ln5_costs - Lecture 5: Costs and Producing 1. Types of...

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1 Lecture 5: Costs and Producing 1. Types of business organizations sole proprietorship: one owner runs everything partnership: multiple owners corporation: shareowners own the business; shares can be bought and sold; shareholders hire a CEO (chief executive officer) to run the corporation 2. Role of profit: we'll assume the objective of any business is to maximize their profits (revenues - costs). So they'll put resources, and make products and services, where they can make the most profit. High profits are a signal that buyers want more of the product or service ("invisible hand" at work), and businesses will be motivated to respond. 3. To start a business, and specifically to get loans from a bank, need a "business plan" which shows what you will produce, who will buy it, how you will produce it, and what your revenues, costs, and profits will look like over several years. A production function shows the "inputs", like labor, material, land, that is used to produce the "output". 4. We'll use the restaurants operated by my friend "Mr. Pizza" to illustrate cost concepts. Three general categories of costs. a. Fixed Costs: Costs unrelated to how much output (# pizzas) is produced. Often called "overhead" by business people. Examples: rent or mortgage on building, property taxes, electricity (if varies little with output), insurance, and management salaries. In the short-run , when Mr. Pizza has a certain number of stores of a certain square footage, fixed costs are the same if 1 pizza is sold per month or if 1000 are sold. b. Variable Costs : Costs which directly increase with increases in output. Examples: food ingredients, pizza boxes, labor of hourly workers. c. Total Costs : sum of fixed costs and variable costs 5. Interesting Implication ("when to fold"): Let's say Mr. Pizza is losing money (his revenues from selling pizzas aren't covering his total costs). Will he automatically close his stores? Answer:
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This note was uploaded on 10/12/2008 for the course HIST 203 taught by Professor James during the Spring '08 term at N.C. State.

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ln5_costs - Lecture 5: Costs and Producing 1. Types of...

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