So a few of you guys seemed interested in my classwork, and since my latest one hasn't been graded yet, I'll post last week's main paper after I get my final grade :)

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Phase 4 IP

ECON212-1303A-05

Instructor Jason Dixon

Jenna Jenks

Colorado Technical University

            Starting a business is never an easy endeavor. To become your own entrepreneur has been stated to be the classic American dream… no one telling you what to do… to be your very own boss! It sounds great on paper, but in reality, it takes serious management skills to undertake a budding operation and succeed. If you put out too much money without generating enough return, your company will be dead in the water before you ever begin.

            To examine this theory in practical terms, it is best to consider what you already have and what you have to gain or lose by pursuing a risk to go into business for yourself and giving up what you already have solidified as a guaranteed return. If your current income level is fifty thousand a year, and you choose to give that job up and invest in selling cookbooks via the internet, will the opportunity costs be worth the profit and extra work? At this point I don’t really know, but we are going to break it down and see if this particular opportunity cost would be worth giving up your pre-established income. Justcookbooks.com is your moneymaking scheme, and through calculations, overall costs have been ascertained to be:

            So far we are in the hole by giving up fifty thousand dollars with an added cost of sixteen thousand dollars (per month) totaling two hundred and ninety-two thousand dollars for the year. In order for this business to be worth the sacrifice of your previous income, we would need to make more than the totaled cost of our opportunities forgone and the added costs of the business for the year. To see whether or not that is plausible, we have to examine supply and demand for the product we plan to sell. It is said that demand for these cookbooks are forty thousand minus five hundred times the going price. If the average cost is twenty dollars, and the average price is thirty dollars, what is the demand verse supply if we charge between thirty-five and twenty-five dollars a cookbook?

             

With a demand of forty thousand the plot points intersect at (7,25000) which is mid range beween $35 and $25 or an optimum price of $30 a cookbook with a supply of 25,000 books. As the price rises, the demand drops. This is not to say you cannot charge more for your cookbooks, but the more you charge the less consumers will choose to buy your particular cookbook.

 

Taking in to account that fixed costs are tech, overhead, and equipment totaling ten grand, what would our total and marginal costs be for twenty-two thousand cookbooks a month? The formula TC/Q can be used to see what the variables can be for total costs depending upons necessary expenditures.

FIXED COSTS	VARIABLE COSTS	QUANTITY	TOTAL COSTS
$10,000	$0	22,000	$.46
$10,000	POSTAGE & HANDLING $1,000	22,000	$.50
$10,000	MISCELLANEOUS      $3,000	22,000	$.59
$10,000	INVENTORY OF BOOKS $2,000	22,000	$.55
$10000	TOTAL VARIABLE COSTS $6,000	22,000	$.73

The lowest total cost for this quantity before any variable costs are applied is $0.46 cents a book and will vary accordingly depending on how much the variable costs run. Now, it was said that to create one single cookbook the cost would be twenty dollars, and to create twenty-two thousand cookbooks at the above stated variables, it will cost $0.73 cents a book. The reason for this being that marginal change comes in to play, and it costs less to produce more. For one cookbook the formula would be seen as such: 1(TC)/(Q +1), so if 22,000 cookbooks total cost is $0.46 cents the marginal change would be 1(.46)/(22000 +0) = $2.09 if I could produce 200 more cookbooks at the same cost, my marginal change would be: 1(.46)/(22000 + 200) = $2.07 a book and so on. With added costs from variables the amount of marginal change thus far is: 1(.73)/(22000 +0) = $3. 32. The marginal cost of one more cookbook after the twenty-two thousandth one  is a considerable change to the original cost of one book said to cost twenty dollars.

            Economies of scale dictate that the price to create a large quantity goes down, the more you make the more profit there is to be gained, but in turn, the more supply there is, the less demand for the item being sold. So how do we decide on a price to sell our cookbook? “Price competition among retailers, large and small, involves fundamental decisions about whether and how often to discount prices.” (Bohlmann, 2013) According to Bohlmann bigger named booksellers are better off charging standard prices with less discounting because they tend to carry a higher rate of loyal customers to “switchers” or consumers who search for better prices. With this in mind, being an emerging enterprise, you have to build a customer base, and appealing to switchers is likely to be your best bet. So, if the average price is thirty dollars than lowering our price to maybe twenty-seven dollars would attract more demand for our particular cookbook over one sold at a more recognized venue. The question is, if we drop our price down to twenty-seven dollars a cookbook, will we sustain enough profit to stay in business?

           

            There are four market structures, and they are as follows: Perfectly Competitive this structure represents that the product being sold is identical to those sold by others and the price is solely dependent on the consumer’s demand leaving very little profit margin comparitively. Examples of this market structure are fruits and vegetables or other naturally provided resources that are not typically altered for consumption. 

           

            Monopolistic Competitive makes up the majority of market structures featuring similar items with small differences. Examples of this branch of market structure would be considered furniture, TVs, and clothing. This type of structure allows for a much greater profit than perfect competitiveness because of the variances, but it does not have a tight hold on consumer loyalty and must remain innovative to keep making an increasing profit with such a competitive market.

           

            Oligopoly is a market structure catering to niches and has much less competition, but in this market, it is a race to keep up with the few firms that share your product type or be buried by becoming outdated. Think of the gaming industry and how PlayStation upgrades their platform and soon Nintendo and Xbox follow suit. Those like Atari and Sega Genesis are now considered obsolete in the market because they failed to keep up. Because supply is so limited, demand is very high and profitability is much higher. Pricing for this type of market is very dependent on the small number of firms selling the given product, and for this reason stay relatively uniform without because undercutting the competitor is often undercutting yourself.

 

The last market structure is a monopoly and is the most controversial because it comes about as being the only firm in a given area to produce a good or service. This creates a very inelastic price matrix since technically the firm can charge what they wish without strain of competition to regulate supply and demand. Typical examples of a monopoly are local electric, gas, and cable station companies. (Hubbard & O’Brien, 2013)

            Our market structure is clearly a monopolistic competitive market. Cookbooks are considered a commodity, so the demand curve would be rather flat and pricing should reflect minor increases or decreases making it elastic. The fact that competition will be high raises the question of how do we create a unique experience with our product and how do we reduce costs to eliminate loss in profits to make our business more cost effective? To make our product stand out, we can use celebrity endorsements to attract a higher demand. Price would have to go up per unit to cover the costs of the added expense, but like the George Foreman grill showed, having a heavy hitter (no pun intended) hocking your wares increases your stability in the market as long as the celebrity chosen makes a good fit for your product. Of course, for many companies, such expenditures are not plausible, and they have to search for other alternative measures to cut costs.

 

            Outsourcing can be beneficial for example; one of the fixed costs is equipment at a cost of four thousand a month. This most likely is due to the fact that on a smaller scale a business only printing one book exclusively is not cost effective. Consider if you could get the same amount of cookbooks for a $.25 cents less a copy? $.25 cents does not sound like that great of a savings right? Well consider this, $.25 cents times twenty-two thousand cookbooks times twelve months equals a total savings of sixty-six thousand dollars a year! Now THAT is a considerable amount of savings, in fact, just that single action negates your fifty grand yearly income as well as the previously conceived one full month of expenses to run your business.

 

            Say that outsourcing was not an option for whatever reason; there is a mix between the two in advertising. With internet businesses, many companies advertise through heavy trafficked sites that give the ability to attract new consumers by following a link. Such advertisements for say cookware or other products associated with cooking would make for a great partnership of interests for either mutual advertising to attract a larger pool of customers or cutting your own tech maintenance fees per month by having another company pay to advertise on your site.

 

            Coming full circle it’s time to evaluate whether the opportunity costs of a 50,000 per year job makes pursuing this business worth the end means. We stated the yearly opportunity cost was two hundred and ninety-two thousand dollars for the year, and if we decided we could effectively sell twenty-two thousand copies for the month our total cost will average $.73 cents a cookbook. Charging a lower rate of twenty-seven dollars a book makes our profit margin equal five hundred and seventy-seven thousand nine hundred-forty dollars. Subtract total costs of two hundred ninety-two thousand dollars and you get an actual profit of two hundred eighty-five thousand nine hundred-forty dollars. I would say that is definitely worth the opportunity cost! 

 

 

Works Cited

Bohlmann, C. K. (2013). Retailer+Pricing+Strategies.PDF. Retrieved from Instructor Jason Dixon, Principles of Microeconomics, Live chats: Colorado Technical Online Campus

Hubbard, R. G., & O’Brien, A. P. (2013, 7 20). The short run and the long run in economics. Retrieved from Microeconomics, fourth edition: http://wow.coursesmart.com/9781256831914/firstsection#X2ludGVybmFsX0J2ZGVwRmxhc2hSZWFkZXI/eG1saWQ9OTc4MTI1NjgzMTkxNC8zNTc=