1. BUSINESS ECONOMICS TOPICS GOAL OF BUSINESSES COSTS OF BUSINESSES PRICES AND REVENUES MARKET STRUCTURE MARKET CHANGE INTERNATIONAL MARKETS

2. TYPES OF BUSINESSES SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

3. GOAL OF A BUSINESS MAXIMIZE PROFIT PROFIT = REVENUES – COSTS PROFIT = PAYMENT TO OWNERSHIP (RISK TAKERS) PURSUIT OF PROFIT ALLOCATES RESOURCES COMPETITION KEEPS PROFIT IN LINE (AVERAGE: 3%) WHAT ABOUT NON-PROFITS?

4. BUSINESS PLAN WHAT TO PRODUCE WHO BUYS AND WHY WHO ARE COMPETITORS STAFFING AND SUPPLIES SALES AND REVENUES COSTS PROFITS ALL OVER MULTIPLE YEARS

5. WHAT, WHY, AND WHO? WHAT? PRODUCT, SERVICE WHY WILL PEOPLE BUY FROM YOU: * BETTER PRODUCT/SERVICE? * BETTER FEATURES? * BETTER LOCATION? * BETTER CUSTOMER SERVICE? * LOWER PRICES? COMPETITORS – WHAT DO YOU HAVE THAT THEY DON’T?

6. FIXED COSTS COSTS WHICH DON’T VARY WITH HOW MUCH IS PRODUCED AND SOLD ALSO CALLED “OVERHEAD” SPACE AND EQUIPMENT MUST PAY

7. VARIABLE COSTS COSTS THAT DIRECTLY INCREASE WITH PRODUCTION AND SALES WORKERS, ENERGY, RAW MATERIALS

8. MIX OF FIXED AND VARIABLE COSTS CAN BE DIFFERENT FOR DIFFERENT BUSINESSES GYM: ALMOST ALL FIXED COSTS FOR SPACE AND EQUIPMENT PERSONAL TRAINER: ALMOST ALL VARIABLE COSTS (TIME)

9. TOTAL COSTS TOTAL COSTS = FIXED COSTS + VARIABLE COSTS RAY’S PIZZERIA (MONTHLY SALES) 2000 PIES 4000 PIES FIXED COSTS $10,000 $10,000 VARIABLE COSTS $8,000 $15,000 TOTAL COSTS $18,000 $25,000

10. ONE IMPLICATION OF THE DIFFERENCE BETWEEN FIXED AND VARIABLE COSTS – THE SHUTDOWN RULE IF ALL VARIABLE COSTS, SHUTDOWN WHENEVER REVENUES ARE LESS THAN COSTS BUT IF HAVE FIXED COSTS, EVEN IF SHUTDOWN, STILL ARE RESPONSIBLE FOR FIXED COSTS IN THIS CASE, STAY OPEN AS LONG AS REVENUES EXCEED VARIABLE COSTS – HAVE $ LEFTOVER TO APPLY TO FIXED COSTS

11. EXAMPLE OF THE SHUTDOWN RULE RAY’S PIZZERIA (4000 PIES) FIXED COSTS $10,000 VARIABLE COSTS $15,000 TOTAL COSTS $25,000 IF REVENUES ARE $22,000, PAYS VARIABLE COSTS, AND HAS $7000 REMAINING TO APPLY TO FIXED COSTS; IN “RED” BY $3000 IF SHUTDOWN, STILL MUST PAY FIXED COSTS OF $10,000 IF REVENUES ARE UNDER $15,000 THEN DOES SHUTDOWN

12. AVERAGE COST TOTAL/NUMBER AVERAGE FIXED COST AVERAGE VARIABLE COST AVERAGE TOTAL COST

13. USING AVERAGE COST 2000 pies 4000 pies Fixed cost $10,000 $10,000 Variable cost $8000 $15,000 Total cost $18,000 $25,000 AFC $5.00 $2.50 AVC $4.00 $3.75 ATC $9.00 $6.25 A LOWER ATC GIVES MORE PROFIT AT SAME PRICE OR ALLOWS PRODUCER TO UNDER-PRICE COMPETITORS AND SELL MORE VOLUME, LEADING TO GREATER PROFITS

14. MARGINAL COST SIMPLY THE COST OF MAKING ONE MORE UNIT OR, IF MAKING SEVERAL MORE UNITS, THE COST PER UNIT EXAMPLE: RAY WANTS TO ADVERTISE TO TRY TO SELL 500 MORE PIES PER MONTH. MARGINAL COST IS THE ADDITIONAL COST PER PIE

15. RAY’S PIZZERIA (4000 PIES) FIXED COSTS $10,000 VARIABLE COSTS $15,000 TOTAL COSTS $25,000 IF RAY IS ALREADY SELLING 4000 PIES AT A TOTAL COST OF $25,000, WON’T THE MARGINAL COST OF EACH OF THE NEXT 500 PIES BE $25,000/4000 = $6.25? NO, IF RAY USES HIS EXISTING SPACE, THEN FIXED COSTS DON’T CHANGE. ADDITIONAL COSTS ARE ONLY VARIABLE COSTS AT $15,000/4000, OR $3.75 PER PIE

16. MARGINAL COST CAN VARY WITH LEVEL OF PRODUCTION DRILL FIRST 1000 FEET: $100 PER FOOT DRILL SECOND 100O FEET: $200 PER FOOT DRILL THIRD 1000 FEET: $300 PER FOOT IF DRILL 3000 FEET: AVERAGE COST IS $200 PER FOOT BUT TO DRILL THE 3001 ST FOOT = COST (MARGINAL) IS $300 PER FOOT.

17. LABOR ISSUES A BUSINESS WANTS IN A WORKFORCE: * APPROPRIATE SKILLS FOR THE JOB * MOTIVATION * DEDICATION * ADAPABILITY * PRODUCTIVITY * LOW TURNOVER QUESTION: PAY A HIGHER-THAN-NEEDED WAGE TO GET THESE – SAVE $ IN LONG-RUN?

18. OWNING VERSUS LEASING ADVANTAGES OF OWNING * TOTAL CONTROL * LOCK-IN COSTS * FOR REAL ESTATE, POSSIBILITY OF VALUE-APPRECIATION ADVANTAGES OF LEASING * FLEXIBILITY * NOT “LOCKED-IN” TO SPACE * AVOID POSSIBLE DEPRECIATION

19. HANDLING OF OWNERSHIP COSTS IF LEASE, LEASE PAYMENTS ARE PART OF FIXED COSTS IF BUYING AND BORROW FUNDS, LOAN PAYMENTS ARE PART OF FIXED COSTS HOWEVER, EVEN IF OWN PROPERTY FREE OF ANY PAYMENTS, PAYMENTS COULD HAVE EARNED BY LEASING SHOULD BE PART OF FIXED COSTS

20. RECOGNIZE DEPRECIATION DURABLE PRODUCTS WEAR OUT SO IF YOU OWN THE DURABLE PRODUCT, THERE IS A COST RELATED TO LOST VALUE EACH YEAR FOOTNOTE: IF HOMES APPRECIATE, IT IS DUE TO THE UNDERLYING LAND VALUE

21. WHEN TO GO TO THE NEXT LEVEL MEANS INCREASE FIXED COSTS TWO REASONS: 1) BECOME MORE COST-EFFICIENT PRODUCING MORE AT A LOWER COST PER UNIT 2) SELLING MORE UNITS (MORE VOLUME) AND THEREFORE MAKING MORE PROFIT

22. RAY DOUBLES THE SIZE OF HIS PIZZERIA PIES PER MONTH 4000 8000 FIXED COSTS $10,000 $20,000 VARIABLE COSTS $15,000 $25,000 TOTAL COSTS $25,000 $45,000 AVERAGE TOTAL COST $6.25 $5.63 REVENUE @$10/PIE $40,000 $80,000 PROFIT $15,000 $35,000

23. IS BIGGER ALWAYS BETTER? YES, IF HAVE ECONOMIES OF SCALE – COSTS PER UNIT FALL AS INCREASE PRODUCTION NO IF HAVE DISECONOMICES OF SCALE – COSTS PER UNIT RISE AS INCREASE PRODUCTION MANAGEMENT AND COORDINATING COSTS SEEM TO BE THE INHIBITING FACTORS FOR CONTINOUS ECONOMIES OF SCALE

24. PARTING QUESTION: CAN YOU PLAN “CREATIVITY”? SOME SAY CREATIVITY CAN’T BE PLANNED HAVE TO GO WITH YOUR “GUT” YOU SEE WHAT OTHERS DON’T DOES WORK FOR SOME; NOT FOR ALL TOLERANCE FOR RISK