Simplified Model of a Corporation
We present a very simplified model of a corporation in Figure #1. It illustrates how capital flows from sales into production which includes purchase of materials and components, and pay to labor. (Equipment could also be included here.)
There is also reinvestment from the company when required.
Product flows from production to sales, and revenues from sales flows in, driving further production. A portion of revenues also goes to profits that can:
- Fund new investment in production,
- Be retained, or
- Distributed to shareholders via dividends or share repurchase.
Obviously, a tremendous amount of detail is overlooked here, but we believe it covers the essential economic flow for our discussion.
In Figure #2, we simplify even further by collapsing the Sales layer as this is not relevant to our discussion either.
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