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Thinking like an economist - Essay Example

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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…
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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.


McConnell and Brue, 15th Edition, McGraw-Hill Irwin, 2007, Chapters 1 and 2 Read More
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