Get your popsicles! Popsicles!
Hello, welcome to GMAT Tuesdays, today I'm eating a popsicle because we're going to talk about Peter
Piper Popsicle Pantry. And the reason that we're talking about that is because we want to learn
about what matters in the real world. Another edition of our real world matters, so remember,
the information that we cover in these videos aren't uh actual concepts that
you're being tested on in the GMAT. These are just things you should know about to
feel more comfortable when you're reading the long passages or reading a critical reasoning
question. So these are definitely concepts that can come up. Um the more that you know about them
the easier it will be to deal with the actual question that they're asking you on the test.
So, this is lime, it's really tart. Um we're gonna learn what all these words mean uh that's why
they're listed here. So to better understand what these words mean we're gonna talk about
a fictitious uh possible company that I want to start. I want to sell these popsicles in the
park on sunny days um and so the three major ideas that we need to know when starting a business are
revenue, cost, and profit. The revenue is all the money that I am going to take in
selling my popsicle. So when I offer you a popsicle and charging money for it that
money I take in is considered revenue. So most of the time with a business your sales are your revenue.
Companies can also make revenue or have revenue come in through investments that they've made
but most of the time it's through sales. Costs are everything that I have to pay as a person. Starting a business to make it run so to buy the juice to make my popsicles to the refrigerator
where I'm going to put them in the refrigerator to freeze them I got to pay for that the electricity
I got to pay for these wooden popsicle sticks so all of that is going to be a cost.
Companies have to pay their employees they, have to pay health insurance, they have to pay taxes,
they pay rent on the place where they have their business, so there's lots of costs that
go into running a business. And then finally the profit is the difference between those two.
As you can see here a very complicated math equation your profit is equal to
revenue minus cost. So ideally you want to turn a profit which is a idiomatic phrase to mean that
you're going to end up with a positive value here. If you don't end up with a positive value
that's when you end up operating at a loss. So this means that you are spending more money than
you're bringing in to your company. Um so you're not actually making any money it's costing you more
money to have the company open than it does to or just cost you more money then you're taking in.
Um when companies start out they will take strategic losses to invest in the future so
for example if I'm starting my popsicle company I'm going to have to invest a lot of money at the
beginning and I'm not going to have any revenue because I don't have popsicles to sell. So I'm
going to take a strategic loss at the beginning and spend a lot of money on popsicle sticks,
it's delicious, juice refrigeration space maybe I need like a little cart that I can push around to
have my popsicles in when I'm at the park. Um, but I'm doing this because I know that in the future
I'm gonna sell my delicious popsicles and people will love them so um that is a strategic loss
that I'm taking. So those are kind of the basics now let's talk a little bit about the difference
between gross and per item and this is actually something that's really good to know about because
in the integrated reasoning questions or critical reasoning um maybe even in the quantitative
section you might get questions about gross costs or per item cost and it's really important to know
the difference between the two. So gross means disgusting but not when it comes to economics
gross means the total instead of saying total cost they say gross cost so it's all of the money
without taking any of any taxes out or any of the cost out. So let's say for example my first run
of popsicles I want to make 50 popsicles and the gross cost for making those popsicles is 20,
very cheap. I'm actually renting space in my parents refrigerator so that's really cheap
and I don't have to pay for that so I really just have to buy the wooden sticks and the popsicle
juice and sugar. Um the gross revenue that I could get from my popsicles, let's say is a
hundred dollars, um so that's the total revenue I take in from selling uh 50 popsicles and selling
for two dollars. And so my gross profit then is the difference between these two which is 80.
The per item cost is different it's going to be as you can see a fraction
so we want to calculate per not the total cost but per item how much does it cost to make a popsicle
and so they're actually pretty reasonable to, oh it's melting on me,
they're actually pretty reasonable to make they only cost 40 cents to make., not too bad.
And the like I said I'm gonna sell them for two dollars so uh the total revenue would be a hundred
dollars but you can see that divide 100 by 50 and I get two dollars so two dollars a popsicle
and that means my profit per item is gonna be a dollar sixty so now,
I realize,
that I don't need this money. These popsicles should do some charitable work
I shouldn't take in all this money and benefit from these delicious popsicles I want to share
the wealth and so I decide I'm not going to be a for-profit corporation where I'm really concerned
about profit. I'm going to become a non-profit. So what a non-profit is and how it's different
is that the company is focused more on some sort of charitable work than it is on turning a profit.
So there's lots of different types of nonprofits out there, schools, churches, volunteer organizations,
museums, music halls, you can have any type of non-profit out there
and in that case the profits don't actually go to people who own the company. You actually don't even
own the company it's held by a group of people and the profits just get reinvested into the company
and the stated goal of a non-profit is to do some sort of charitable work that will benefit society.
So what I've decided is that I'm gonna make these popsicles, sell them, and give all of my profits
to my favorite charity. So that's all you need to know about what matters in the real world,
or actually there's a lot more else out there to know, but this is a good start.
So know that this is just the very beginning, it's a very basic introduction to these ideas,
but the more you can go out and read about these concepts the better
you'll do when it comes to testing. All right be excellent to the universe and I'll see you soon!