No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seven: Production: Man at Work 163 to innovate and gain approval through additional layers of management that often accompanies growth. In some cases, it may not be bureaucracy, but rather the difficulty in scaling inputs. Many fine artisans do not become a chain; they cannot duplicate the original genius at similar costs. For example, you can get your car painted at any Maaco nationwide, but getting Chip Foose to overhaul your ’55 Chevy will be difficult! Both returns to scale and economies to scale are important for firms to consider; returns to scale capture how efficiently a firm can produce as it grows larger, and economies of scale capture the costs of growing larger. They are obviously similar concepts, and yet distinct—entrepreneurs must consider both. PROFIT: THE DRIVING FORCE FOR ENTREPRENEURS Now that we have an idea about production, we need to understand why an entrepreneur might want to produce at all. We need to think about making some money! Isn’t that what you first thought economics was all about? The opportunity for profit is a powerful motivator of entrepreneurs; we will assume that entrepreneurs are profit maximizers . Let’s define profit (Π as equaling total revenues minus total costs : ∏ = TR − TC Total revenue (TR) is simply the price (P) of goods sold, multiplied by the quantity (Q) of goods sold; total costs (TC) equals the sum of all the entrepreneur’s monetary costs: labor, capital, rent, interest, etc. (more on costs below). Let’s look at a simple example that illustrates this. Let’s say that Tom sets up a lemonade stand on the corner of a convenience store. He pays the manager of the store $20 to allow him to set up the stand there for the whole weekend, he pays his little sister Sarah $30 to run the stand, and he buys ice and lemonade supplies for $40. Tom has a table, chairs, and sign materials that he doesn’t have to pay for. Let’s assume over the weekend his stand sells 300 glasses of lemonade at $.75 each. What was Tom’s profit? ∏ = TR − TC TR = PQ = $.75 × 300 = $225 TC = Stand Fee + Labor + Material = $20 + $30 + $40 = $90 So his profit is equal to: Profit maximizers: Firms/ entrepreneurs may pursue many goals, but competitive pressures will force them to maximize profits for their enterprise. All other goals and objectives are subsidiary, as they are enabled by high profits. ∏ = $225 − $90 = $135