Hermes+bags+record+2011+profits+and+sales

//**REMEMBER: DO NOT SUMMARIZE THE ARTICLE!!!**//

=TITLE OF EXTRACT:= Hermes bags record 2011 profits and sales

=SOURCE:= http://www.bbc.co.uk/news/business-17479818

=DATE EXTRACT WAS WRITTEN:= march 22nd 2012

=DATE CURRENT EVENT WAS WRITTEN:= march 26th 2012

=EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:= "All luxury goods firms have been boosted by demand from Asia and other regions of the world that are growing much faster than Europe and the US." The Hermes market has expanded to Asia and other regions, therefore the number of consumers for Hermes products have also increased. When the article states that Asia is growing much faster than Europe and the US, the implication is that the average income of the people in Asia is also increasing. Income and number of consumers are both determinants of demand. Because there has been an increase in both these factors the demand curve shifts upward, causing an increase in the quantity supplied by Hermes and the price of their products. This statement also claims Hermes to produce luxury goods, meaning that they have high income elasticity. The Asian people are currently experiencing a boost in income which is benefiting the Hermes market, however if their income were to fall the Hermes market would experience a drastic decrease in demand.

"The firm, famous for its Birkin bags and scarves, said net profit rose 41% to 594m euros (£495m) in 2011 from a year ago." The Hermes firm participates in a monopolistic competition. Currently it is experiencing an abnormal profit. In monopolistic competition a firm can experience abnormal profit and losses in the short run, however, in the long run will experience normal profits.

"Hermes plans to build two new leather factories in France to cope with demand. The results included a capital gain of 29.5m euros from the sale of 45% of Jean Paul Gaultier to Spanish company Puig." The short run average cost curve is about to shift along the long run average cost curve for the Hermes firm as they increase their fixed factor of production - capital (factories). With such results we can assume that Hermes is still in the increasing returns to scale region of the long run average cost curve. Meaning they can still afford to move their short run average cost curve along the long run average cost curve till they reach constant returns to scale. That is where they would reach profit maximization, and should not move anymore.

=VOCABULARY TERMS AND DEFINITIONS:= supply - the willingness and ability of a producer to produce a quantity of a good or service at different prices (in a given time period). quantity supplied - the willingness and ability of a producer to produce a quantity of a good or service at a certain price (in a given time period).

demand - the willingness and ability of a consumer to purchase a quantity of a good or service at different prices (in a given time period). __ determinants of demand (nonprice factors) __
 * Number of consumers - willing and able to buy product
 * Taste - what people like
 * Income - amount of money a person makes

income elasticity of demand (YED) - a measure of how much the demand for a product changes when there is a change in the consumers income.

luxury goods/ superior goods - YED is greater than one. products that have high income elasticity, non essential products. It is a normal good, as income increases demand increases. Note that because it is elastic, if there is a change in income, there could be a drastic shift in the demand for the product.

short run - the period of time in which at least one factor of production is fixed. All production takes place in the short run.

long run - the period of time in which all factors of production are variable, but the state of technology is fixed. All planning takes place in the long run.

normal profit - total revenue = total cost (fixed, variable, and opportunity). The opportunity cost is the amount of profit that the owner of the firm expects to make. If the owner does, then he/she is happy.

abnormal profit - Total revenue > total cost (fixed, variable, and opportunity). The owner is making more that his/her expected profit and so is very happy.

monopolistic competition __ assumptions __ 1. industry is made up of a fairly large number of firms 2. each firm is small, relative to the size of the industry. the actions of one firm are unlikely to have a great effect on any of its competitors. 3. The firms all produce slightly differentiated goods. 4. Firms are completely free to enter and exit the industry. __ short run (sr) abnormal profits __ in the sr they may make excess profits. __ long run (lr) normal profits __ lr firms only make normal profits __ efficiency __ in lr and sr aren't either allocatively efficient (MC does not = AR) or productively efficient (MC does not = AC)

increasing returns to scale - when input is increased the output increases more than proportionately __ determinants __
 * Large machines - captial/factories

factors of production - resources capital - all equipment, machinery, and factories that are used to produce goods and services.

=DIAGRAMS:=

=EVALUATION:= Currently Hermes is doing well for themselves. However, they must take into account their future. At this point they need to be careful about how much they expand their firm, and also their target consumers. If they expand more they could reach constant returns to scale which is good, but anything more will only hurt them. While it is beneficial for them to focus on Asia for now, they need to start thinking about other markets that could allow them to keep a stable profit if the Asian market ever were to collapse.