Profit and non Profit Organizations

I want to write about this issue because I´ve felt temptated to name this site "My Think Tank" instead of "My Blog", thinking about the concept as a a bucket full of ideas and this is not true.

A Think Tank is so far much than this and in a fast search I´ve found the following definition :

A think tank (also called a policy institute) is an organization, institute, corporation, or group that conducts research and engages in advocacy in areas such as social policy, political strategy, economy, science or technology issues, industrial or business policies, or military advice. Many think tanks are non-profit organizations, which in some countries such as the US and Canada provides them with tax exempt status. While many think tanks are funded by governments, interest groups, or businesses, some think tanks also derive income from consulting or research work related to their mandate.

After read this paragraph you will understand clearly what are the main objectives of that organizations and you will see they usually are non-profit organizations.

So I´ve remembered about the main distinctions about profits and non-profits organizations. But in economics we say firms (we don´t make distinctions between both types in our General Equilibrium Models) are maximizing profits as well as the consumers are maximizing their utility functions. And this point is very important because the efficiency in General Equilibrium Theory is when all the firms and consumers are using efficiently every input and output respectively given their prices. They are getting profits as in perfect competition and there´re no wasted resources and all the system get a whole equilibria.

In management instead we have to deal with profits and non profits organization and the last ones claim to be efficient as well as any profit organization. But this is not true because we are talking about different concepts.

Unfortunately the main objective of a non-profit organization is to provide a good or service in an enought quantity to cover all the requirements of the members or the beneficiaries, not withstanding the profits but instead the budget, this is, they will provide the service meanwhile they can pay the costs. So in this sense we have non-profits organizations which are providing goods and services in a large quantities probably until they equate incomes to costs.

This is not the rationality of a maximizing profits organization, e.g. the firm. The firm is all the time optimizing and maximizing profits and they will provide the goods and services until they get the Maximun difference between Incomes and Costs, this is when they are maximizing profits.

If the firm is providing a large amount of a good or service to the point where the income equates the costs we talk about efficacy, this is they reach the targets but they don´t necessarilly maximize profits, so they are not efficient. Instead the firm is Efficient and have the Efficacy property at the same time, because they reach the given objectives to maximize profits.

In the figure above we find a profit organization which maximize profits where the second derivative of the income equates the second derivative of the costs function (Qprofits) and inmediatly we find a non-profit organization providing a larger quantity (at the green line) than the firm but they are not maximizing profits (Qnon-profits). We can think in an organization which provide with breakfasts to people in poverty, they will continue providing breakfast until they can cover the costs and expenses with the Income (Income = Costs).

So the firm is efficient ( they are maximizing profits) and they reach their objectives in quantities defined to acomplish that goal and even they have the property of efficacy.

Instead the non-profit organizations meet the efficacy property because they reach the goals but not efficient at all, because they are not maximing profits.

I hope many respectable Think Tanks will understand they are not efficient just because they are not maximizing profits but instead they are providing a service which is equally valuable by the society as a whole.

So at the light of this reflection I´ve decide to avoid the title "My Think Tank" and I´ve decided to keep the words My Blog.

Driving in the Highway : The Market

The first time I felt the experience of going at fast speed in the highway ( the market ) was when I was working at the bank. I was an executive manager and the customers were mainly exporters and sometimes importers. Exporters are supposed to sell their production usually in US currency and Importers are assumed to purchase their supplies in US currency. It is the most frequent situation and it was exactly what I had to face.

When you are trading currencies you are in the highway at fast speed, you have to quote all day the exchange rate for your better clients and still make every business a profitable one. Outside the US, Exporters are Supplying US currency to the local market ( they need local currency to pay their expenses) and Importers are Demanding US currency to pay their external supliers.

Early in the morning after reviewing the unpayable checks you begin the day with people asking you for exchange rates and you have to quote with the trade room the best exchange rates for your clients even they are importers or Exporters ( you are giving a service ) and of course caring for the profitability of the operations.

If you are dealing with an exporter they want the highest exchange rate you can get at the market but this will depend on who is this particular day quoting and trading at the trade room.

In the local market the mainly exporters are companies in mining so they liquidate US currency to convert it in local currency, when great exporters companies enter into the market selling dollars you are in problems the Law of Demand and Supply operates and due to the large supply of US currency, this means the US exchange rate will be priced probably at lower levels than previous days.

Your customer is in problems he wants the best conditions for his exchange rate and you can´t get a better rate than the previous day. But still remains the possibility of greater importers entering in the market and increasing the Demand and you could get a better exchange rate, so you are hopeless and still keep your-self quoting with the trading room. Sometimes in the middle of the day the exporters take deffensive positions and wait for a better moment, in this moment you have the pulse of the market at your fingers and you feel you are in the highway at top fast speed.

You keep your hands on both phones quoting exchange rates and probably quoting a special interest rate with the trade room. At this moment you are working not at your office rather you are part of the team, you are inside the trade room and doing your best for your customers and your company.

Again, now you are driving at top speed in the Highway :

... The market.

I think this experience to feel the market in your hands and living every second to understand what goes on during the day to get better quotes and transactions is the best lesson about how a market works. It is so simple when the demand increase (ceteris paribus), the price of the US currency will be higher and if the supply increase (ceteris paribus) the price of the US currency will decrease too. So simple like that , The law of Supply and Demand in motion. Enjoy it !