Resources

Bicycle or Chickens?

Choose roles and act out the following.

NAOMI: Hi, Maria. How is your business? Is it growing?

MARIA: It’s ok, but I am very tired. I work very hard, but I don’t make enough money.

NAOMI: Sounds like you need more productive assets.

MARIA: What are productive assets?

NAOMI: Things that help your business make more money.

MARIA: Oh, I like that. I would like more productive assets … but wait; I don’t think I have any now.

NAOMI: Sure you do. Your chickens are productive assets. Would you make more money if you had more chickens?

MARIA: Yes, I would. I should get more chickens.

NAOMI: What else would make it easier for you to do business?

MARIA: It would really be nice to have a bicycle to deliver eggs and to haul chicken feed. My feet get so tired from walking.

NAOMI: Well, maybe you should buy a bicycle. Would you make more money if you had a bicycle?

MARIA: Yes, if I had a bicycle, I would deliver more quickly. I would have more time to sell. But should I get a bicycle or more chickens?

NAOMI: Which is the highest priority for your business right now? A bicycle or more chickens?

MARIA: I don’t know. How can I decide?

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Careful with Fixed Costs

Choose roles and act out the following:

MARIA: Naomi, I think productive assets will make my business more money. But I’m worried about the costs.

NAOMI: Good, Maria, you should always try to reduce costs.

MARIA: How would I know what my costs will be? They change so much!

NAOMI: First, you need to divide your fixed and variable costs.

MARIA: Oh, I don’t know what that means.

NAOMI: Let me describe it this way. Do you know Daniel?

MARIA: The guy who sells furniture?

NAOMI: Yes. When Daniel makes a chair to sell, do you think he pays a supplier for the wood he uses to build it?

MARIA: Yes.

NAOMI: That’s right. Daniel likes to wait until he has an order before he buys any wood.

If Daniel sells one chair this month, he only pays for wood for one chair. If he sells ten chairs next month, he will pay ten times as much for wood.

MARIA: But that’s ok, because he sells ten times as many chairs!

NAOMI: Exactly. Daniel’s cost for the wood is a variable cost. It goes up or down depending on how much he sells.

Now, Daniel pays rent for his shop. Let’s say his rent is 1000 per month. How much rent does he pay if he sells ten chairs?

MARIA: 1000, of course.

NAOMI: How much does he pay if he only sells one chair?

MARIA: Still 1000. It doesn’t change.

NAOMI: That’s right. Daniel’s rent is a fixed cost. It doesn’t matter how much or how little he sells. He still has to pay.

MARIA: Oh, I don’t think I like fixed costs.

NAOMI: We just have to be careful with fixed costs. They can be helpful if they are for productive assets.

MARIA: And we sell enough to pay for them!

NAOMI: That’s right!

MARIA: Naomi, can you help me know which of my costs are fixed and which are variable?

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