Business Decisions and Investments UNIT VI – Fundamental Economic Principles

Why do businesses form? To make a profit Sometimes to better society

Business Decisions Business owners must make their decisions carefully Every decision will have a consequence, whether good or bad Every decision is a gamble as to whether or not it will create more profit

What types of decisions do businesses have to make?

Business Investments Investment decisions are the most important decisions for a business to make Businesses invest in the four factors to create the largest profit possible

Why would a business invest in each of the following? Hiring more workers? Purchasing a larger factory? Training employees more? Investing in new technology? Outsourcing jobs to other countries?

Law of Diminishing Return Businesses understand that an investment will not always produce a profit The Law of Diminishing Return states that at some point a business will invest too much and lose money as a result

Costs Fixed – doesn’t change based on amount produced (rent) Variable – changes based on amount produced (labor, resources) Total Cost = Fixed + Variable Cost (this would be the bills and labor costs)

Revenue Total amount of money made before bills and labor costs Total Revenue = amount sold X price

Profit Total amount pocketed after bills and labor are paid Profit = Total Revenue – Total Cost