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Tuesday, August 19, 2008

Understanding Microeconomics

Understanding Microeconomics
by Brent Radcliffe
How do companies decide what price to charge for their sleek new gadgets? Why are some people willing to pay more for a product than others? How do your decisions play into how corporations price their products? The answer to all of these questions and many more is microeconomics. Read on to find out what microeconomics is and how it works.

What Is It?
Microeconomics focuses on the role consumers and businesses play in the economy, with specific attention paid to how these two groups make decisions. These decisions include when a consumer purchases a good and for how much, or how a business determines the price it will charge for its product. Microeconomics examines smaller units of the overall economy; it is different than macroeconomics, which focuses primarily on the effects of interest rates, employment, output and exchange rates on governments and economies as a whole. Both microeconomics and macroeconomics examine the effects of actions in terms of supply and demand. (To learn more about supply and demand, see Economics Basics.)

Microeconomics breaks down into the following tenets:
  • Individuals make decisions based on the concept of utility. In other words, the decision made by the individual is supposed to increase that individual's happiness or satisfaction. This concept is called rational behavior or rational decision-making.
  • Businesses make decisions based on the competition they face in the market. The more competition a business faces, the less leeway it has in terms of pricing.
  • Both individuals and consumers take the opportunity cost of their actions into account when making their decisions.
Total and Marginal Utility
At the core of how a consumer makes a decision is the concept of individual benefit, also known as utility. The more benefit a consumer feels a product provides, the more that consumer is willing to pay for the product. Consumers often assign different levels of utility to different goods, creating different levels of demand. Consumers have the choice of purchasing any number of goods, so utility analysis often looks at marginal utility, which shows the satisfaction that one additional unit of a good brings. Total utility is the total satisfaction the consumption of a product brings to the consumer.

Utility can be difficult to measure and is even more difficult to aggregate in order to explain how all consumers will behave. After all, each consumer feels differently about a particular product. Take the following example:

Think of how much you like eating a particular food, such as pizza. While you might be really satisfied after one slice, that seventh slice of pizza makes your stomach hurt. In the case of you and pizza, you might say that the benefit (utility) that you receive from eating that seventh slice of pizza is not nearly as great as that of the first slice. Imagine that the value of eating that first slice of pizza is set to 14 (an arbitrary number chosen for the sake of illustration). Figure 1, below, shows that each additional slice of pizza you eat increases your total utility because you feel less hungry as you eat more. At the same time, because the hunger you feel decreases with each additional slice you consume, the marginal utility - the utility of each additional slice - also decreases.

Slices of Pizza Marginal Utility Total Utility
1 14 14
2 12 26
3 10 36
4 8 44
5 6 50
6 4 54
7 2 56

Figure 1

In graph form, Figures 2  and 3 would look like the following:

Figure 2

Figure 3

The decreasing satisfaction the consumer feels from additional units is referred to as the law of diminishing marginal utility. While the law of diminishing marginal utility isn't really a law in the strictest sense (there are exceptions), it does help illustrate how resources spent by a consumer, such as the extra dollar needed to buy that seventh piece of pizza, could have been better used elsewhere. For example, if you were given the choice of buying more pizza or buying a soda, you might decide to forgo another slice in order to have something to drink. Just as you were able to indicate in a chart how much each slice of pizza meant to you, you probably could also indicate how you felt about combinations of different amounts of soda and pizza. If you were to plot out this chart on a graph, you'd get an indifference curve, a diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods. Figure 4 shows the combinations of soda and pizza, which you would be equally happy with.

Figure 4
Opportunity Costs
When consumers or businesses make the decision to purchase or produce particular goods, they are doing so at the expense of buying or producing something else. This is referred to as the opportunity cost. If an individual decides to use a month's salary for a vacation instead of saving, the immediate benefit is the vacation on a sandy beach, but the opportunity cost is the money that could have accrued in that account in interest, as well as what could have been done with that money in the future.

When illustrating how opportunity costs influence decision making, economists use a graph called the production possibility frontier (PPF). Figure 5 shows the combinations of two goods that a company or economy can produce. Points within the curve (Point A) are considered inefficient because the maximum combination of the two goods is not reached, while points outside of the curve (Point B) cannot exist because they require a higher level of efficiency than what is currently possible. Points outside the curve can only be reached by an increase in resources or by improvements to technology. The curve represents maximum efficiency.

Figure 5

The graph represents the amount of two different goods that a firm can produce, but instead of always seeking to produce along the curve, a firm might choose to produce within the curve's boundaries. The firm's decision to produce less than what is efficient is determined by demand for the two types of goods. If the demand for goods is lower than what can be efficiently produced, then the firm is more likely to limit production. This decision is also influenced by the competition faced by the firm.

A well-known example of the PPF in practice is the "guns and butter" model, which shows the combinations of defense spending and civilian spending that a government can support. While the model itself oversimplifies the complex relationships between politics and economics, the general idea is that the more a government spends on defense, the less it can spend on non-defense items.

Market Failure and Competition
While the term "market failure" might conjure up images of unemployment or a massive economic depression, the meaning of the term is different. Market failure exists when the economy is unable to efficiently allocate resources. This can result in scarcity, a glut or a general mismatch between supply and demand. Market failure is frequently associated with the role that competition plays in the production of goods and services, but can also arise from asymmetric information or from a misjudgment in the effects of a particular action (referred to as externalities).

The level of competition a firm faces in a market, as well as how this determines consumer prices, is probably the more widely-referenced concept. There are four main types of competition:
  • Perfect Competition - A large number of firms produce a good, and a large number of buyers are in the market. Because so many firms are producing, there is little room for differentiation between products, and individual firms cannot affect prices because they have a low market share. There are few barriers to entry in the production of this good.
  • Monopolistic Competition - A large number of firms produce a good, but the firms are able to differentiate their products. There are also few barriers to entry.
  • Oligopoly - A relatively small number of firms produce a good, and each firm is able to differentiate its product from its competitors. Barriers to entry are relatively high.
  • Monopoly - One firm controls the market. The barriers to entry are very high because the firm controls the entire share of the market.
The price that a firm sets is determined by the competitiveness of its industry, and the firm's profits are judged by how well it balances costs to revenues. The more competitive the industry, the less choice the individual firm has when it sets its price. (To learn about how the economic system we now use was created, check out History of Capitalism.)

We can analyze the economy by examining how the decisions of individuals and firms alter the types of goods that are produced. Ultimately, it is the smallest segment of the market - the consumer - who determines the course of the economy by making choices that best fit the consumer's perception of cost and benefit.

by Brent Radcliffe,

Brent Radcliffe is an analyst with WiserAdvisor.com, a website that helps investors find local financial advisors as well as educate investors on how to take control of their finances. He is a graduate of the University of Florida with a degree in International Economics, with minors in both French and International Relations. Radcliffe is a freelance writer covering topics related to economics, trade and investing.


Jazakum Allah khair,

Ila liqo, billahi taufiq wal hidayah,

Wassalamu'alaykum WR WB,


Maulana Pribadi, SE







Warren Buffett: How He Does It

Warren Buffett: How He Does It
by Investopedia Staff, (Investopedia.com)
Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000. Whether you like him or not, Buffett's investment strategy is arguably the most successful ever. With a sustained compound return this high for this long, it's no wonder Buffett's legend has swelled to mythical proportions. But how the heck did he do it? In this article, we'll introduce you to some of the most important tenets of Buffett's investment philosophy.

Buffett's Philosophy

Warren Buffett descends from the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth. When discussing stocks, determining intrinsic value can be a bit tricky as there is no universally accepted way to obtain this figure. Most often intrinsic worth is estimated by analyzing a company's fundamentals. Like bargain hunters, value investors seek products that are beneficial and of high quality but underpriced. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not recognized as such by the majority of other buyers.

Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the efficient market hypothesis, but they do trust that the market will eventually start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't concerned with the supply and demand intricacies of the stock market. In fact, he's not really concerned with the activities of the stock market at all. This is the implication this paraphrase of his famous quote : "In the short term the market is a popularity contest; in the long term it is a weighing machine."(see What Is Warren Buffett's Investing Style?)

He chooses stocks solely on the basis of their overall potential as a company - he looks at each as a whole. Holding these stocks as a long-term play, Buffett seeks not capital gain but ownership in quality companies extremely capable of generating earnings. When Buffett invests in a company, he isn't concerned with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business. (Interested in what companies Warren Buffett is buying and selling? Check out Coattail Investor, a subscription product tracking some of the best investors in the world.)

Buffett's Methodology
Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price. Keep in mind that these are not the only things he analyzes but rather a brief summary of what Buffett looks for:

1. Has the company consistently performed well?
Sometimes return on equity (ROE) is referred to as "stockholder's return on investment". It reveals the rate at which shareholders are earning income on their shares. Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry. ROE is calculated as follows:
= Net Income

Shareholder's Equity

Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to get a good idea of historical performance.

2. Has the company avoided excess debt?
The debt/equity ratio is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money. The debt/equity ratio is calculated as follows:

= Total Liabilities

Shareholders' Equity

This ratio shows the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt - rather than equity - is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities in the calculation above.

3. Are profit margins high? Are they increasing?
The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates the company is executing its business well, but increasing margins means management has been extremely efficient and successful at controlling expenses.

4. How long has the company been public?
Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their initial public offerings (IPOs) in the past decade wouldn't get on Buffett's radar (not to mention the fact that Buffett will invest only in a business that he fully understands, and he admittedly does not understand what a lot of today's technology companies actually do). It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued.

Never underestimate the value of historical performance, which demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that the past performance of a stock does not guarantee future performance - the job of the value investor is to determine how well the company can perform as well as it did in the past. Determining this is inherently tricky, but evidently Buffett is very good at it.

5. Do the company's products rely on a commodity?
Initially you might think of this question as a radical approach to narrowing down a company. Buffett, however, sees this question as an important one. He tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart. Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share.

6. Is the stock selling at a 25% discount to its real value?
This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of value investing, and Buffett's most important skill. To check this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements. (To learn more about Warren Buffett and the holdings his investment vehicle, Berkshire Hathaway, currently owns check out Coattail Investor.)

Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value. Sounds easy, doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his criteria, we have no way of knowing exactly how he gained such precise mastery of calculating value. (To learn more about the value investing strategy of selecting stocks, check out our Guide To Stock-Picking Strategies.)


As you have probably noticed, Buffett's investing style, like the shopping style of a bargain hunter, reflects a practical, down-to-earth attitude. Buffett maintains this attitude in other areas of his life: he doesn't live in a huge house, he doesn't collect cars and he doesn't take a limousine to work. The value-investing style is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2004, he holds the title of the second-richest man in the world, with a net worth of more $40 billion (Forbes 2004). Do note that the most difficult thing for any value investor, including Buffett, is in accurately determining a company's intrinsic value.

by Investopedia Staff,

Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including more than 1,200 original and objective articles and tutorials on a wide variety of financial topics.


Jazakum Allah khair,

Ila liqo, billahi taufiq wal hidayah,

Wassalamu'alaykum WR WB,


Maulana Pribadi, SE







Monday, August 18, 2008


Assalamu 'alaikum warohmatullohi wabarokatuhu...


Mari kita Senantiasa Setting NIAT,

Upgrade IMAN,

Download SABAR,

Delete DOSA,

Approve MAAF; Hunting PAHALA, ...

Agar Kita Getting GUEST LIST Masuk SURGA-Nya.

Pulang ke kampung SURGA Yuuukkk!!!!

Pakai Mobil JIHAD yang Berbahan Bakar ISTIQOMAH,

Dengan Sopir KEIKHLASAN,

Lewat Jalan IMAN,,

eeiittt!!.. Jangan Lupa bawa Peta QUR"AN & SUNNAH,

juga Bekal TAQWA.....Semoga Qta ketemu disana.

Kini Ramadhan insya Allah akan tiba 2 pekan lagi,

dengan kerendahan hati maafkanlah segala


"Allahumma Baariklana fi Rajaban wa Sya'ban Wa Balligna Ramadhan"

Selamat mempersiapkan diri tuk sambut ibadah puasa 1429 H.

Mari kita kuatkan Iman, bersama menyongsong Bulan penuh Rahmah,

Maghfirah dan Berkah.

Jazakum Allah khair,
Ila liqo, billahi taufiq wal hidayah,
Wassalamu'alaykum WR WB,

Maulana Pribadi, SE

Tuesday, August 12, 2008

Matematika Gaji dan Logika Sedekah

Matematika Gaji dan Logika Sedekah

In forkit@yahoogroups.com, "Muafigmail" <ahmad.muafi@> wrote:

Thanks berat Mas Bahar ..... Artikelnya bagus banget ....
pencerahan terhadap hati kami yang sedang di selimuti kabut tebal egoisme.