3rd lecture - Economics 101 Lecture 3 The Business World"I...

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Economics 101 Lecture 3
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The Business World “I don’t want be the best MC. I want be the best Hustler. If it don’t make money it don’t make sense” -MASTER P, founder and CEO of No Limit Enterprises
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Who are these people? Bill Gates Steve Jobs Larry Page Sergey Brin Mark Zuckerberg These guys are loaded despite dropping out of school.
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How to Make Money You are an entrepreneur Should I offer a product or feature X Let C(X) be my cost of offering X Let B(X) be the consumer’s benefit from having X In order to make money, it must be that C(X) < B(X). I can charge p(X), where C(X) < p(X) < B(X) Buyer surplus = B(X) – P(X), Seller Surplus = P(X) – C(X). Wealth Creation = B(X) – C(X).
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Why is milk sold in rectangular containers while soft drinks sold in round ones? Suppose B(round) > 0 for soft drinks and milk. What is happening on the cost side
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So C(round) > 0 for soft drinks and milk. BUT Milk requires refrigerated shelf space versus soft drinks, which require only regular shelf space. SO C(round) >> 0 for milk. It doesn’t pay.
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Some Common Pitfalls for Decision Makers Pitfall #1. Measuring costs and benefits as proportions rather than as absolute dollar amounts (as in the K- Mart vs. Campus Store examples from lecture 1)
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Exercise: Your employer has a travel discount voucher that can be redeemed on one of your next two business trips. You could use it to save $100 on a $2000 plane ticket to Tokyo; or you could save $90 on a $200 plane ticket to Chicago? If your goal is to do what would be best for your company, for which trip should you use the coupon?
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Pitfall #2. Ignoring Opportunity Costs If doing activity x means not being able to do activity y , then the value to you of doing y is an opportunity cost of doing x . Many people make bad decisions because they tend to ignore the value of such foregone opportunities.
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It will almost always be instructive to translate questions like "Should I do x ?" into ones like "Should I do x or y ?" In the latter question, y is simply the most highly valued alternative to doing x .
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Example 3.1. Should I go skiing today?
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From experience you can confidently say that a day on the slopes is worth $50 to you. The charge for the day is $30 (which includes busfare, lift ticket, and equipment). But this is not the only cost of going skiing. You must also take into account the value of the most attractive alternative you will forego by heading for the slopes.
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Suppose that if you don't go skiing, you will work at your new job as a research assistant for one of your professors. The job pays $40 dollars per day, and
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3rd lecture - Economics 101 Lecture 3 The Business World"I...

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