Approved Learning Partner

in Egypt and Middle East

 FPAC Part I Certificate

Beacon Holding
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B e a c o n F i n T r a i n 2
 FPAC Part I Certificate

International
Institutions
and Affiliation
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International Certifications

B e a c o n F i n T r a i n 4
 Welcome to FPAC Part I
Financial Planning & Analysis

Certification
Sayed Aref
Develop the Change Vision
a financial orientation and help them think of their
 FPAC Part I Certificate

FPAC Structure
Part 1 (13 Topics) Part 2 (12 Topics)
• Domain A • Domain A .
1. Finance Principles & Processes (5) 1. Sales Volume & Revenue Projections
2. Strategy (4) 2. Financial Statements Projections
3. Financial Accounting & Reporting (6) 3. Valuing Projects, Customers, Deals & Products
4. Ratio Analysis (6) 4. Risk Analysis
5. Managerial & Cost Accounting (4) 5. Analyzing Information & Giving Feedback
6. Macroenvironment
7. Microeconomics • Domain B
6. Specifying Outputs & Getting Inputs
• Domain B
. .
7. Improving the quality of information
8. Using Worksheets & Worksheet Functions 8. Refining Data, Risks, Opportunities & Plans
9. Working with Data 9. Building & refining Models
10. Using Models & Sensitivities / Scenarios
• Domain C 11. Making Conclusions & recommendations
10. Information & FP&A
11. Organization • Domain C
12. Industry 12. Effective Communication
13. Managing FP&A Projects

B e a c o n F i n T r a i n 7
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Topics Overview
• Basic Terminology
Chapter 10:
Microeconomics • Laws of Supply and Demand
 FPAC Part I Certificate

Chapter 7
Microenvironment

1. Basic Terminology
2. Laws of Supply and Demand

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 FPAC Part I Certificate

What is Microeconomics?
• Microeconomics is the study of what is likely to happen when individuals make

choices in response to changes in prices, resources, and/or methods of production.

Individual actors are often grouped into microeconomic subgroups, such as buyers, sellers,

and business owners.

• FP&A is concerned with microeconomics because of the way changes in the economy can

affect forecasts and projections. Microeconomic concepts are used in forecasting potential

market demand, setting prices for products and estimating cash flow for new projects. The

resulting decisions are reflected in forecasts and budgets.

 FPAC Part I Certificate

1. Basic Terminology
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Basic Terminology
 FPAC Part I Certificate

Discussion Question
Key terminology: Define each term.

Answers:
• Supply and Demand Supply: Amount of a good or service available at a given
price
Demand: Amount of a good or service people or
• Elasticity of demand organizations are able to buy

As price rises, demand goes down

• Scarcity
Goods and services are limited
• Rationing
Price creates a limitation on the use of resources
 FPAC Part I Certificate

Discussion Question
Key terminology: Define each term.

Answers:

• Opportunity cost The value of the rejected option

When the price of one option increases the consumption of

• Substitution effect another option

Costs that cannot be reversed/recovered. Should not be

• Sunk costs considered in decision-making

Additional costs of the option chosen or the additional unit

• Marginal costs sold/produced
 FPAC Part I Certificate

Discussion Question
Key terminology: Define each term.

Answers:

The additional benefit from one additional unit

• Marginal utility
Cost/benefit analysis using marginal cost and margin utility
• Marginal analysis
As output increases, cost per unit of output decreases
• Economies of scale
 FPAC Part I Certificate

Discussion Question
Key terminology: Define each term.

Answers:

• Diminishing returns If additional costs are incurred because output is increasing,

cost per unit increases
• Competitive markets Multiple organizations provide similar or substitutable
products
• Monopoly
A good or service has no close substitute
 FPAC Part I Certificate

Marginal Cost vs. Marginal Benefits

VS.

At what point does Marginal Cost exceed Marginal Benefit

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Supply and Demand and Elasticity of Demand

• Supply: the amount of goods and services available at a given price.

• Law of Supply: as the value or price of a good increases, supply increases.

• Demand: the amount of goods or services that people are able to buy.

• Law of Demand: as the value or price of goods increases, demand

decreases.

• Elasticity of Demand: change in quantity demand due to change in price.

 FPAC Part I Certificate

Example

• Net Revenue / 000 = 50$

• Operating Income / 000 = 20$
• RSP = 30$
• If I take a pricing of 1$, what’s the impact?
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Scarcity Mindset
• Scarcity: Goods and services are not unlimited. Because they are limited, people and
organizations are forced to make choices. The term “scarcity” reflects the limited nature
of resources.

• Pricing: is the mechanism that deals with scarcity. If supply decreases, pricing will
increase.

• Rationing: is another outcome that deals with scarcity. Because resources are limited,
pricing creates a limitation on the use of resources.
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Opportunity Costs
• Opportunity Cost: trade off with going with one alternative vs.
another. When choices are made between two options, the value of
the rejected option is the opportunity cost. It is the value of the lost
opportunity.

• Substitution Effect: when cost of a product increases vs. another

option, consumption of the 1st item decreases.
 FPAC Part I Certificate

Sunk and Marginal Costs

• Sunk Costs: Costs that can’t be reversed or recovered. In making a decision, we
should consider only the costs affected by that decision. Costs that are not
affected by the decision are sunk costs.
https://www.investopedia.com/terms/s/sunkcost.asp

• Marginal Costs: costs that are relevant to a new investment analysis. Incurred
only if a given investment is undertaken.
 FPAC Part I Certificate

Marginal Utility and Analysis

• Marginal Utility: the extra utility (benefit) gained from consuming
one additional unit.

• Diminishing Returns: At a certain point, the more goods or

resources produced, the lower the value of each additional unit. Coke

• Marginal analysis: the marginal utility of a choice is compared to

the marginal cost of a choice. If the marginal utility exceeds the
marginal cost, it is a good option.
 FPAC Part I Certificate

Economies of Scale
• Economies of Scale: As output increases, the cost per unit of output decreases. This is
because fixed costs are allocated over a greater number of units.

• Monopoly: when a good has no substitute and provided by 1 company. Thus, company
has control over both price and supply.
 FPAC Part I Certificate

Application
If it costs a trucking company $2,000 to move one truck of freight from Location X to Y, and the truck can take
10,000 kg of freight, the average cost is $2,000/10,000 kg. = $0.20/kg. Without an understanding of marginal
costs and benefits, one might assume that shipping freight for less than $0.2/kg would never be a good idea.

However, if the truck has empty space and a customer is willing to pay $0.15 per pound, the microeconomic way to
determine whether to accept the offer or reject it is to consider the marginal costs to the marginal benefits.

The costs will increase by the amount of additional fuel needed to ship the added weight, by a tiny bit more for
wear and tear on the truck, and by some amount for costs of fuel and driver mileage fees to go to an additional
destination. Everything else is already included in the cost such as most of the driver’s mileage, all of the insurance,
and so on. If the marginal cost for this extra load were $0.05 for kg then the additional $0.15 /kg. of benefit
produces a marginal net benefit of $0.10 per kg.

Accepting the offer is then the rational decision.

 FPAC Part I Certificate

2.Laws of Supply and Demand

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Law of Demand

Quantity of a good or
service demanded.

Price for a good

or service.
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Law of Demand
For normal goods, there is an inverse relationship between price and the quantity demanded of a good.
Factors that shift the demand curve:

• Consumer Preferences

• Number of potential buyers in the market

• Consumers Incomes

• Price of substitute goods

• Price of complementary goods

• Consumer Expectations

➢ Caution: a change in price does not shift the demand curve; it’s a movement along the exiting
demand curve.
 FPAC Part I Certificate

Law of Supply
➢ The law of supply states that as the price rises, more quantity will be supplied. Higher prices result in more

incentive to produce products and services while lower prices reduce profit margins and prevent producers from

profitably producing more supply.

➢ Organizations will produce goods or services only while the marginal benefit exceeds the marginal cost.

➢ Factors that shift the supply curve:

• Prices for necessary raw materials and input resources

• Changes in Technology

• Subsidies and taxes

• Natural conditions
 FPAC Part I Certificate

Equilibrium
Together, the forces of supply and demand tend toward an equilibrium price
and an equilibrium quantity.

Competitive forces drive prices to this point, and only disruptive forces to
supply and/or demand will cause it to shift from this point.

If one curve shifts, there will be a new equilibrium price and quantity.

The law of supply and demand states that the price of any good will adjust
until the quantity supplied and quantity demanded are in balance.
 FPAC Part I Certificate

Equilibrium (Excel Exercise)

 FPAC Part I Certificate

Elasticity of Demand
• While the laws of supply and demand work in general, there will be differences for different products. For example,
demand for milk may not rise much as household incomes rise but demand for inexpensive consumer electronics could
rise a great deal. This concept is captured in the concept of price elasticity of demand.
 FPAC Part I Certificate

Price Elasticity of Demand

For some… For others…

A small change in price creates a A small change in price will have only a
large change in demand. small change in demand.

|Change in Quantity|
Sum of Quantities  2
Ed
|Change in Price|
Sum of Prices  2
 FPAC Part I Certificate

Elasticity of Supply

Percentage Change in
Quantity Supplied
Price Elasticity of Supply
Percentage Change in
Price for a Product
 FPAC Part I Certificate

Elasticity
An elasticity coefficient greater than 1 is considered to be elastic, while results less than 1 are considered
inelastic. Demand for a few products (such as those considered necessities) in theory may be perfectly inelastic
or 0, meaning demand is unaffected by price. An elasticity coefficient of 1.22 is elastic and the organization
will therefore carefully weigh the benefits and costs of any price change.
 FPAC Part I Certificate

Elasticity
• Price elasticity of demand is affected by the following qualities:

• Relative price of item to consumer (Low-priced items have low elasticity or are less affected by price changes.)

• Whether it is a luxury or a necessity (Necessities have low elasticity.)

• Short term vs. long term (Demand is more inelastic over the short term and more elastic over the long term, e.g.,
paying more for electricity now but shifting to cheaper light bulbs and so on over time.)
 FPAC Part I Certificate

Elasticity
➢ How to Interpret the Elasticity Coefficient:
• 1) If Ep > 1, demand is elastic. This means that a slight variation in price can produce greater change in quantity
demanded. Therefore, hike in prices will negatively affect revenue, as the sales will drop with increase in price
and vice versa.

• 2) If Ep < 1, demand is inelastic for the particular good or service. It means quantity demanded is not affected
significantly from variation in price of goods and services. In simple words, there is less change in quantity
demanded due to price fluctuation.

• 3) If Ep = 1, demand for goods is unit elastic. It means quantity demanded is fluctuated in proportion to price of
goods and services. Thus, price changes have no effects on revenue of the firm.
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Questions

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Answer

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Answer

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Thank you

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