Long run costs and Economies of scale

I am interested in starting a business in Promotional items ranging from T-Shirts, cups, pens, paper, bags, etc.  All items being customized to suit the customers needs and requests.  My business would start off small from home and depending on the sales volume I would eventually move into a small location suitable to staff a small group with the necessary printing equipment.  There would be no store inventory and I would start off purchasing from a wholesaler and subcontracting the printing until I have enough revenue to lease equipment, office space and hire additional staff. 

Long run costs of this type of business would include inventory, Internet support for website development and maintenance, Office location and advertising; they are all variable costs that depend on the success of the existing performance.  Short run costs would be a computer in which the current success of the business relies for orders and items available; which would be the one fixed costs while all other related costs are variable.  Fixed costs would include insurance and telephone.

A similar business in which I would like to see my company eventually compete with would be The Bargains Group.  They are an online promotional supply company that started it's business 17 years ago from home.  The owner (Mom and wife) started the business from home and it eventually expanded to operating in it's own office space and 20 employees.  The Bargains Group is now a multimillion dollar company that started off with a $1000.00 investment by the owner.

Long run costs associated with her success were inventory, office space and wages.  Short run costs related to the start up of the company would have been the requirement of computer.  Fixed costs included telephone and advertising.

http://www.bargainsgroup.com/Products1.aspx

Law of Diminishing Returns

The law of diminishing returns occurs when the amount of a single factor of production is increased, while holding the amount of all other (fixed) factors of production constant, at some point will yeild lower per untit returns rather than increasing production as the factor is increased.

 

In the Article "The Diminishing Returns to Tobacco Legislation" written by Pierre Lemieux, the law of diminishing returns is indicated in the following points:

• Additional reduction in tobacco consumption require more and more potent interventions.
• The phenomenon is also illustrated by cigarette taxation, where there are indications that decreasing returns have kicked in.
• One reason why government interventions agains smoking becomes less effective is that smokers who were the most easily persuaded have already quit.
• Too much information mayalso kill information
• A chapter of "Tobacco control in developing countries sites researh claiming that, indeed, the impact of information shocks a decay in time.

 

Lessening the debate on the diminishing returns on toabacco legislation can be observed throught hte following statement:

• Studies by American Economists Kip Viscuse have shown that smokers overestimate the risk of smoking, as evaluated by the public health literature and too much information may also kill information.  As advice, warnings and threats from authority become more numerous and visible, theytend to be discounted or ignored.

 

The only solution observed as a result of reviewing the article would be to impose more regulations and increase taxes.  Smokers are hard to sway, should the government be successful at their awareness program the affect would cuase a decrease in the demand and supply (shifting both curves to the left).

 

Sin taxes on cigarettes would need to continuously be increased to effectively impact consumers.  Because larger taxes would be required to achieve the same results as previously; addictive products tend to be inelastic.  Therefore, increasing taxes would have very little impact on the consumers decision making in purchasing cigarettes.

http://www.pierrelemieux.org/artdiminish.html

Elasticity

"Why $100 per barrel of oil prices are bad for Alberta - and everywhere else"

Is a blog on the current oil prices per barrel in comparison to the price 10 years ago.  As the price of oil and gas rises the demand decreases and travellers and tourists find alternative methods of enjoying the great outdoors and travel methods.  Gone are the days families will plan more than one trip per summer to enjoy an outing with family and friends.  People are finding cheaper alternatives of travelling such as car pooling, public transportation, biking and simply walking.  More and more city dwellers are also choosing more cost efficient ways of entertaining themselves by remaining within the city limits and enjoying what the city has to offer.  This is good for the shops and venues within the city limits but bad for rural business where tourism is low.

Prices have increased dramatically within the last ten years rising from $20.00 per barren in 1990 to $100.00 per barren in 2010.  Therefore causing the demand for gas/fuel to become more and more inelastic.  There is no close substitute for gas/fuel and although the price rises people have no alternative but to purchase at the price given therefore forcing the consumer to choose alternative methods of saving money by changing their choice of transportation.  The time it takes to produce gas is lengthy and takes time this also adds to the factor of inelasticity because the longer the period of time it takes to produce the product the greater the elasticity.  Finally there is a large percentage of one's income spend on fuel to travel to and from work, school, shopping and for educational purposes resulting in a person spending a large percentage of their income of fuel.

Our oil and gas resources are non-renewable and as our oil and gas deplete we can expect the prices per barrel to continue to increase rather than to fall and ever be where it was 10 years ago.  We really need to consider new and improve methods of fueling our vehicles.

http://looking-for-balance.blogspot.com/2011/03/why-100-per-barrel-oil-prices-are-bad.html

Elasticity of Demand

Price elasticity of demand is a measure of how much quantity demanded changes as a result of a change in price.  The measurement of elasticity is obtained by taking the percentage in quantity and dividing it by it's percentage change in price the result is called the elasticity coefficient.  Results ranging greater than one indicate the commodity being elastic which also says they can be substituted.  Results less than one (or in decimal form) are inelastic and are difficult to find substitutes for or have no alternative substitute.

In the article I am using as an example it states "North Americans thirst for oil has reached a turning point, as high gasoline prices and slow economic growth finally forces consumers to cut back on their fuel consumption.  Among US customers [demand] elasticity is low, but not quite zero."  As a result as the price increases for oil per barrel due to the decline in oil production the demand also decreases.  Consumers look for alternative (cheaper) ways of travelling or conducting business decreasing (and cutting back on) fuel consumption.

I picked an article from the Globe and Mail on "High Prices crunch U.S. oil demand" posted on May 13, 2011 and after much review and research I found that crude oil demand is almost perfectly inelastic.  As a result of performing the elasticity coefficient the elasticity for crude oil is near zero; 0.01 and 0.02 for the years 2008 and 2009.  Should the price of Oil increase Total Revenue will increase and should the price of crude oil decrease the expected revenue generated will decrease.  The quantity demanded for crude oil is not very responsive to a price change.  There is no elasticity in crude oil because oil is a rare commodity.

http://proquest.umi.com.libresources1.sait.ab.ca/pqdweb?did=2345378271&sid=2&Fmt=3&clientId=5337&RQT=309&VName=PQD