Microeconomics Research Paper
How do businesses grow? Unfortunately, there is no simple answer to this question, mainly since it is evidently clear that offering the best service, the best price or the best promotion is no guarantee for success. Therefore, sound business administration implies that a wide array of internal and external factors must be taken into consideration when we try to open, expand or manage a business entity. One of the possible ways to examine this issue is to use tools and theories from the science of microeconomics, whose main concern is “the economic behavior of part(s) of an economic system” (Rutherford, 2002, p. 382). The microeconomic approach does not give us the complete picture of business performance, but it is surely handy in order to develop a logical and systematic decision-making at the single entity’s level. By that this science differs from other studies of economic behavior, such as macroeconomics, which deals with the economic conduct of groups, societies and markets. This aim of this paper is twofold. First, it introduces in brief several key microeconomic concepts, which are relevant for a sound analysis of business growth opportunities. Second, it applies those concepts into practical context, by demonstrating how a small cleaning business can use microeconomics to develop its market share, revenues and profits.
2 Key Microeconomic Concepts
The main problem facing economists is the issue of scarcity (McKenzie & Lee, 2006). That is, since we not one can always satisfy all needs and wants, people will always seek for the conduct that will bring the most favorable outcome (in term of utility). In microeconomics, this assumption is tested in the level of individual players, who engage in various kinds of behavior to maximize their utility and minimize costs. In other words, businesses seek for profits, and wise management implies long-term thinking. As stated by French economist Frederic Bastiat (1801-1850): There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
2.1 Profit and Loss
Before discussing the competitive environment in which a small cleaning service can act, one should recognize that there are several ways to measure profitability. In order to do so, we should first introduce three concepts, namely utility, cost and opportunity cost, and apply them into our example. In order to survive, a cleaning service is constantly occupied with trading over utility. A prospective trade, or contract, can only be made with someone for who prefer a clean space (or object) over a dirty one; for her, the cleaning service is beneficial, and thus she might agree to give the business an incentive to give her this value. This incentive is the business’s utility. The most common example is money, a means that can provide other utility for the business in the future. Upon entering the agreement, each party will have to give up on something. A cost is thus the resources, which each party needs to sacrifice in order to for the other – money, time, materials, comfort, and so on. However, not all costs are given to the other party, as the party may incur many indirect costs, such as the time one may spend from the moment of order until complete delivery and the physical efforts of cleaning a house. Costs are thus not necessarily quantifiable, just as utility. But there is another type of cost. Remembering the concept of scarcity, opportunity cost is the value of utility that could have been gained when the resources would have been allocated differently. That is, when the cleaning service chooses to enter a contract, it may have to refuse other opportunities it may have, such as a contract with a different party or leisure time. Combining utility, costs, and opportunity costs together,...
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July 13, 2012Tags: Business, Economics
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