Economics of a cupcake factory | Inflation | Finance & Capital Markets | Khan Academy

ruticker 08.03.2025 21:05:02

Recognized text from YouScriptor channel Khan Academy

Recognized from a YouTube video by YouScriptor.com, For more details, follow the link Economics of a cupcake factory | Inflation | Finance & Capital Markets | Khan Academy

All the talk today is about whether we are going to see inflation or deflation. Before we dive into that, I think it's really important to get a microeconomic level understanding of why prices increase or decrease. So, we'll do a little example of me starting a business and when the prices increase or decrease in that market. Let's say I wanted to start a **cupcake factory**. The process of this video, even though this isn't the intent of this playlist, is eventually for you to be able to go to your econ professor and say, "No, we will or we will not have inflation or deflation for reasons X, Y, and Z." But in the process, you might learn a little bit about accounting and starting a cupcake factory. So, let's say I want to start a cupcake factory. It costs **$1 million** to build. Just the economics of the factory cost **$500,000** a year to operate. This literally covers paying the electric bills, having people ready to make cupcakes, accountants, and all the rest. I also have to pay people to clean the place. Now, regarding the economics of the cupcakes themselves, the cost per cupcake is **$1**. Let me do that in red because I'll do all of these in red. The cost per cupcake is **$1**. Where does that cost come from? Some of it is the incremental cost. Let's assume that I have a completely automated robotic factory, so there's actually very little labor involved. This is just the cost of ingredients—cream, sugar, butter, and those little wax paper things that the cupcake is held in—and the electricity to run my robots. Over time, I also need to maintain the robots that make my factory run. Now, let's say I think that I can charge **$2** per cupcake. Just as an exercise, let's think about this. Oh, and one other thing: my **$1 million factory** can produce **1 million cupcakes** per year. As a couple of exercises, because I'm a businessman, I'm not just going to plunk down a million dollars before I figure out how much money I can make. Let's think about how much money we can make in different scenarios. ### Scenario One: The Optimistic Scenario We'll call this the **optimistic scenario**. I sell **1 million cupcakes**. My factory can produce **1 million cupcakes**, and I sell **1 million cupcakes**. If I sell **1 million cupcakes**, I am fully utilizing my factory. We would say we're **100% utilized**. So, how much is my revenue? Let me make **Revenue** in green because that's a good thing. If my background weren't already black, I would make that in black. That's why people say being in the black or being in the red—because being in the black means you're positive, and being in the red means you're negative. But my background is black, so I'll use green. What would be my revenue? I'm selling **1 million cupcakes** at **$2** per cupcake. So, my revenue is equal to **$2 million** per year. Now, what are my costs of goods sold (COGS)? I'll write the common acronym there, COGS. If I have **1 million cupcakes**, my cost per cupcake is **$1**. So, it's **$1 million** per year. Now, what is my profit just from selling the cupcakes? This is called **gross profit**. Gross profit is essentially how much I'm bringing in from the cupcakes minus how much those cupcakes cost me. So, I'll do a line here and subtract that from that. My gross profit is **$1 million** (from revenue) minus **$1 million** (from COGS), which equals **$0**. You might say, "Oh, that's great! I'm making a million!" But no, we're not done yet. This is just the gross profit. I have all of this overhead expense. Oftentimes, on a regular income statement, it'll be called **selling, general, and administrative** or **overhead costs**. I'll just call it **overhead**. I'll make it red because it's an expense. So, my overhead is **$500,000** a year. Now, how much am I making from the business? This is called **operating profit**. How much am I making from operating the business? I won't go into all the details of an income statement, but any income statement you look at will have this operating profit line. Everything below the operating profit line will cover things not really related to the actual operations of the business, like expenses related to financing the business or taxes. But let's assume an ideal world without taxes. So, my operating profit is **$500,000**. That's pretty good! I had a **$1 million** one-time investment, and I'm making **$500,000** a year in this scenario. That's a **50% return**, which is great! If I told you I had an investment where you could make **50%** a year on your money, you'd say, "Yeah, here's my money!" But this is, of course, an optimistic scenario. Let's think of other scenarios. ### Break-Even Analysis Now, let's do a break-even analysis. I want to know what has to happen for my operating profit to be zero—what's the minimum number of cupcakes I need to make or what price I have to charge. If my operating profit is zero, we know my overhead is fixed at **$500,000**. So, the gross profit has to be **$500,000**. Now, we can think of a bunch of scenarios where we end up with **$500,000** gross profit. If we sold **500,000 cupcakes** at **$2** per cupcake, that would give us **$1 million** of revenue. My cost of goods sold would be **$500,000** (500,000 cupcakes at $1 each). This is a break-even scenario where I sell **500,000 cupcakes** at **$2** per cupcake. I would make **$500,000** gross profit, and after taking out the overhead, I wouldn't make a loss. This tells me that if I'm charging **$2** per cupcake, I have to sell at least **500,000 cupcakes** to make money. It would never be rational to sell anything less than **500,000 cupcakes**; otherwise, I shouldn't operate the business. In future videos, we'll explore situations in which that does happen and where people start to cut prices to compete, often doing very irrational things. I realize I've run out of time in this video. I'll see you in the next one, and we'll actually see what happens once I start my cupcake factory!

Назад

Залогинтесь, что бы оставить свой комментарий