Profits, losses and entrepreneurs
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.
Factors of production: Land, labor, capital
Explicit cost: rent wage fixed cost
Implicit cost: opp cost foregone wage normal rate of return
Even when I own the land, I still have to pay the rent because I give up the chance to do other things on the land.
Cost includes explicit and implicit costs
What decides whether you should buy or rent something: The equation of profitability
Profitability= rental rate + appreciation rate - interest rate
Rental rate: annual rental payment / price of good
Appreciation rate: change in asset price / price of good (It's the expectation of how much you wanna sell the next year)
Interest rate
Application: Whether to buy or rent a car?
Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10%
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.
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