Entrepreneurship and Economics.

Economics has always interested me and I have lots of thoughts/questions in my head about it. How do you make a profit if you want to go into business for yourself? How do people that earn profits influence the commodity/resource/service? Can the value of your product stay the same if there is a decline in the want of the product? What must an entrepreneur do to earn a profit? Is a loss bad?

RobFox
Economics has always interested me and I have lots of thoughts/questions in my head about it. How do you make a profit if you want to go into business for yourself? How do people that earn profits influence the commodity/resource/service? Can the value of your product stay the same if there is a decline in the want of the product? What must an entrepreneur do to earn a profit? Is a loss bad?

You make a profit by having more income than you have expense. There are standard models that you can study and adopt. All successful models are ratio driven, for the most part. There are always fixed and variable aspects, so not everything is ratio driven down to the minute detail. If it were, it would be a science instead of an art, and no business would fail.

Ownership influences the service by first defining who they are. Who is the customer. You could answer that your customer is a middle class single male, and since you run a bar you will target this type of person. This would mean you are looking for a sports bar, or maybe a neighborhood pub. You will then model your business using standard rations of beverage cost, labor cost, etc, etc. Since you are seeking the middle class male demographic, perhaps you will want to target a price point that is modest, but not so modest that you attract "the wrong crowd" and you have to skimp on service. We all know the middle class person will want a few touches of something nice here and there to remind them they aren't at a dive.

It isn't difficult to figure out the concepts of how you do it. The devil is in the details. An example would be sight lines. Can your bartender, in the above example, see all entrances and exits? This is an important detail. Do you have a system to keep track of liquor down to the ounce? So on and so forth.

reply to post by RobFox


All of these answers can be found through an intermediate microeconomics course. The profit that a firm can make depends on a few different general concepts (and a lot of specifics that this post won't be able to adequately address due to level of detail involved): 1) demand, 2) supply, 3) elasticity, and 4) the type of firm that the entrepreneur hopes to establish.

Put very simply, demand and supply allow a firm to calculate the price that can be charged for a good or service when taking into account the economic and implicit costs needed to produce a given good or service. Elasticity describes how a change in price, income, the price of another good or supply affect the demand for the good in question. The type of firm that the entrepreneur create determines the amount of economic profit that the firm can predictably earn based on market competition. In a perfectly competitive market, each firm produces similar profits, there are no entry or exit barriers, and firms break even. These firms are called price takers because the price of a good is determined by the market. Any firm that charges a price higher than market price will have a demand of zero for their good or service. On the other end of the extreme, monopolistic competition describes production of a good or service for which significant and costly barriers to entry exist. The most common form of entry barrier is technology in the form of patents. These firms can charge significantly more for their products and the amount of market control (I.e. The percentage mark-up over perfectly competitive market prices) can be calculated through the Lerner index. There are also duopolies, oligopolies, and competitive markets for firms that fall somewhere in the middle of the two extremes. Your profit depends on all of these factors (among many others).

Economic loss is never a good thing, and there are ways to determine whether the firm should continue operating, even if loss is occurring in the short run. However, owning your own business can be advantageous for many reasons, so if you are thinking about starting your own, you should definitely become familiar with microeconomics and public finance.

This doesn't answer all of your questions, but it should give you a good starting point to begin familiarizing yourself with some important concepts.