Individual Assignment Essay

Financial Concepts Guillermo Navallez is challenged with a market changes that have occurred over the past couple of years. With the economic environment created by the new competition and increase in labor costs, he will need to apply principles of finance to determine the best course of action to allow his furniture store to survive. After review and thoughtful consideration Guillermo decided to use the following to determine the best course of action: The Principle of Self-Interest Behavior, the Signaling Principle, and The Principle of Comparative Advantage. Using the behavioral based principles, economics and psychology can be integrated to help in the decision making process. Likewise, expertise can be the basis for choices made. The Principle of Self-Interested Behavior People generally, act in their own financial self-interest. The Principle of Self-Interested Behavior states that when all things are equal, parties involved will gravitate to the action that is most financially advantageous. A key concept with this principle is the idea of opportunity costs, or the difference between the value of one action and the value of best alternative (Emery, Finnerty, & Stowe, 2007). To maximize potential profits, Guillermo will want to review carefully the different options available. The development and review of anticipate financial results will help identify from a purely financial perspective. The Principle of Self-Interested Behavior would help Guillermo with his end decision, if his financial interest was the most important component. When considering his concern the effect that the decision will have on his family life, this principle will likely not be the guiding force in the decision he makes. The Signaling Principle The Signaling Principle is an extension of the Principle of Self-Interested Behavior (Emery, Finnerty, & Stowe, 2007). Decisions of one party in a financial market will provide signals to others. The old adage â€Å"actions speak louder than words† is a clear explanation of this principle (Garger, 2011). The actions of the competitors can play an important role in the decision making process. Guillermo understands that how others are handling the changes in the market can help him with his decision. He learns that many of his competitors are consolidating in to large organizations. The path taken by the others in the industry were not attractive to him. Guillermo saw that additional management reasonability and the forced retirements were not fitting to his lifestyle or personal financial expectations. The Signaling Principle would be a good practice for the foreign competition as they would benefit by understanding how others capitalized on the situation of the individual furniture makers left in the market. The Principle of Comparative Advantage Much like the very idea that the United States’ economic system is based, the Principle of Comparative Advantage stated that if people do what they do best, the most qualified people will be completing that type of work. One can pay another to do what they do best and vice versa. Foreign trade is based on this same idea. Some countries can produce goods more economically than others. By producing these goods and trading them with countries that can efficiently produce another needed good, everybody benefits (Emery, Finnerty, & Stowe, 2007). Through his research, Guillermo found a company that was still operating in exclusively in Norway, but was looking to distribute in the North America. Guillermo had connections with distributors and expert knowledge as to the furniture being sought after. By becoming a representative for the Norwegian company, he would work with the network he had developed to distribute their products. His company focus would change from primarily manufacturing to distribution. The Norwegian company would pay him for work he was extremely qualified to do, and they would make a majority of the furniture that would be sold. Both Guillermo and the furniture maker would win under of the Principle of Comparative Advantage. Conclusion Principles of finance can be very beneficial in making business decisions. They can deal with the competition in the economic environment, creating value and economic efficiency, and financial transactions.