Weighted Average Cost Of Capital (WACC)

Weighted Average Cost Of Capital (WACC) is a calculation of company cost of capital which is based on a weighted average between debt and equity. Its mathematical expression is listed below;

Weighted Average Cost Of Capital (WACC) 1

WACC represents the minimum return on investment that can be a base line for a company to make a decision for new projects. Generally, companies will accept only projects that have returns more than WACC.

This example will use the previous information from Cost of Debt and Cost of Equity article to demonstrate WACC calculation.

Weighted-Average-Cost-Of-Capital-(WACC)-cover Continue reading

Effect of Demand Shifters

Demand changes can effect on quantity of supply in both positive and negative ways. For this time, we will look at 5 factors of demand shifters and how they affect on price and quantity of products in the market.


Five Demand Shifter Factors are as follows;

  1. Number of potential buyers in the market – increase or decrease of buyers wanting to buy product in the market
  2. Buyers’ taste and preferencesfashion products as jeans may be in trend this season, the buyers want to buy them so the price goes up. For next season, the same model of jeans may not be a fashion trend so buyers don’t want to buy them. The price will drastically drop.
  3. Buyers’ incomeIncrease in buyers’ income will have a great purchasing power. Conversely, decrease in buyers’ income will badly affect on demand to buy things.
  4. Buyers’ expectationThis is the expectation of buyers of future market conditions and it will impact on the economy outlook if there are a lot of buyers having the same expectations.
  5. Price of substitute and complementary goods Substitute goods are products that can be use in place of one another such as potatoes and rice. Complementary goods are products the used together such car and fuel.

Continue reading

Understand Demand and Supply

The Demand and Supply is one of fundamental concepts of economics that will help us understand about oil price in a free market environment.

Understand Demand and Supply cover

In order to give you a  simple concept of demand and supply, please look at the fresh market image below (Figure 1).


Figure 1 – Fresh Market Continue reading