BUSSPP 0020 1st Edition Lecture 6Outline of Last Lecture I. What do we mean by “stability”? II. Price TheoryIII. Regulatory MechanismsIV. Central Thesis Outline of Current LectureI. Recap: Central Thesis II. A thorough investigation of riskIII. Sources of moneyCurrent LectureI. 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 markets3. Some output will not generate revenuea. Firms produce garbage -find a way to recycle or-pay someone to haul it ofB. Escape/avoid perfect competition 1. Diferentiate product a. may sell both generic and diferentiated productsb. 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 investmenta. 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 riskA. Investment in Education 1. Out-of-pocket costsa. tuition – 17,000 (or 27,000 out of state) b. room – 8,000c. food – 4,500d. 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. +/- 10,0005. Opportunity cost a. $ not earned: 100-125k over the course of undergrad b. alternate investments: 10,0006. Total: $250k-$350kB. 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 lateC. Entrepreneurially: 1. Good idea 2. Prototype 3. Ability to scale it up to production levels4. 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 years3. Half of the remaining could barely break-even 4. About 15% held onE. 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 risksIII. Sources of money for an investment (in perfect competition) A. Sources of money1. Current revenue a. Basically 02. Retained earnings a. revenues generated in previous periods that were not expended b. Basically 03. Equitya. Selling a chunk (going public) b. One investor (for a portion of the company) c. Basically 04. Debta. MAYBE one bank will lend, but at really high interest b. Max out that credit card5. Sale of assets a. You don’t have anything
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