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

2. 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?

3. Business Costs and Revenue
Who wants to be an accountant?
Business Costs and Revenue

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

5. 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?

6. 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

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

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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 $4 2 10 6 3 8 4 5 11

15. Profit and Loss
Profit is the amount of money left over after all the costs of production have been paid
(Loss) is the amount of money by which total cost (TC) exceeds total revenue (TR)
Profit or (loss) = TR-TC

16. Profit or loss = TR-TC 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

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

19. $20
$20
$28
$32
$26
($20)
$26
$20
$43
$20
$104

20. You Try!!!!!! Oaklee and Blake deliver doughnuts for $10 per box.
20 people purchased boxes of doughnuts in October.
Oaklee and Blake uses their moms car to transport them to their doughnut delivery destinations. Her car payment and insurance are $100/month.
Oaklee & Blake’s other major cost is hair spray, so she can look awesome! They use about one bottle of spray per 5 boxes of doughnuts, and each bottle costs $2.
Calculate their TR for the month
What are their fixed costs?
What are their variable costs?
What is their profit (or loss)
for the month of October?
Tr= 200
FC= 100
VC= 8.00
TC= = 108
TR 200 –TC 108= profit 92.00

21. 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 Shop

22. 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

23. Law of Diminishing Marginal Returns
Definition: a level of production in which the marginal product of labor decreases as the number of workers increases

24. 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

25. 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.

26. Law of Diminishing Marginal Returns
Diminishing returns occurs when an increase in labor 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.

27. How many times can you write economics in the box below?

28. How Many Workers Should the Firm Hire?
Stop when the amount you pay the worker exceeds the value of their output

29. Law of Diminishing Marginal Returns
Workers
Q of output produced each day
Additional output produced as a result of hiring an additional worker
0 units 1 5
5 (5-0) 2 11
6 (11-5) 3 18
7 (18-11) 4 23
5 (23-18) 26
3 (26-23)

30. Workers
Total production
Marginal production
0 units 1 5
5 (5-0) 2 11
6 (11-5) 3 18
7 (18-11) 4 23
5 (23-18) 26
3 (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?

31. 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

32. Hiring Employees
What does diminishing marginal returns have to do with hiring?