BUSSPP 0020 1st Edition Lecture 6 Outline of Last Lecture I What do we mean by stability II Price Theory III Regulatory Mechanisms IV Central Thesis Outline of Current Lecture I Recap Central Thesis II A thorough investigation of risk III Sources of money Current Lecture I Central Thesis A On the selling side perfect competition is not comfortable 1 Firms both buy and sell 2 Firms must interact with their environment in both input and output markets 3 Some output will not generate revenue a Firms produce garbage find a way to recycle or pay someone to haul it of B Escape avoid perfect competition 1 Diferentiate product a may sell both generic and diferentiated products b diferentiation requires input of resources money time labor etc c I e converting resources into a diferent kind of resource the product 2 All of this requires an investment a all investments are considered risky These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute b what direction will it go and by how much may want to participate in future transactions such as in regard to currency exchange II A thorough investigation of risk A Investment in Education 1 Out of pocket costs a tuition 17 000 or 27 000 out of state b room 8 000 c food 4 500 d books etc 1000 2 walking around money a 30 a week roughly b Roughly 3 000 a year 3 Time value of money a 167 500 out of pocket accounting 4 Cost of capital a every source of money has a cost b 10 000 5 Opportunity cost a not earned 100 125k over the course of undergrad b alternate investments 10 000 6 Total 250k 350k B Cost before benefit 1 Just because you ve made the investment does not guarantee any return 2 Even if benefits occur they may be too little or they may not begin until too late C Entrepreneurially 1 Good idea 2 Prototype 3 Ability to scale it up to production levels 4 Efective price 5 Hope to God that no one else grabs it D How long do most new restaurants last 1 Every new restaurant in Manhattan 2 About 70 failed within the first 3 years 3 Half of the remaining could barely break even 4 About 15 held on E How many new bands start up every day 1 So like 99 fail F Bottom line avoiding competition must be REALLY important for people firms to take these kinds of risks III Sources of money for an investment in perfect competition A Sources of money 1 Current revenue a Basically 0 2 Retained earnings a revenues generated in previous periods that were not expended b Basically 0 3 Equity a Selling a chunk going public b One investor for a portion of the company c Basically 0 4 Debt a MAYBE one bank will lend but at really high interest b Max out that credit card 5 Sale of assets a You don t have anything ZERO
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