Wednesday, January 10, 2018

Business Economic Features

Business Economics is one of the few areas I consider amazing and believe. It is what it's seems to be: the combination of business and economics. Most people consider Economics (on its own) boring. I cannot agree with them, but I need to accept it and this is why I promise I will keep it as brief and simple as possible. However, I must run through some parts of this beautiful Science, because it DOES have impact on the production of business ideas.

Running after profit


Of course, you won't open up a business unless you can earn a decent profit. To achieve it, you need to keep in mind the following accounting principle:

Prudence concept: assets and incomes are not overstated, and liabilities and expenses are not understated.

In other words: never overestimate the amount of money, which inflows to your company and never underestimate the amount of money, which outflows. It's quite rational, but many people make this mistake, which leads to bankruptcy. I told you: brief and simple.


What moves the market?


You might have heard about the two basic "pillars" of the market, which are supply and demand. 

The supply of a good or service is defined as quantities that people are ready to sell at various prices within some given time period. It's determined by the price level itself, costs and government regulations. Simply: you will sell more if price is high, costs are low and there is no regulation, which would prevent it (e.g. price limits). 

Demand for a good or service is defined as quantities that people are ready (willing and able) to buy at various prices within some given time period. It's influenced by several factors, such as price level, taste of customers, information on the product, substitutes, income level end so on. What is important: if you increase your price, you will sell less (in quantity). If the price of a substitute (e.g. Pepsi) decreases, people will adjust with time and change from Coca Cola and will consume Pepsi. If the income decreases, or customers change their preference, the demand for your product will decrease. Of course, higher income and preference means higher demand.

And if supply and demand meets, we say that we are in equilibrium (see bellow) at the market price and quantity.
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But what happens, if you enter the market? Supply will increase, which will lead to lower prices and higher quantity. It results in a new equilibrium (E1).
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Of course it's more complicated in real life, but for our purpose it's far enough. Let's have a story: In a small town, only one guy sells apples, and since people want to be healthy and this is the only way to get apple, this guy will make a fortune. If somebody joins him, the total supply of apple is increased, there's a competition, so price goes down, the first guy will earn less, but still, both of them have a decent profit. It will continue if the third, fourth person joins the market until the profit of apple dealers will be so small, the smallest players will get bankrupt.

The lesson: if you're looking for a business idea and want to have a decent profit, not necessarily follow others, just because they earn money in now. Make long-term plan and join the market only you have some competitive advantage (we will discuss later).

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