Entrepreneurship -- Section 3.2

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Lesson 3.2THE CONCEPT OF COST : 

Chapter 3 Slide 1 Lesson 3.2THE CONCEPT OF COST Identify various types of costs. Discover how different types of costs affect the prices entrepreneurs charge. GOALS

FIXED AND VARIABLE COSTS : 

Chapter 3 Slide 2 FIXED AND VARIABLE COSTS Fixed costs are costs that must be paid regardless of how much of a good or service is produced. Fixed costs are also called sunk costs. Variable costs are costs that go up and down depending on the quantity of the good or service produced.

Fixed vs. Variable Costs : 

Chapter 3 Slide 3 Fixed vs. Variable Costs

MARGINAL BENEFIT AND MARGINAL COST : 

Chapter 3 Slide 4 MARGINAL BENEFIT AND MARGINAL COST Marginal benefit measures the advantages of producing one additional unit of a good or service. Marginal cost measures the disadvantages of producing one additional unit of a good or service.

Marginal Benefit : 

Chapter 3 Slide 5 Marginal Benefit Chelsea has a coffee and bagel shop She thinks about keeping her store open for an extra 2 hours every day She estimates by doing this, she will sell 150 more baked goods and 30 more cups of coffee This will bring in an estimated $100 more in revenue $100 is the Marginal Benefit

Marginal Cost : 

Chapter 3 Slide 6 Marginal Cost Chelsea will need to figure out how much it is going to cost her to stay open 2 hours later Additional Ingredients: $25 Overtime Pay: $50 Paper Products: $10 Utility Bills: $30

Should Chelsea Stay Open Longer? : 

Chapter 3 Slide 7 Should Chelsea Stay Open Longer? Marginal Benefit: $100 Marginal Cost: $125 NO: Marginal Cost exceeds Marginal Benefits MC>MB not a good economic decision

OPPORTUNITY COST : 

Chapter 3 Slide 8 OPPORTUNITY COST Opportunity cost is the cost of choosing one opportunity or investment over another.

Opportunity Cost : 

Chapter 3 Slide 9 Opportunity Cost Brandon wants to start his own car dealership He has been offered another job that would pay him $28,000/year 2 weeks paid vacation $1,200 Medical Insurance $1,800 year $31,000 total Brandon is giving up by having his own business

Opportunity Cost : 

Chapter 3 Slide 10 Opportunity Cost The amount you could have earned by choosing a different path Business people use the concept of opportunity cost all the time when making decisions

Example of Opportunity Cost : 

Chapter 3 Slide 11 Example of Opportunity Cost Molly has her own cake decorating business She has an extra $2,500 in cash that she wants to put back into her business Options Advertising campaign Invest in new equipment

Example of Opportunity Cost : 

Chapter 3 Slide 12 Example of Opportunity Cost If Molly chooses to use the money for advertising she will not get new equipment Her opportunity cost is the equipment If Molly chooses to use the money for new equipment she will not be able to invest in an advertising campaign Her opportunity cost is the advertising campaign

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