Mrs. Leonard Entrepreneurship 3.2 The Concept of Cost Mrs. Leonard Entrepreneurship 3.2

The Concept of Cost To determine profit entrepreneurs must: Know how much it costs to ______________ their goods and services Consider all the ____________ that go into producing the good and service to determine a price to charge EX. Jewel Box – produces handmade jewelry Need office space, materials, labor, management, and other costs All resources that go into making a piece of jewelry must be taken into account A company that prices its product based only on the materials involved in producing it will lose money and go out of business quickly

Fixed and Variable costs _____________ Costs – costs that must be paid regardless of how much of a good or service is produced Also called ___________ costs ________________ Costs – costs that go up and down depending on the quantity of the good or service produced These costs rise directly with the number of items sold

Fixed and Variable Cost Example Bread and Bagel shop Fixed costs – _____________, interest on loans taken out, insurance fees Must pay these costs regardless of whether the Bread and Bagel shop makes any sales Variable costs – flour, ___________, coffee More cups of coffee or donuts the company sells, the more resources it must buy to make more goods A business with many fixed costs is a ___________ risk than a business with mostly variable costs because fixed costs will be incurred regardless of sales Fixed or variable expense worksheet

Marginal Benefit and Marginal Cost Marginal __________________ – measures the advantages of producing one additional unit of a good or service Marginal _______________ – measures the disadvantages of producing one additional unit of a good or service

Marginal Benefit and Marginal Cost Example: Bread and Bagel Shop Keep the store open two extra hours every day Estimates selling 150 baked goods and 30 cups of coffee – bringing in additional revenues of $100/night This $100 represents the marginal ________________ of keeping the store open an extra two hours a day Estimates purchasing additional ingredients to produce another 150 baked goods and 30 cups of coffee Will have to pay overtime to employees, use more electricity – staying open will cost him $125/day Because the marginal cost of staying open $125 exceeds the marginal benefit – Bread and Bagel decides not to change store hours

Opportunity Cost ___________________ Cost – cost of choosing one opportunity or investment over another Opportunity cost of one choice or decision is always the ____________________ that was not chosen Ex. $2,500 extra money to put back in business Can invest money in advertising campaign that costs exactly $2,500 or invest in new equipment Opportunity cost of advertising campaign will be the value of the new equipment – must weigh out choices and choose the best option

Think About It… Write a one paragraph summary (minimum 4 sentences) on the following topic: Explain the opportunity costs of choosing to open your business over taking a job with the government that includes 2 weeks paid vacation and medical insurance.

Chapter 3.2 Assessment Directions: Answer the following assessment questions. Add them to your 3.1 assessment questions. Write the questions and the answers. Save your work. Section 3.2 Assessment What is the difference between fixed and variable costs? How do entrepreneurs use the concepts of marginal benefit and marginal cost? What is opportunity cost?