Changes

==Accounting==

==Accounting==

Keeping track of all the revenue, expenses and profits is the task of “accountants”.  This is its own profession: like doctors, lawyers, ministers, teachers, and so on, there is the profession of “accounting”.  You take courses in this in college, and can pass exams to become a certified public accountant (CPA).  They provide services to businesses and earn a fine living.  It involves numbers, but never becomes more complicated than ordinary arithmetic.

Keeping track of all the revenue, expenses and profits of a firm is the task of “accountants”.  This is its own profession: like doctors, lawyers, ministers, teachers, and so on, there is the profession of “accounting”.  You take courses in this in college, and can pass exams to become a certified public accountant (CPA).  They provide services to businesses and earn a fine living.  It involves numbers, but is never more complicated than ordinary arithmetic.  A personality that likes to keep track of financial matters and likes the stability of steady work, with little conflict, is often well suited to becoming an accountant.

It is the job of accountants to calculate the profits of a business: Accounting profits equal total revenue minus explicit costs.  The explicit costs are the expenses of the inputs, such as workers’ wages, cost of materials, and the cost of maintenance and depreciation on facilities like plants and equipment.  (Depreciation is the predictable wear and tear on something that makes it gradually less valuable and useful.)

It is the job of accountants to calculate the profits of a business: '''''Accounting profits equal total revenue minus explicit costs.''''' The explicit costs are the expenses of the inputs, such as workers’ wages, cost of materials, and the cost of maintenance and depreciation on facilities like plants and equipment.  ("Depreciation" is the predictable wear and tear on something that makes it gradually less valuable and useful, such as depreciation of your car's tires every time to drive somewhere, because the tread wears down with every ride.)

“Economic profit” is a broader concept than “accounting profit.”  “Economic profit” includes all of the implicit costs, such as the opportunity cost of the time and effort spent by an owner (which can be enormous) and also the opportunity cost of investment in the firm.  If a company turns a $1 “accounting profit” each year, then you can bet it has a huge economic loss once you factor in all the opportunity costs.

“Economic profit” is a broader concept than “accounting profit.”  “Economic profit” includes all of the implicit costs, such as the opportunity cost of the time and effort spent by an owner (which can be enormous) and also the opportunity cost of investment in the firm.  If a company has only a $1 “accounting profit” in a certain year, then it's economic loss is much bigger once you factor in all the opportunity costs.

The highly publicized scandals of Enron and WorldCom earlier this decade suggest that there are tricks of accounting to overstate the profitability of a company.  If you ever consider investing or even working for a company, you should be aware of the distortions that are possible in accounting.  The rule “caveat emptor” (buyer beware) applies to investors just as much as consumers.

There are tricks of accounting to overstate the profitability of a company, and that has led to huge scandals and bankruptcies for firms like Enron.  If you ever consider investing in a firm, you should be aware of the distortions that are possible in accounting.  The rule “caveat emptor” (buyer beware) applies to investors just as much as consumers.

It is easy to overstate sales, particularly sales projections.  It is easy to overstate the value of a company’s inventory.  Something about money makes everyone want to exaggerate.  That’s because nobody can ever obtain enough money to satisfy themselves.  Take assertions about money with a grain of salt.  Even if there is a lot of money somewhere, it is virtually never as meaningful as people claim.

It is easy to overstate sales, particularly sales projections.  It is easy to overstate the value of a company’s inventory.  Something about money makes everyone want to exaggerate.  That’s because nobody can ever obtain enough money to satisfy themselves or their expectations.  Take all assertions about money with a grain of salt.  Even if there is a great deal of money somewhere, it is virtually never as much as people claim and never as meaningful as people pretend.

Companies also find it easy to understate depreciation (wear and tear) and future liabilities.  Some companies, like Ford Motor Company, may actually be bankrupt once the true costs of its pensions for retired workers are taken into account.

Firms also find it easy to understate depreciation (wear and tear) and future liabilities.  Some companies, like Ford Motor Company, may actually be bankrupt once the true costs of its pensions for retired workers are taken into account.

Occasionally a major company will suddenly declare itself to be broke and will ask the government for a “bailout” to save its jobs.  The car maker Chrysler did this about 25 years ago.  The federal government, despite substantial criticism, provided cheap loans to Chrysler to keep it out of bankruptcy.  So many jobs were at stake that there was political benefit to some officials for doing this.  But don’t expect the government ever to save a company you work for from going bankrupt.  Should the government bail out a company to keep it from going bankrupt?

Occasionally a major firm will suddenly declare itself to be broke and will ask the government for a “bailout” to save its jobs, as General Motors recently did.  The car maker Chrysler also did this about 25 years ago.  The federal government, despite substantial criticism, provided cheap loans to Chrysler to keep it out of bankruptcy.  So many jobs were at stake that there was political benefit to some officials for doing this.  But don’t expect the government ever to save '''''your firm''''' from going bankrupt.   

 

Debate question: Should the government bail out a company to keep it from going bankrupt?

==Alfred Sloan and Charity==

==Alfred Sloan and Charity==

Read and, if necessary, reread the above lecture.   

Read and, if necessary, reread the above lecture.   

2.  Suppose your company spends $10,000 on labor and $30,000 on equipment for an output of 5000 widgets.  You increase your labor costs to $15,000 and your equipment costs to $45,000, and your output increases to 8000. Describe your return to scale: increasing, constant, or decreasing?

1.  The Lecture mentioned how a prior student in this course is working her way through college by working as a waitress in a fancy Manhattan restaurant.  Suppose her boss tells her one day, "We were profitable last month.  To double our profits this month, I'm going to doubt our number of waitresses so that we can be double the number of people we serve!" Our former student told him that his plan would fail because there is _____________ economies of scale in the restaurant: the more waitresses would result in more wasted time talking to each other, and waitresses getting in the way of each other.

3. Suppose the population doubled and the other utilized economic inputs (air, water, capital, etc.) doubled as needed.  What would happen to economic output, such as new inventions and food production?  In other words, what is the return to scale from increasing population (labor) and other inputs?

3.  Marginal product question

4. Suppose you hire an employee who just took this course, and he says you should invest everything you have in a new facility to reap long-run efficiencies.  Why might you say “no”?

4. <fix>Suppose the population doubled and the other utilized economic inputs (air, water, capital, etc.) doubled as needed.  What would happen to economic output, such as new inventions and food production?  In other words, what is the return to scale from increasing population (labor) and other inputs?

5. In an online encyclopedia such as Wikipedia or Conservapedia, would you say that the marginal product of adding another contributor (editor) increases or decreases? What does that imply about the growth path of the project?

5.   

6. Is obtaining a medical, legal, accounting or other type of license to practice in a profession a short-run or long-run cost?  Should the State require licenses for professions?

6.  

7. Suppose your classmate’s company grew and grew, until it had 1 million employees.  But then the economy had a downturn, and you faced bankruptcy.  You were in the legislature and your classmate begged you to sponsor legislation to give his company a special zero-interest government loan to make it through the tough times.  Should you?

7.  

===Honors===

===Honors===