Small business concepts and applications

¶ … customer preferences on supply and demand in a small business.

Review information on supply and demand.

Human wants and needs and how those are translated into the sales of goods affect supply and demand, particularly in a small business environment.

[Small Business]

Supply and demand provides a framework for understanding how prices are determined in individual markets, especially when it comes to the small business owner. Prices and quantities are the two components in the small business marketplace and individuals play a key role in determining what the marketplace will bear.

It all begins with our own individual needs and desires and how we communicate this, resulting in the right blend of goods and services. As individuals, we are all at one time or another involved in the buying or selling of goods. The whole process is very interactive and highly integrated.

The idea of optimization involves both buyers and sellers. Sellers want to maximize profits while consumers allocate their income to maximize their buying power. Sellers, which in this case are small business owners offer desired goods and determine fair prices based on what the market will bear. Basically they want to maximize their profits by producing and selling goods. Entrepreneurs are particularly interested in microeconomic modeling before they consider starting a business. They want to know how healthy the market is; can it handle more competition and what is the appropriate input-output combination for making a profit.

Consider the pizza industry. Over the years, competition has increased in this industry, because companies like Chicago Pizza and Dominos are in competition with small mom and pop pizza shops. Companies that once just specialized in making pizza now offer other items. The lines of competition have been blurred and mom and pop pizza shops are trying to compete with bigger companies that can meet consumer tastes. Profit maximization is harder to achieve by the production and sale of one particular good.

The buyer finds that his purchasing power has increased and that companies are vying for his business. They may end up buying greater quantities of a good, which will increase demand but this in turn sets off diminished marginal utility which implies that the consumer will pay less for these additional items and use his purchasing power for items that will bring greater satisfaction.

So small business owners begin to cut their prices relative to what their competitors are now selling the same goods for. This impacts the rate of production and the rate of consumption. The interaction of each critical piece sets off a chain reaction that affects the entire economic cycle.