Class#41 12/9/11

 Rizzo started the class by writing PROFITS, LOSSES, AND ENTREPRENEUERS on the board. He then talked about Viktor Schregckengost. He was the inventor of the riding lawn mower as well as revolutionizing a lot of industries. Great entrepreneur. An interesting point that was brought up was that Ghandi starved and kept millions of Indians in poverty. They starved by being self sufficient and not trading between villages. It’s weird how we don’t celebrate the accumulation of wealth of bill gates, but we celebrate him giving it away.

What does it mean to make too much money off of someone’s misfortunes. To say this is to say clothing companies make money off of nakedness, and locksmiths make money off of fear, house builders make money off of homelessness.

“greedy” insurance company profits- agrirgate profits of $10 billion. People spent $2.5 trillion in health care last year. This 10 billion won’t help anything when the number is as big as 2.5 trillion. Clothing companies make money by clothing people. Food companies make money by feeding people. Health care firms get money by keeping us well in health.

Rizzo would have died if he didn’t go to the hospital his illness. Doctors saved his life. They wouldn’t be there if they weren’t paid. Doctors made $1,200 that day. Large revenues they can earn by making new drugs motivates companies to make new drug discoveries. Polio vaccine made for profit opportunities.  When you really want something, you show it by paying more. How is it okay to sell clothes for money but not doctor services for money. What forces us to get business from one specific thing. To start a business, you need to understand the costs. Things called factors of production. If Rizzo wants to start a school on his land in Kentucky the costs are Land, Labor, and Capital. All of these have both explicit and implicit costs. The explicit costs from land are rent. The implicit costs are also rent.  The explicit costs of labor are wages. The implicit costs of labor are foregone wages. The explicit costs of capital are rent. The implicit costs of capital are foregone rent. THE SUM OF ALL EXPLICIT AND IMPLICIT COSTS ETERMINE IF HE SHOULD DO SOMETHING.

BY USING LAND TO BUILD THE SCHOOL, IT IS AN OPPORTUNITY COST. LOSING THE CHANCE OF USING IT FOR SOMETHING ELSE, OR RENT LAND TO SOMEONE ELSE.

To tell if something is profitable of whether you should rent or buy it you use the equation

PROFITABILITY= RENTAL RATE + (APPRECIATION RATE- INTEREST COST)

The rental rate is (ANUUAL RENTAL PAYMENT/ PRICE OF GOOD) appreciation rate is (CHANGE IN ASSET PRICE/ PRICE) interest cost is the interest rate that you pay. Whether you can a loan out or pay out of pocket you are paying interest due to the opportunity cost of not using the money out of pocket of investing.

Rizzo showed us an example of this. If you lease a Mazda for 1 year it costs $12,000 a year. If you buy one, it costs $32,000. You think you can sell it the next year at $24,000. The interest rate on a loan is 10%. The equation would be

(12,000/32,000) – (8,000/32,000) – (10%)= 37.5%-25%-10%= 2.5%

This positive 2.5% tells Rizzo that he should buy his car. It means that he is 2.5% richer each year owning the car compared to leasing it. If Rizzo financed it himself, he is still paying interest because of foregone chance to invest it elsewhere. It is an opportunity cost.

4% of a building value is needed to maintain it each year. If you want 0 cost, you would have to raise double the money. A $100,000 house costs $4,000 a year to maintain.