Long-run Costs and Economics of scale: My Business Idea

A small business I have thought of is to rebuild and recreate by grandparents’ homestead on the original site and operate it as a local inn. The closest place for visitors to stay in the area is 50+ miles away. The house was large enough to raise ten children and hold large family events. The yard is an area that would be very suitable for family reunions and weddings. Activities on the farm for guests would include fishing and horseback riding.

There is not a very large market for the hospitality industry in the area. Revenue has to be supplemented. Pasture land is scarce. Therefore, due to the large amount of natural grassland, pasture land would be rented to local farmers.

Long-run costs are the purchase of the land, construction of house, repairs to out-buildings and fencing, and purchase of horses and riding gear. Fixed costs would be interest, utilities, advertising, taxes and insurance. The short-run cost is wages for a farmhand.

A similar business is called Green Hectares Bed & Breakfast. They charge $75-120/night. They have 6 rooms, 15 person capacity. Barbecue and fire pits available. Provide banquet facilities, meeting space, tours, bird watching, farm animal viewing, “bed and bale.”

Another is McMaster Manor. There sited showed wedding pictures. It has 5 rooms for $70-85/day. They too have tours, fire pits and barbeque available and prepare meals requested. http://www.sasktourism.com/things-to-do/outdoor-adventure/horse-experiences?WT.mc_id=go8g1&WT.srch=1

“The Diminishing Returns to Tobacco Legislation”

Pierre Lemieux makes three key points in this article regarding why government intervention does not work. The first is those that want to quit have. Second, too much information tends to become discounted. The third point is people look for ways to avoid taxes.

The increasing size and aggressiveness of government warnings on tobacco products point to decreasing returns to regulation. In order to maintain the antismoking movement's momentum, more and more regulations and taxes are required, which is also consistent with the interest of our large public health bureaucracies. Certainly, health bureaucrats have become addicted to power. One wonders what will be the next regulatory steps. (Lemieux, 2001).

This point lessons the debate because it contradicts the prior three statements about interventions not working.

“Sin taxes” are placed on inelastic items such as cigarettes. Government increases tax revenues on cigarettes, demand goes down. As well, the decline in quantity is less than the tax increase. The revenue increases more than the decrease of the demand. Therefore, not enough people quit smoking to decrease the tax revenue (p. 126  (John E. Sayre, 2009). There will also be a portion of the population that would seek a cheaper, illegal supply.

Let’s next review some key textbook definitions. “Total product is the total output of the productive process. Marginal product is the increase in total product as a result of adding one more unit of input. Average product is the total product/total output divided by the quantity of inputs used to produce that total. The law of diminishing returns is as more of a variable input is added to a fixed input in the production process, the resulting increase in output will, at some point begin to diminish” (p.203, 204). (John E. Sayre, 2009)

An estimated point of diminishing return for the government would be to increase variable costs such as labour, advertising, and packaging to fixed costs to the point that output diminishes. Supply would increase. The market would have too much, demand decreases.

Tourism Canada

The government of Canada recognises the importance of tourism to the Canadian economy. There is in place a 5 year marketing plan to increase tourism dollars. Tehy also intend to put into place training programs for people in the tourist industy. Statistics show a decrease in tourism since the 2010 Olympics.

Overview of overnight Travel Characteristics from CTC key markets Q3 2010

Travel Characteristics from key international CTC program sector areas

Trips ‘000		10/09 Q1-Q3 %		Spending $ M		10/09 Q1-Q3 %		Average trip Duration (nights)		10/09 Q1-Q3 %		Average Spend per Trip		10/09 Q1-Q3 %		Average Spend per Night		10/09 Q1-Q3 %
Americas	5,007		1.8%		2,819.2		3.1%		4.6		-2.2%		563		1.2%		124		3.5%
European	587		3.1%		777.3		-1.8%		15.5		-4.9%		1,324		-4.7%		85		0.2%
Asia/Pacific	277		20.1%		461.6		23.3%		17.5		0.4%		1,666		2.6%		95		2.2%
Emerging	78		32.5%		102.0		49.5%		17.3		-11.3%		1,304		12.8%		76		27.2%
Total Key Markets	5,949		3.0%		4,160.1		4.8%		6.4		-0.9%		699		1.8%		109		2.7%
Other Countries	654		5.9%		882.5		7.2%		16.6		-2.0%		1,350		1.2%		82		3.2%
Total Countries	6,603		3.3%		5,042.6		5.2%		7.4		-0.8%		764		1.9%		103		2.7%

Source: Statistics Canada, International Travel Survey, preliminary estimates
*Americas Key Markets include the U.S. and Mexico
*Asia/Pacific Key Markets include Japan, South Korea, China and Australia*European Key Markets include the U.K., France and Germany*Emerging Key Markets include Brazil and India
http://en-corporate.canada.travel/

Relationship between Elasticity of Demand and Total Revenue

How does price change affect total revenue?

Determine the unitary elasticity. When %change in quantity equals the %change in price (€=1). This is when P=$5.00 and Q=5.

When graphed, the upper half, above 5, is elastic (€=∞) and the lower half, below 5, is inelastic (€=0).

Looking at both graphs shows that as the price decreased from $10.00 - $5.00, the revenues increased.

Competing as Starbucks

Starbucks can be considered part of a perfect market competition because:

There is extensive specialization – coffee, which results in specialized trade within the market - the purchase of a commodity (coffee beans), the processing of it, and the sale of freshly brewed coffee.

There is perfect competition. First, there is a number of other businesses selling coffee. They compete with other large firms such as Caribou Coffee, McDonald’s McCafe, Dunkin Donuts and Tim Horton’s, as well as small coffee shops, which offer coffee, donuts and pastries.

Also, entry into the market is easy – buy coffee, make sweets and sell them. Starbucks is not able to control the price because people are willing to pay a limited amount for a cup of coffee. All competitors have access to the same market information and trends, and free to act with this information as they choose.

There is private, not government ownership of Starbucks.

There is a “legal and social foundation.” Starbucks is a publicly traded company and must follow the regulations as set out by legislation.

Starbucks had to Realign their business practices, according to “Starbucks Gossip,” February 14, 2007, were to Howard Schultz and others’ decisions to who they were as an organization; an organization that once had “romance and theater…[with] the La Marzocca machine” and becoming a chain store no longer part of a warm neighborhood. Between July and October 2009, they close a number of stores (70% of the stores opening since 2005 were being closed) and putting 12,000 people out of work. They stated the reason is due to the stores are not expected to be profitable
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The impact these decisions had on Starbucks

In terms of the short-run, Starbucks changed the way the workers prepared coffee and interacted with their customers. They were to become more efficient in their labour input, increasing output until the law of diminishing returns came into effect.

In terms of the long-run, Starbucks has used pecuniary economics of scale by increased its number of variable costs by opening specialty retail operations including: locations in airports, bookstores and grocery stores, selling coffee, tea and CD’s, forming partnerships with Pepsi and Dreyer, and teaming with Burger King. As well, Starbucks continues to close US stores and increase the number of international market

On 11/12/10, Howard Schultz, CEO, announced that "Our ability to navigate through the financial crisis and come out much stronger gives us reason to start growing the company again," CEO Howard Schultz told Bloomberg in an interview in China's Yunnan province Shultz told the news outlet that Starbucks plans to open 500 stores this fiscal year, 400 of which will be outside the U.S. China will be the coffee shop chain's biggest growth market over the next two years, the report said, and Middle Kingdom consumers can expect to choose from over 1,000 Starbucks locations in the country in the "near future," according to the company's China chief, Jinlong Wang.”

Starbucks’ coffee prices

Change too much? No. Starbucks targets young professionals who are willing to pay the price.

If prices were to be lowered, Starbucks would have to utilize technical economics by continuing the division of labour, and machine specializations. A decrease in demand will cause prices to decrease in the short-run, but increase in the long-run.

Q1 FY2011 Earnings summary: $346.6 million/.45 EPS, ↑ from $241.5 million/.32 EPS one year ago.  SBUX revenue ↑ from 2.93 billion to 3.0 billion.

 http://topics.nytimes.com/top/news/business/companies/starbucks_corporation/index.html
http://www.starbucks.com/
www.wikinvest.com/stock/Starbucks_(SBUX
http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html
http://www.cbc.ca/news/business/story/2008/07/01/starbucks-closures.html
http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html
http://www.thestreet.com/story/10920822/1/starbucks-to-open-500-new-stores.html

GRAPHING CHANGES to DEMAND

 

DEMAND CURVE: decrease in quantity demanded, demand curve moves left;

increase in quantity demanded, demand curve moves right.

DEMAND CURVE: decrease in quantity demanded, demand curve moves left; increase in quantity demanded, demand curve moves right. DEMAND: refers to consumers desire and ability to purchase with Ceteris paribus LAW OF DEMAND: the higher the price, the smaller the quantity demanded; the lower the price, the greater the quantity demanded CHANGE IN DEMAND: when anything other than price influences consumer purchases

CHANGES IN DEMAND
AFFECTING INDIVIDUAL CONSUMER DEMAND
QUANTITY DECREASES	QUANTITY INCREASES
Price of substitute falls	Price of substitute rises
Price of compliment rises	Price of complement falls
Price of product is expected to fall in future	Price of product is expected to rise in future
Income falls	Income increases
Expected future income to fall	Expected future income to increase
AFFECTING TOTAL CONSUMER DEMAND/Market Demand
Population decreases	Population increases