

For equipment, managers must balance type-volume with equipment. Low-volumes and high customization favor general-purpose equipment, which has low fixed costs but higher operating costs. High volumes and low-customization favor specific-purpose equipment, which has high fixed costs but lower operating costs.

  1. Capital intensity

The greater the relative cost of equipment, the greater the capital intensity. If investment costs are large, automation works best when volume is high. Processes must be well designed before automation.

Fixed automation priduces one type of part or product in a fixed sequence of simple operations; it is useful for line and continuous-flow process choices, with drawbacks of high investment cost and inflexibility. Flexible automation can be changed easily to handle various products. Some capital intensities can take advantage of economies of scope, where goods can be produced more cheaply in combination.

Strategic fit could involve several ways to gain focus:

  • Process segemnets: Plants within plants are operatinons with a facilitity that can be divided physically or authoritatively.
  • Service operations: Specialty retailers have stores with samller, accessible spaces.
  • Factories: Focused factories split large plants into specialized smaller plants.

There two two types of process updates:

  1. Process improvement is the systematic study of activities and flows to improve it constantly and incrementally. Examples include streamlining tasks, eliminating processes, cutting expensive materials, improving the environment, and making jobs safer.
  2. Process reengineering is a rethinking and radical redesign of the process to improve performance dramatically, best suited for core processes. Key elements are strong leadership, cross-functional teams, information technology, clean-slate philosophy, and process analysis.

Tesla continuously innovates products, automates manufacturing processes, and ensures timely shipment from overseas. Amazon has 175 fulfillment centers with the competitive priorities of speed, variety, customization, and low cost operations.

Internal pressures need to be consider for a supply chain:

  • Dyanmic sales volume - volatile sales can cause excessive inventories, underutilize personnel, or expensive delivery options.
  • Customer service and equality expectations - sales and marketing groups may expect superior service levels.
  • Service/product proflieration - greater variety adds complexity.
  • Emerging markets - new markets impact the price and availability of raw materials.

For services, supply chain design is driven by the need to support essential elements of services. For manufacturing, the fundamental purpose is to control inventory, as 60%+ of total income is spent on inputs.

Three inventory measures are average aggregate inventory value, weeks of supply, and inventory turnover: \(\text{Average aggregate inventory value} = \sum_{i} \text{Units of item}_i \times \text{Value of item}_i\\ \text{Weeks of inventory} = \frac{\text{Value of inventory}}{\text{Sales at cost per week}}\\ \text{Invetory turnover} = \frac{\text{Annual sales at cost}}{\text{Average aggregate inventory value}}\) Inventory is an investment, but it also ties up funds. A higher return-on-asset can be achieved by increasing revenue, decreasing costs, or increasing asset utilitization. Examples of how to improve financail measures:

  • Total revenue - better customer service increases volume
  • COGS - Reduce transportation and material costs
  • Operating expenses - Cut overhead
  • Cash flow - Reduce lead times
  • Working capital - reduce inventory investment
  • ROA - higher net income

Efficient supply chains vs. responsive supply chains:

  • Make-to-stock (high volumes) vs. assemble-to-order (customized, variety)
  • Low capacity cushion -> high turns vs. high capacity cushion -> fast delivery
  • Cheap, consistent, reliable suppliers vs. high quality, customizable, variable suppliers

Three types of decision factors:

  1. Inventory placement. Centralized placement stores finished goods at a single location, which pool inventory and reduces cost but imposes higher shipping costs. Forward placement locates stock closer to the customer, which enables faster delivery time and cheaper shipments but needs more inventory.
  2. Mass Customization. Goods and services can be tailored to customers, or modulated to enable mass production.
  3. Outsourcing. Some goods and services can be created by other external firms.

Supply networks may not always be high performance. The bullwhip effect causes players high in the supply chain to over-adjust to short term changes and dramatically change orders.

The five main supply chain drivers:

  • Facilities - more facilities -> more responsive, less efficent.
  • Inventory - higher inventory -> more responsive, less efficient
  • Transportation - faster transportation -> more responsive, less efficient
  • Information - more responsive, more efficient
  • Sourcing - only if the supplier can achieve better results

Supply chain sustainbility is the managerment of environment, social and econmic impacts with encourage of good governance practices. Drivers include legal demands, customer demands, stakeholder demands, competitive advantages, external pressure and reputation. Methods include supply chain mapping, demand forecasting, and transportation systems.

Greenwashing is misleading.

Chapter Notes

Chapter 1

Businesses sell goods and services to earn profits. Profits are revenues mienus expenses. Under capitalism, consumers choose what to consume. Businesses spur innovations that improve quality of life.

The external environment of businesses comprise everything outside hte business.

  • Domestic business environment = the location where the firm conducts operations.
  • Global business environment = international forces, such as trade agreements, economic conditions, and political unrest.
  • Technological environment = the ways in which firms create value, such as human knowledge, equipment, electronics, etc.
  • Political-legal environment = relationship between business and government, e.g. regulations.
  • Sociocultural environment = norms, customs, values.
  • Economic environment = economic conditions, such as average wages and financial pressures.

An economic system is how a nation allocate its resources among its citizens. Different systems have different ways of managing factors of production. These include labor (or human capital), capital (the financial resources to create a business), entreprenuers (people who accept risks and create/operate businesses), physical resources (tangible resources used to run busiensses), and information resources (intangible goods, such as data and other information).

Planned economies rely on the government to control most factors of production. A market economy allows producers and consumers control production and allocation. Most countries have mixed market economies that regulate and restrict certain activitie. In transitioning frmo a planned to market economies, governments under privatization, converting government entreprises into privately owned companies.

Demand is the willingness and ability of buyers to purchase a product. Supply is the willingness and ability of producers to sell a good or service. According to the laws and demand and supply, buyers and producers with purchase more and supply less respectively as the price of a product drops.

A private enterprise system requires four elements: private property, freedom of choice, profits, and competition. Under perfect competition, all firms are small and there are many firms in the industry. In monopolistic competition, numerous competitors seek to differentiate their products. An oligopoly has only a handful of sellers, while a monopoly has only one producer.

Experts look at economic indicators to evaluate an economy. The business cycle involves ecomomic regular expenasions and contractions as measured in aggregate output, the total amount of goods and services produced. When output per capita goes up and a surplus exists, the standard of living goes up as well.

GDP refers ot the total valu eof all goods and services produced by a national economy thorugh domestic factors of production. GNP refers to all goods and services produced by a national economy regardless of where the factors of production are located. If General Motors operates a plant in Brazil, the profits are included in the U.S. GNP but not in the U.S. GDP.

Economists think GDP is more reliable because it only foucses on domestic factors of production. A common measure of quality of life GDP per capita. Real GDP adjusts the nominal GDP for changes in the value of currency.

Productivity is a measure of economic performance that roughly measures the efficiency of resource use. U.S. productivity is generall increases.

Balance of trade referes to the value of exports minus the value of imports. A negative balance of trade is a trade deficit, a nation with a trade deficit is a debtor nation rather than a creditor nation.

Stability is a condition where the amount of monety avialable and the quantity of goods and services produced are growing as the same rate. Inlfation occurs when the economic system experiences widepsread price increases. Price indices such as the consumer price index measure the prices of typical products over time.

Unemployment is the level of joblessness among people actively seeking work. If wage rates get too high, business hire fewer workers. Unemployment often decreases income, leading to further unemployment. A recession is a period during which real GDP declines. A prolonged and deep recession is a depression.

The government uses stabilization policy to manage the economy, which comprises fiscal policies (via collection and spending of revenues) and monetary policies (via controlling the size of the nations monetary supply).

Chapter 2

Accounting refers to collecitng, analyzing, adn communicating financial information. Accountants keep records of taxes, cinome, and expenses, a process called bookkeeping. In the modern area, the accounting information system is the procedure for retainingfinancial information. The info is used by managers (to make decisions), employees (for personal finance), investors (to estimate returns), tax authorities (to determine tax liabilities), and regulatory agencies (to ensure compliance). The controller ensures a firm’s AIS provides the necessary info.

Financial accounting is concerned with external information users (e.g. income statements, balance sheets), while managerial accounting serves internal users (e.g. material costs). Certified public accoutants provide accounting services to the public. An audit examines the AIS for accuracy. Tax services help a business file taxes and save money. Management advisory services span perfonal finance to corporate mergers. Many accountants work before taking the CPA exam, often as private accountants; most private accountants are manager accountants , supporting managers, and many become certified manageement accounts.

Forensic accounting is the use of accounting for legal purposes, holding company records to scrutiny. They often investgate financial trails and support litigation. The Certified Fraud Examiner designation requires an exam that covers fraud prevention and deterrence, financial transactions, fraud investigation, and legal elements of fraud.

The Sarbanes-Oxley Act of 2002 was designed to improve trust in accounting by restricting the kinds of services a firm can provide. For example, an accounting firm cannot design a business’s AIS and also perform their audits.

The accounting equation is: \(Assets = Liabiltiies + Owner's\ Equity\) After each transaction, the accounting equation must be in balance. An asset is any economic resources that benefits a firm, including land, buildings, equipment, inventories, and accounts receivable. A liability is a debt the firms owes to an outside party. The owners’ equity is the amount of money that owners would receive if they sold of a company’s assets at their presumed values; an equivalent term is net worth. Owners’ equity consists of the original investment of the owners and profits earned by and reinvested in the company.

There are three kinds of financial statements: balance sheets, income statements, and statements of cash flows.

Balance sheets provide detailed information about assets, liabilities, and owner’s equity.

  • Current assets include cash and assets that can be liquidated within a year. Marketable securities and merchandise inventory can be quickly liquidated. Fixed assets have long-term value, but buildings and equipment depreciate. Intangible assets have value in the form of expected benefits, sich as fees paid. Goodwill is the amount a buyer would pay beyond the value of tangible assets.

  • Current liabilities are debts to be paid within a year, including accounts parable, unpaid bills to suppliers, wages, and taxes. Long-term liabilities usually include borrowed funds.

  • Owner’s equity is comprised of paid-in capital (invested by owners) and retained earnings (net profits kept by the firm).

Income statements are descriptions of profits and revenues, divided into revenues, cost of revenues, operating expenses, and net income. Revenues are funds that flow into a business from selling goods and services. The cost of revenues can include costs paid to manufacturers, licensing fees, third-party services, etc. Other companies report cost of goods sold, which comprise the costs of obtaining and transforming materials to make physical products. Gross profit is the revenues minus the cost of revenues.

Operating expenses are resources that must flow out of a company to earn revenue. It often comprises research development and selling, administrative, and general. Operating income is gross profit minus operating expenses.

The statement of cash flows summarizes cash receipts and payments, spanning operating activities, investing activities, and financing activities.

  • Cash flows from operations include transactions involved in buying and selling goods and services.
  • Cash flows from investing includes receipts and payments from buying and selling stocks, bonds, property, and other assets.
  • Cash flows from financing include inflows from borrowing or issuing stock, and outflows for paying dividends or repaying borrowed money.

The budget is a detailed report on estimate receipts and expenditures for a period of one year, 3 years, or 5 years.

Generally accepted accounting principles (GAAP) guide reporting, including revenue recognition. Earnings are not reported until the earnings cycle is completed, which means the sale is complete and the sale price is collectible. The full disclosure principle suggests that management should interpret and explain the numbers and leave their comments.

There are groups of ratios: solvency ratios for estimating risk, profitability ratios for measuring potential earnings, and activity ratios for evaluating asset efficiency.

Short-term solvnecy ratios measure the ability to pay immediate debts, among which a common choice is the current ratio, dividing current assets by current liabilities. A current ratio of 2:1 or higher is satisfactory. \(Current\ Ratio = \frac{Current\ Assets}{Current\ Liabilities}\) Long-term solvency is calculated by dividing debt by owner’s equity. Borrowing is often beneficial because it gives firms leverage. \(\text{Long-term solvency} = \frac{\text{Debt}}{\text{Leverage}}\)

Earnings per share is the net income divided by the number of shares of common stock. the price earnings ratio is the share price to earnings per share. \(\text{Earnings per share} = \frac{\text{Net income}}{\text{Number of shares}}\\ \text{Price earnings ratio} = \frac{\text{Share price}}{\text{Earnings per share}}\) Activities ratio measure the efficiency of resources. The ratio of profits to assets and the inventory turnover ratio are common measures of efficiency. \(\text{Asset turnover} = \frac{\text{Total sales}}{\text{Average assets}}\)

The code of professional conduct identifies responsibiltiies as a professional, serving the public interest, maintaining integrity, being objective and independent, maintaining standards through due care, and professional conduct in providing services as areas were accountants must comply.

Chapter 3

Money is portable, divisible, durable, and stable. It serves as a medium of exchange, store of value, and a measure of worth.

There are multiple measures of monetary supply.

  • M-1 counts only the most liquid form s of money. Paper money and coins are currency (cash). Checks instruct banks to pay a given sum. Checking accounts/demand deposits can be withdrawn at any time.
  • M-2 includes short-term investments such as time deposits, mutual funds, and savings account. time deposits have a fixed term, and deposits less than $100,000 are counted in M-2. In money market mutual funds, companies by low-risk, short-term financial securities. Credit cards are not included.

Financial institutions facilitate the flow of money from those with surpluses to those with deficits.

  • Commerical banks accept deposits, make loans, earn profits, and pay interest and dividends. To compete, banks have begun to offer loans at rates below the price rate. Banks often offer trust services, under which banks manage logistical tasks.
  • Savings institutions include mutual savings banks and savings and loan associations (S&Ls). S&Ls accept deposits, make loans, and are owned by investors. Mutual savings banks divide profits proportionately among investors.
  • Credit unions are nonprofit institutions run by their members designed to promote thrift.
  • Non deposit institutions use funds for things other than earning interest.
    • Pension funds provide retirement income, primarily social security. IRAs are tax-deffered retirement funds.
    • insurance companies use money frmo premiums to provide coverage.
    • Fiannce companies make loans to businesses and consumers.
    • Securities investment dealers buy and sell stocks and bonds for client investors.
  • International services include currency exchange, letters of credit (a promise to pay if conditions are meant), and banker’s acceptances (promises to pay some amount).
  • Financial advice and brokerage services recommend investment opportunities.
  • Electronic funds transfer services like PayPal make it easier to send payments. Automated teller machines (ATMs) let companies withdraw money, make despotis,a dn trasfer funds from anywhere.

Financial institutions create money by making loans. Banks can loan out most of the money they take in deposit. The Federal Deposit Insurance Corporations supervises banks and insures deposits. The FDIC guarantees the safety of all accounts if the bank collapses up to $250,000.

The Fed is independent of political pressures and led by a Board of Governers. The Federal Open Market Committee makes policies; it is staffed by the seven governors and 5 of the 12 reserve bank presidents. All charatered banks are members of the Fed; others are subject to its regulations and are covered by other regulatory agencies.

The Fed’s functions include:

  • The government’s bank, producing the nation’s paper currency.
  • The banker’s bank, lending money to individual banks.
  • Check clearing, ensuring cash is properly deducted and deposited.
  • Monetary policy, promoting economic growth by managing the money supply and interest rates. Inflation refers to widespread price increases, whereas deflation occurs when the supply of goods outpaces the supply of money.

The Fed has three avenues to affect the economy:

  1. Open market operations refers to the sale and purchase of securities. The Fed can buy securities from commercial dealers or sell Treasury securities.
  2. Discount rate of loans to banks; the federal funds rate is the rate that banks lend reserves to each other. It ranges from 1 to 5%.
  3. Cash reserve requirements, which can restrict how much supply can expand, often 10% for the largest transactions and 3% for transactions between 12 and 80 million.

After the Great Recession, the Fed made loans to banks to help them write off or sell bad mortgages. The government imposed assurances, holding loans, mortgages, and securities until repaid.

Banks are required by regulations to maintain systems for identifying suspicious activities. Electronic technologies have improved efficiency and customer service.

  • Atuomated Clearing House (ACH) provides interbank clearing of electronic payments, allowing businesses, government, and consumers to choose electronic alternatives.
  • Check 21 is a law that lets a receiving bank make an electronic image of paper checks.
  • Blink Credit Card use a computer chip to send signals.
  • Debit Cards allow users to transfer money between accounts.
  • Smart cards can be programmed with electronic money.

Often, weak currencies can be good news for exporters. Central banks can change currency values by controlling the monetary supply. In transactions, balanced trades do not have to involve flows of money. The World Bank funds national improvements while the IMF promotes economic health.

Chapter 4

The time value of money reflects the ability to gain value via interest or other forms of return. Compound growth refers to the cumulative growth from interest paid over time periods. The rule of 72: the number of years to double your money is roughly the percent annual interest rate divided binto 72.

A stock is a portion of the ownership of a corporation. A share of common stock is the most basic form of ownership. The value of a stock is expressed in market value (the amount buyers will pay) and book value (the firm’s owner’s equity).

Common stocks are risky investments. Unprofitable years and changing economic conditions can cause unstable profits. A dividend is a payment to shareholders; some profits distribute 30 to 70 percent of profits to shareholders. Blue-chip stocks have historically provided reliable dividends.

Mutual funds pool individual and organization investments to purchase bundles of stocks, bonds, and securities. Investors in no-load funds are not charged comissions. Load funds pay comissions of 2 to 8 percent.

Investors can invest for financial stability, conservative growth, and aggressive growth. Most managed funds don’t perform as well as the market. Passively managed funds such as index mutual funds mimic the performance of market indices.

An exchange-traded fund tracks the overall perforamnce of a market and is traded like a stock. It is advantageous of mutual funds because they can be traded throughout the day, involve little to no human decisions, and require no minimum investment.

Stocks, bonds, and mutual funds are securities because they represent secured claims; they are securities markets. In primary securities markets, stocks and bonds are sold by firms and governments; private placements let issuers keep plans confidential. Usually, stocks are sold on a public market governed by the Securities and Exchange Comission (SEC). A firm relies on an investment bank to launch an IPO which advises companies on timing and financial terms, underwrites the new securities, and creates distribution networks for the securities.

Exisiting stocks and bonds are sold in the secondary securities market. A stock exchange is a group of individuals coordinated to provide an auction. The major stock exchanges are the New York Stock Exchange (a hybrid market), various global stock exchanges, and the NASDAQ market (a electronic market). Electronic communication networks bring buyers and sellers together outside of exchanges.

Individual investors include stock brokers (who earn commissions by trading for customers), discount brokers (who offer a low-cost way to buy stocks), full-service brokers (who offer financial advice), and online investors (who buy and sell thousands of companies).

Market indexes summarizes overall price trends, including bull (over a year of growth) and bear (20 percent off peak price) market trends. the Dow Jones Industrial Average is the oldest and most widely cited index, averaging prices for 30 large firms. The S&P 500 lists the top 500 stocks, whereas the NASDAQ Composite Index tracks all stocks. The Russell 2000 Index measures the performance of the smallest companies. Index-matching ETFs track these indices.

Each investment has a risk-return relationship: safer investments offer lower returns, riskier investment offer higher returns. Roughly, the ranking is: short-term Treasuery Bills, high-grade corporate bonds, high-quality common stocks, balanced mutual funds, medium-quality preferred stocks, high-quality common stocks, junk bonds, low-quality common stocks.

The rat eof return paid to shareholders is the current dividend yield (or current interest yield for investments). \(\text{Current dividend yield} = \frac{\text{Dividend income}}{\text{Current market value}}\) Price appreciation is an increase in the dollar value of an investment. The profit realized is a capital gain. The total return is the yield and capital gain over the original investment: \(\text{Total return} = \frac{\text{Current dividend + Capital gains}}{\text{Original investment } \times 100}\) Diversification fefers to buying different kinds of investments to mitigate risk. This includes investing across sectors and across asset class. Employees who have all of hteir investments in a company’s risk could lose their savings if the company goes bankrupt.

Asset allocation is the proportion of funds investing in each investment alternatives. A portfolio is the combined holdings of all financial investments. Together, diversification and asset allocation enable a firm to protect against risk.

Firms under secured loans by pledging an asset as collateral. The money that must be repaid is the loan principal and the additional fee is the interest, which depends on the annual percentage rate (APR). With an unsecured loan, the bank usually requires the borrower to maintain a compensating balance.

Entreprenuers underestimate the value of bank credit lines; the U.S. Small business Administration may also guarantee a loan if the small business is prudent, planning for cash flow requirements. Outside individuals who provide capital are angel investors, providing venture capital.

Corporations can also issue corporate bonds, formal pledges obligating the issuer to pay regular interest.

  • The bondholder claims no ownership. Payments to bondholders take priority over bondholders.
  • Terms are spelled out in the bond indenture. The maturity date is when the firm must repay the face value.
  • 5-10 year bonds are intermediate term. 10+ year bonds are long-term, which are risker.
  • A bond defaults if the borrower fails to make payment. Bondhoders can file a bondholders’ claim to request court enforcement; a company may file for bankruptcy.
  • Several bond rating systems such as Moody’s and S&P rate bonds on a letter grade scale. These ratings can be unreliable, as exemplfiied by their optimistic ratings of mortgage-backed secrutiies.

The IPO is the first sale of a company’s stock to the general public. A corporate raider attempts to seize control of companies by buying cheap stocks, selling off assets. Stock prices are arbitrary as they depend on the number of shares; companies can restore prices to a lower range via a stock split. Market capitalization refers to the total dollar value of all of a company’s outstanding shares.

Firms can raise capital through debt financing or equity financing.

  • Debt financing via long-term loans are quick and private, but may be difficult to find and impose restrictions.
  • Bonds can raise large amounts of capital, but require administrative and selling costs.
  • Selling common stock is expensive and not tax deductible.
  • Retained earnings can be attractive if succesful, but trade off with dividend payments.

A prospectus contains information about the offered security and issuing company. The SEC bans insider trading, using specialized information to profit.


  • Personal finance
    • Older people should shift to less risky.
    • Direct benefit - doesn’t depend on contribution.
  • Dupont analysis decomposes return on assets into profitability and asset efficiency.
\[\text{Return on assets} = \text{Net income} / \text{Total assets}\\ = \text{Net profit margin} \times \text{Asset turnover}\\ \frac{\text{Income}}{\text{Assets}} = \frac{\text{Income}}{\text{Revenues}} \times \frac{\text{Revenues}}{\text{Assets}}\]
  • Apple is highly profitable. Amazon’s efficiency is 1.41, which is quite high. Tesla’s ROa is much lower than Apple’s, but it has high revenue growth. Tesla has really low earnings yield and high price earning’s ratio because of high expected growth.
  • Reserve banking = money is kept.
  • Human capita is most important.
  • Increasing number of defined contribution schemes over defined benefit schemes
  • Most depend on Social Security
  • Rebalance stocks periodically to balance stocks and bonds.
  • Don’t cash out when moving jobs


Claire Cain Miller, “Delivery Start-Ups Are Back Like It’s 1999”, The New York Times

New startups are once again making delivery start-ups popular. To get around the costs of physical capital, companies like Instacart connect customers with couriers. It relies on people being lazy, which could create a two-tier economy of those who can and can’t afford to automate their errands.

Zumbrun, “Coronavirus Lifts Government Debt to WWII Levels—Cutting It Won’t Be Easy”, The Wall Street Journal (August 2020)

Debt hit 128% of GDP in July. Admist a war, it shouldn’t worry about debt. Population growth is slowing, which makes a similar post-war boom unlikely. Today’s high levels of debt have been driven by health care and pensions. There’s also no inflation, despite stimulus spending. Central banks buy large quantities of their own debt to bring down interest rates and shore up growth.

Neil Irwin, “Is Inflation About to Take Off? That’s the Wrong Question”, The New York Times (January 2021)

Inflation is not up. There are multiple drivers.

  1. Yo-yo effect - The economy is recovering very rapidly, particularly in sectors like flight.
  2. Hibernation - People are returning to the economy in droves.
  3. A huge amount of money is in savings. The Fed probably won’t sow ht economy. Powell doesn’t believe in inflrationary cycles.
  4. Greater labor supply has been keeping inflation low. But, as China’s outlook looks bleek, inflation could rise again.


  • The profit margin equation:
\[\text{Profit margin} = \frac{\text{Net income}}{\text{Sales}}\]
  • The return on equity equation:
\[\text{Return on equity} = \frac{\text{Net income}}{\text{Stockholder's equity}}\]
  • A bank run is erasion of confidence in a bank that causes panic withdrawal.

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