Goals for the day:
· Connect inputs with diminishing, constant or increasing marginal returns
· Understand how to work with price, quantity and costs to make profit
· Consider the size and character of your business idea
· Understand barriers to sustainable production and strategies for overcoming them
Welcome back again for your three-day break. For those, considering the pros and cons of the economic strategy of reducing everyone's pay and hours so we can hire more workers and move toward full employment, remember these last two three-day weekends.
There are three parts to today's lesson.
1.) How to juggle price, production, and costs to make a profit
2.) Thinking about the size and character of your business
3.) Ways to make your business more "sustainable."
Part 1
The starter to get us focused is for you to graph the production returns from Zia purchasing greenhouses for local farmers to produce burritos. (You should have read the article on Zia Taqueria and finished the reading questions!) Use this worksheet to create a graph using the numbers provided. Simple, simple.
I'll then show you this table that goes back to the questions we asked at the beginning of the business unit. I want the connection between the graphs and tables I've thrown at you and the questions you need to answer to start a business to be tighter. This table shows how the concepts we're discussing apply to the questions business owners have to answer.
With that in mind, we're going to deal with some graphs and tables. The BIG question all business owners ask at one point or another is how much profit can I make. The general equation for profit is pretty simple. PROFIT = (Price X Quantity Sold) - Costs.
We're now going to go deeper into the greenhouse example by breaking down this table that I've shared with you. This table assumes that the "greenhouses" are the only variable input in making Zia's burritos. This isn't true but we're just showing you how this works at this point. We're also assuming the market for burritos is perfectly competitive. This means that marginal revenue equals price. We'll talk more about perfect competition tomorrow.
As I go through this table I will explain the idea of marginality: how much MORE from one additional thing. This includes how much more production from one more greenhouse (marginal return). This includes how much more cost from one more greenhouse (marginal cost). This includes how much more revenue from selling one more burrito (marginal revenue). "Marginal" is an uber-important word in economics because it implies tradeoffs, which is what many think economics is all about.
As you look at this table, realize a couple of things. Look for the row that creates the highest profits. You get the profit by simply looking at the difference between Total Revenue and Total Cost. How many greenhouses give you the most profit. Notice also in this row below where you get the most profit (meaning the row showing one more greenhouse) the marginal cost is greater than the marginal revenue. This means one more of something is going to give you more cost than benefit. As a business owner, you don't want to go there.
You can plug estimates for your own business into this table, play with changing the price and quantities and costs. But highly competitive market, you can use tables like this to make all kinds of decisions for your business.
Part II
Notice in the table that the cost of each additional greenhouse goes down. Why? If you guessed buying in bulk, you're on the nose. This is part of the general idea of economies of scale: the more you produce (or buy) the less expensive inputs become. This works for many, though not all, businesses. For example, a locksmith has a van and tools. Getting bigger doesn't necessarily reduce costs because adding a second locksmith to the business means buying a whole other van and set of tools. You might save a little on advertising and paper clips, but you're not going to save a lot of money going from one to two people as part of the business.
An iron foundry, on the other hand, has a huge investment up front for the machinery and building, but then you can produce things cheaply and quickly. And to pay back the loan for buying all that equipment, you want to sell as many things as possible. Certain things like factories and hospitals are more cost effective as they get bigger. Other things work better when they stay small.
What's the right size for Zia? Would it reduce their costs and increase their profit if they added another location?
After break, we'll then consider the opposite to the big factory production that takes advantage of the economies of scale. The opposite is what's being called the "artisan economy." This is small scale production that generates value because of its unique and handcrafted nature. I will show you this video that introduces the artisan economy. I'll also show you this article that details artisan businesses in our area. Assembly lines and factory production is a function of neoclassical economists focus on efficiency. The artisan economy comes from contextual economics.
Is Zia an artisan business? One part of your homework will to read the handout on the artisan economy and then journal about what you think the right size is for your business idea.
Part III
The last part of class we'll talk about sustainable business. Sustainable business means making decisions based on the "triple bottom line": people, planet, profit. We'll look at and discuss what Zia is doing in this realm.
There are definitely barriers to getting a sustainable business off the ground. Do you think government should give sustainable businesses a boost by helping them overcome barriers (e.g. building a chicken processing facility)? Or do you think government should stay out of it and let the laws of supply and demand run their course.
We'll look at some different approaches taken in the local food economy in La Plata County. We'll talk about the importance of consumer demand to get people with money to invest in sustainable business. How do you create demand?
Advertising!! And now we're almost back full circle to what we've been studying for the past week. I'll show you how the Environmental Center tried to generate demand for sustainable businesses in town like Tim at Zia.
Your second piece of homework is to fill out the Center's sustainable business inventory for your business idea.
Homework due January 28th
Read the fact sheet on the artisan economy and try to answer what is the right size for my business?
· Are there natural economies of scale?
· Could this be an artisan item? Or is it best to mass produce?
· What do your customers want?
· How do I want to produce?
Fill out the sustainable business inventory for your business
· Connect inputs with diminishing, constant or increasing marginal returns
· Understand how to work with price, quantity and costs to make profit
· Consider the size and character of your business idea
· Understand barriers to sustainable production and strategies for overcoming them
Welcome back again for your three-day break. For those, considering the pros and cons of the economic strategy of reducing everyone's pay and hours so we can hire more workers and move toward full employment, remember these last two three-day weekends.
There are three parts to today's lesson.
1.) How to juggle price, production, and costs to make a profit
2.) Thinking about the size and character of your business
3.) Ways to make your business more "sustainable."
Part 1
The starter to get us focused is for you to graph the production returns from Zia purchasing greenhouses for local farmers to produce burritos. (You should have read the article on Zia Taqueria and finished the reading questions!) Use this worksheet to create a graph using the numbers provided. Simple, simple.
I'll then show you this table that goes back to the questions we asked at the beginning of the business unit. I want the connection between the graphs and tables I've thrown at you and the questions you need to answer to start a business to be tighter. This table shows how the concepts we're discussing apply to the questions business owners have to answer.
With that in mind, we're going to deal with some graphs and tables. The BIG question all business owners ask at one point or another is how much profit can I make. The general equation for profit is pretty simple. PROFIT = (Price X Quantity Sold) - Costs.
We're now going to go deeper into the greenhouse example by breaking down this table that I've shared with you. This table assumes that the "greenhouses" are the only variable input in making Zia's burritos. This isn't true but we're just showing you how this works at this point. We're also assuming the market for burritos is perfectly competitive. This means that marginal revenue equals price. We'll talk more about perfect competition tomorrow.
As I go through this table I will explain the idea of marginality: how much MORE from one additional thing. This includes how much more production from one more greenhouse (marginal return). This includes how much more cost from one more greenhouse (marginal cost). This includes how much more revenue from selling one more burrito (marginal revenue). "Marginal" is an uber-important word in economics because it implies tradeoffs, which is what many think economics is all about.
As you look at this table, realize a couple of things. Look for the row that creates the highest profits. You get the profit by simply looking at the difference between Total Revenue and Total Cost. How many greenhouses give you the most profit. Notice also in this row below where you get the most profit (meaning the row showing one more greenhouse) the marginal cost is greater than the marginal revenue. This means one more of something is going to give you more cost than benefit. As a business owner, you don't want to go there.
You can plug estimates for your own business into this table, play with changing the price and quantities and costs. But highly competitive market, you can use tables like this to make all kinds of decisions for your business.
Part II
Notice in the table that the cost of each additional greenhouse goes down. Why? If you guessed buying in bulk, you're on the nose. This is part of the general idea of economies of scale: the more you produce (or buy) the less expensive inputs become. This works for many, though not all, businesses. For example, a locksmith has a van and tools. Getting bigger doesn't necessarily reduce costs because adding a second locksmith to the business means buying a whole other van and set of tools. You might save a little on advertising and paper clips, but you're not going to save a lot of money going from one to two people as part of the business.
An iron foundry, on the other hand, has a huge investment up front for the machinery and building, but then you can produce things cheaply and quickly. And to pay back the loan for buying all that equipment, you want to sell as many things as possible. Certain things like factories and hospitals are more cost effective as they get bigger. Other things work better when they stay small.
What's the right size for Zia? Would it reduce their costs and increase their profit if they added another location?
After break, we'll then consider the opposite to the big factory production that takes advantage of the economies of scale. The opposite is what's being called the "artisan economy." This is small scale production that generates value because of its unique and handcrafted nature. I will show you this video that introduces the artisan economy. I'll also show you this article that details artisan businesses in our area. Assembly lines and factory production is a function of neoclassical economists focus on efficiency. The artisan economy comes from contextual economics.
Is Zia an artisan business? One part of your homework will to read the handout on the artisan economy and then journal about what you think the right size is for your business idea.
Part III
The last part of class we'll talk about sustainable business. Sustainable business means making decisions based on the "triple bottom line": people, planet, profit. We'll look at and discuss what Zia is doing in this realm.
There are definitely barriers to getting a sustainable business off the ground. Do you think government should give sustainable businesses a boost by helping them overcome barriers (e.g. building a chicken processing facility)? Or do you think government should stay out of it and let the laws of supply and demand run their course.
We'll look at some different approaches taken in the local food economy in La Plata County. We'll talk about the importance of consumer demand to get people with money to invest in sustainable business. How do you create demand?
Advertising!! And now we're almost back full circle to what we've been studying for the past week. I'll show you how the Environmental Center tried to generate demand for sustainable businesses in town like Tim at Zia.
Your second piece of homework is to fill out the Center's sustainable business inventory for your business idea.
Homework due January 28th
Read the fact sheet on the artisan economy and try to answer what is the right size for my business?
· Are there natural economies of scale?
· Could this be an artisan item? Or is it best to mass produce?
· What do your customers want?
· How do I want to produce?
Fill out the sustainable business inventory for your business