Thinking like an economist - Essay Example

Module 1 Thinking Like an Economist Each of us deals on a daily basis with many small stores and other retail businesses. These firms may be small but they reflect most of the major concepts of economics. For my project I have selected a retail food store or supermarket. These stores operate on a very tight margin, so that the difference between profit and loss, and indeed between security and survival, is a very narrow one. They must therefore apply sound economics. The margin for such stores depends on the spread between all of their costs and expenses and the selling prices of their products.

Those selling prices, in turn, depend on the supply and demand for those products. If there is a shortage of, say, coffee or grain, the costs of those products will rise to the retailer, but those increased costs may not be passed along to customers. The role of competition is crucial here, as if there is heavy competition, each store may have to absorb much of the cost increases to avoid losing business. That would erode their profit margins and perhaps even cause losses to them.

In addition to supply factors such as shortages versus surpluses, there are many demand considerations. For example, if a particular food product is determined to be harmful for health reasons, its demand will drop drastically. On the other hand, foods which are considered particularly healthy can experience a sudden sharp rise in demand. For example, in the 1970s it was found that many special of fish had high levels of mercury due to environmental pollution, and eating too much of these could be toxic.

The demand for tuna, in particular, was drastically reduced as a result, but it has since recovered as the impact of these negative news reports seems to have worn off. Module 1 - 2 The owner and proprietor of a small food store must keep up with trends and news reports which affect his or her business, but that is only a small part of the talks. It is also necessary to hold down costs by using affordable sources of the items sold, and minimizing labor costs by automating the stores processes as much as possible.

For example, at one time staff would bag groceries and even carry them out to customers vehicles. More and more now, customers are expected to bag their own groceries and certainly to carry them out themselves. Similarly, optical scanners now allow direct entry of food and non-food prices into cash registers so that orders are processed quite rapidly. The time when each food price had to be entered manually is long past, and there are fewer errors in prices as a result of the automatic scanners.

Underlying supply considerations is the fundamental economic reality of scarcity. Agricultural products such as those mentioned above are subject to weather and other factors. In the case of grains, for example, the recent growth in the demand for biofuels such as ethanol has drastically reduced the supply of some grains for food consumption. This reduction has raised the cost of products made from grains such as bread and cereal. But the effects do not stop there, due to the basic economic interdependence of a great many factors.

Farm animals are also fed largely on grains, so when the cost of those same grains rises, the cost of animal products such as meat and milk now start to rise. All of these interactions affect food prices at the retail level, and therefore the incomes of the proprietors of small food stores. Another lesson which such retailers must learn is that decisions must be made at the margin. This means that there are few all-or-nothing decisions, but rather that changes are incremental in nature.

In the examples above, the decisions typically involve buying a bit more coffee or grain products or fish or meat, rather than whether or not to carry a product at all. Skill in marginal analysis is vital to economic success, so that proprietors may avoid either running out of insufficient items or overstocking often-perishable foods, On the whole, then, a knowledge of economic concepts, principles, and approaches is absolutely vital to small retailers - and to everyone else, as well.

Economists think in terms of options and alternatives, and of the costs and benefits of each choice we make. Nothing could be more important than the ability to make the best possible decisions, and developing that ability is the essence of economics. Reference McConnell and Brue, 15th Edition, McGraw-Hill Irwin, 2007, Chapters 1 and 2