Class Thirty Seven

Profits, Losses, and Entrepreneurs
Society doesn't celebrate the accumulation of wealth, only its distribution.

Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.

Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.

The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.

Losses force business to change with changing conditions and shift to what they are comparatively good at.

Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
 Entrepreneurs - When starting a business, the most important thing to do is understand your real costs.
Factors of Production: (1) land, (2) labor, and (3) capital. You can about explicit and implicit costs
1) Explicit:rent ; Implicit: rent (cost of forgone opportunities)
2) Explicit:wages ; Implicit: forgone wages
3) Explicit: rent (projectors, laptops) ; Implicit: forgone rent

What decides whether you should buy or rent something: The equation of profitability
Profitability = Rental Rate + Appreciation Rate - Interest Rate
Benefits of buying an asset: its the forgone rental payments you would have to make.
So annual:
[(rental payments) / (price of good)] + [(Change in asset price)/(price)](It's the expectation of how much you wanna sell the next year) - 10% = 2.5%
37.5% + (-25%) - 10% = 2.5%

Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10% (associated with The cost of administrate loans, risk, time preference, inflation )

Rental rate= 12000/32000 = 37.5%
Appreciation rate= -8000/32000= -25%
Interest rate: 10%
Profitability= 37.5% + (-25%) - 10% = 2.5%

If the outcome is larger than 0, you should buy the stuff.

What does 2.5% mean?
It shows how much richer you are every year if you own the thing rather than rent the thing.
2.5% means: how much richer I am each year from owning the car as compared to if I rented the car. If the number is positive you should buy; if the number is negative you should rent. If you buy, you are $250 richer than if you had rented the car.