Bell Ringer!  In your mind, what defines “success” for a business ?  What non-financial factors might determine success for a particular business?

Bell Ringer!  Let’s talk about market research!  What did you learn about your ideal customers or your product from conducting interviews this weekend?  Will you change anything about your product as a result of your interviews?

Who wants to be an accountant?

What is the Goal of Business Firms?  The goal of every company is to MAXIMIZE PROFITS

What do we need to know to determine if there is a profit?  We need to know about Costs What are the payments associated with making this product?  We need to know about Revenues What is the income, earnings, or proceeds that come from this business?

Various Measures of Cost  Fixed Cost (FC): costs that do not vary with the quantity of output produced Fixed costs stay the same even if production is 0 ○ Lease costs are the same no matter how much you produce ○ Insurance costs are the same not matter how much you produce  Variable Cost (VC): costs that do vary with the quantity of output Variable costs increase as you make more product ○ Labor costs increase as output increases ○ Raw material costs increase as output increases  A firms Total Cost (TC) is the sum of its fixed and variable costs TC = FC + VC

Measures of Cost cont.  Average total cost (ATC) tells the per- unit cost ATC = TC Q

Measures of Cost cont.  Marginal cost (MC) is the cost of producing one more unit of a good  Marginal cost (MC) is one factor businesses must know about when deciding how much of a good it is best to produce

Marginal Cost  Every time you hear the word “marginal” you should think “additional” Marginal = + 1 MC = TC Q Remember: means “change in” or the difference

Various Measures of Revenue  Total revenue (TR) is the amount of money a company receives from the sale of its goods or services Simply multiply the price of the good (P) by the quantity of output (Q) TR= P x Q

Measures of Revenue cont.  Marginal revenue (MR) is the revenue from selling an additional unit of a good (the change in total revenue that results from selling an additional unit of output) MR = TR Q

How much will a firm produce?  What do I need to know to determine how many shoes to produce? Marginal cost (MC) Marginal revenue (MR)

How many t-shirts should I produce?  You want to keep producing t-shirts until MR = MC  If MC >MR do not produce  So….how many t-shirts should I produce? T-shirts MR = ∆ TR ∆ Q MC= ∆ TC ∆ Q 1$10$

Profit and Loss  Remember…every firm wants to MAXIMIZE profit!  We want to get the largest possible difference between total revenue (price of item x quantity) and total cost (fixed costs + variable costs) Profit or loss = TR-TC

How to compute profit and loss  Example: VC is $100, FC is $400. What is TC? ○ $100 + $400 = $ units are sold for $7. What is TR? ○ $7 x 100 = $700 What is our profit or loss? ○ $700 - $500 = $200 profit

Bell Ringer!  Dom delivers doughnuts for $10 per box.  20 people purchase boxes of doughnuts in October.  Dom uses a car to transport him to his doughnut delivery destinations. His car payment and insurance are $100/month.  Dom’s other major cost is hair gel. He uses about one bottle of gel per 5 boxes of doughnuts, and each bottle costs $2. 1. Calculate Dom’s TR for the month 2. What are Dom’s fixed costs? 3. What are Dom’s variable costs? 4. What is Dom’s profit (or loss) for the month of October?

Economies of Scale  Only experienced by larger businesses  Large businesses can buy inputs at discounts (bulk) and can afford machinery that small businesses cannot Allows businesses to keep input costs down and increase productivity  Examples: Nike factory vs. Italian shoe maker $80 vs. $450 Walmart vs. Mom and Pop Shopppe

How Many Workers Should the Firm Hire?  Every business has to decide how many employees it will hire  To do this we look at the Law of Diminishing Marginal Returns

Law of Diminishing Marginal Returns  If we add additional units of a resource (labor) to another resource (capital) that is in fixed supply, eventually the additional output produced (as a result of hiring an additional worker) will decrease

Law of Diminishing Marginal Returns  Diminishing returns occurs when an increase in inputs does not lead to an increase in productivity  The decrease in productivity is due to one input staying the same (# of sewing machines) and the other input increasing (number of workers) Due to overcrowding, the productivity will actually diminish as more workers are added.

Law of Diminishing Marginal Returns WorkersQ of output produced each day Additional output produced as a result of hiring an additional worker 00 units 155 (5-0) 2116 (11-5) 3187 (18-11) 4235 (23-18) 5263 (26-23)

Hiring Employees  Where is the point at which diminishing returns sets in?  The fourth worker  What does the law of diminishing returns have to do with hiring workers? Turn the factors into dollars: ○ You sell each unit of output for $30, and you pay each worker $70 ○ Person 4’s marginal revenue is $30 x 5 = $150 ○ Person 4’s marginal cost (assuming the materials are free) is $70, so is it worth it to hire him/her? WorkersTotal production Marginal production 00 units 155 (5-0) 2116 (11-5) 3187 (18-11) 4235 (23-18) 5263 (26-23)

Hiring Employees  General rule for hiring employees: As long as the additional output produced by the additional worker multiplied by the price of the good is greater than the wage you have to pay the worker, then hire the worker