In my last Clare Associates blog post, I looked at aggregate demand curves and aggregate supply curves. We know that for a given product, demand is higher if the price is lower and supply is higher if the price is higher, and how in a competitive market, the market price will tend to the intersection of the two curves.
Now if we know that demand is higher if the price is lower, the next question to ask is this:
How much will demand increase in response to a price decrease?
The answer is all about elasticity.
For many years now, I’ve spent a fair amount of time in local school sixth forms (helping to run this). One thing that surprises me about schools today is how few of them teach economics. While it’s true that you don’t need an economics degree to run a business, some of the theory will help you.
Supply and demand is one of those things that even people without an economics background can grasp quite easily, and if they think about for a bit, can probably work out. But if you understand supply and demand in the way that economists do, you’ll be able to understand slightly more advanced concepts like elasticity, which will be directly relevant to your business. More on elasticity in ‘Important Economics Concepts Every Businessman Should Know, Number 3: Elasticity’…
Important Economics Concepts Every Businessman Should Know, Number 2: Supply and Demand Continue reading
This is the third in a series of articles on Opportunity Cost and why it matters in business.
Opportunity cost is one of the most important concepts in all of economics. If you understand it, you can start to see the world in a slightly different way. It’s also one of the most relevant economic concepts to simple business decisions. Continue reading
If you didn’t see the first post on opportunity cost, you need to read that first. It is here.
For those of you who have read that post, let’s continue…
If you remember, in part 1 of this article, I asked you to consider this scenario:
You’ve just won a ticket to see Eric Clapton in concert tonight. You can’t resell the ticket. The only other thing you might want to do tonight is see Bob Dylan in concert. Assume that both concerts are the only gigs each performer is playing that you could get to in the foreseeable future.
The Dylan ticket costs £40. You quite like Bob Dylan, and normally, you would be prepared to spend up to £50 to see a Dylan concert. If Dylan tickets cost more than £50 you would think that too expensive and you wouldn’t go even if you had nothing else to do.
What is the opportunity cost of attending the Clapton concert? Continue reading
Let’s say you pay your office cleaners £20 to clean the office each night. You could actually clean the entire office yourself and you wouldn’t have to pay anyone £20, just a few quid on cleaning consumables, dusters etc. Now you know that the reason you don’t is because it would take you a couple of hours to do it, and if you were to spend an extra two hours a day at work, there are far more useful and lucrative things you could be doing with your time. So while the cost of you doing the cleaning should take into account the £20 you’re saving by not paying the cleaners, it also needs to take into account the profit the company would have made but now won’t see on the extra sales that you would have made with an extra couple of hours in the office. That, in a nutshell, is what opportunity cost is all about. Continue reading