Competition and price

The profit motive

The foundation of the US economic system is profit, the difference between what it costs to produce and market something and what someone is willing to pay for it. If it costs you a dollar to make a sandwich and you can sell the sandwich for $1.50, your profit is 50 cents.

In the American society, the owner of a business is entitled to keep whatever profits the business produces (less taxes, of course). Profit thus becomes the whole point, the “bottom line”, for most business activities and enterprises. It takes effort, after all, to put a desirable product or service into useful form and then sell it to people. Furthermore, the entrepreneur may have to make a considerable investment in resources before a single product is ready to sell. And if the venture doesn’t succeed, the entrepreneur stands to lose a great deal.

Scarcity and opportunity cost

It is a basic fact of economic life that resources are scarce. There are only so many acres of land, only so many workers, only so much capital. Even the number of a business’s potential customers is limited – and certainly their dollars are. Because of the scarcity of resources, all individuals and all enterprises are sometimes required to make hard economic choices.

For example, it’s Friday night and you have $10 in your pocket. Do you spend that $10 on a good dinner for yourself? Do you use it to go shopping for some much-needed toiletries? Or do you perhaps save it for something altogether different? You are free to choose any of these options; but as soon as you spend that $10, it’s gone. You can’t do anything else with it.

If you understand that simple fact, you can understand the concept of opportunity cost. Say that you decided to spend the $10 on dinner. Not only would that decision cost you $10, but it would also cost you the opportunity to buy toiletries. Even if a friend invited you to dinner so you could save your $10, the time you spent at dinner would not be available for other pursuits. In other words, then, whenever resources are limited, the decision to use some of those resources means that they will not be available for other, perhaps more worthwhile, uses. And the true cost of making an economic decision – that is, a decision to expend resources – is not only the dollars and time involved but also the value of the alternatives that can’t be chosen.

Competition

Just as scarcity is an economic fact of life, so is competition. If you set out to sell a product or service in a society like ours, chances are that someone else will be trying to sell something similar. And because potential customers are free to buy where they please, you must compete with your rivals for those customers’ business. You might choose to compete in one of three ways: price, quality, or innovation.

Competition and price

Say that you're interested in selling blue jeans in your community. If your rival is selling blue jeans for $28 a pair, you might try attracting business by offering the jeans for $25. The catch, of course, is that you'll get $3 less than your rival does for each pair you sell, and you'll still have to cover the same expenses — buying the jeans from the manufacturer, paying rent on your store, and so forth.

How, then, can you charge less and still make a worthwhile profit? The answer—you hope—is that the lower price will attract more customers. Even though you make less money than your rival does on each pair of jeans, you'll sell more of them and so come out with a good overall profit.

A business owner who can improve efficiency and reduce operating costs may be able to lower prices without settling for a smaller profit per unit. In selling blue jeans, for example, you may find that rearranging the store layout makes it possible to display more items in the same amount of space or that installing a new lighting system cuts the electric bills. You can maintain your profits at a lower selling price, so you pass the savings along to customers.

Head-on competition like this tends to keep prices down, which is good for the buying public. At the same time, it holds out the promise of great profits to the business that can sell more of its product or service than competitors do.

Дата добавления: 2015-10-29