For my example of economies of scale I decided to choose the sewing industry as the industry which I know the best. First let’s look at the industry as a whole. It is labor-intensive industry where the qualification of the workers plays a key role. The mass production there is very well established and the numerous big existing companies tend to create difficulties for the new companies to enter the market. And is a result of intense use of economies in scale the minimum efficient scale is at very low prices and huge outputs. And when asking if it is possible to do it in today’s Canada the answer would be “No” in 99%. Why? Simply because Canada’s high level of life and small population created high-paid jobs and labor-intensive industries cannot compete successfully in our very competitive world especially because the small population of the country creates small market and for the success the company would need to export its production to bigger markets.

But are there any other possibilities? Yes, the niches. The product should be very unique, innovative and there should be the demand for it but not in large quantities. All that would give the opportunity to reach the minimum efficient scale at prices high enough to get the profit. It is illustrated in the graph below where LRAC1 is long-pun curve for big mass production companies and LRAC2 is long-run curve for small custom-oriented companies.

One of those products would be the custom theatre and dance wear, school uniforms, corporate clothing for small local restaurants etc. The potential customers are not powerful enough to order large amounts of products, all the products must be unique but with some possibility of labor division and this local market would exist for long time without big fluctuations in size. The tricky part would be to determine the right size for the future company. To cut-out the fixed costs I would start from home-operated business and devoted most of my time to advertisement. There are a few local websites where for relatively small cost I can advertise my business. For better productivity I would spend some money on quality equipment keeping in mind that the labor wages is the biggest input and increased productivity would cut a big piece of average variable costs. In attempts to use a division of labor the most I would hire a good sewer and do all patterning on myself. The reason would be to reduce the explicit costs at the beginning when the cash flow is low while keeping the high quality of the work my company is doing. On the graph it illustrates AVC1 and AFC1 curves.

After some improvements in cash flow I would rent the space in crowded neighborhood with relatively high average family income and easy transportation access for my shop. To keep my costs down I could make the size of the shop big enough to accommodate just few more workers. In my decision how many people I should hire I would calculate the marginal cost of hiring new person, buying new equipment and approximate decrease in average total costs with the output increased. If the marginal cost would be higher I would stop hiring. And I would try to implement the economy of scope by taking side orders of alterations, repairs etc. That would help to fill in the gaps in between the big orders. And at the same time I would build the base for people willing to take the contract work for simpler parts. It would help me to get done big orders without involving many permanent workers and keep fixed costs lower. Also I would hire the receptionist to meet and greet visitors and do all high-paid accounting and design work on myself to cut variable average costs and keep all company cash flows under my control. Definitely while calculating the profit I would use the economic approach to figure out how well or bad I am doing and instantly trying to get my total average cost lower or at least same when the minimum efficient scale achieved. It is illustrated on the graph above by AVC2 and AFC2 curves. Please note that though the AFC2 is higher than AFC1 the total AVC2+AFC2 is less than AVC1+AFC2 because of greater specialization and bigger output (Q2 compared to Q1). All that demonstrated as well in long run LRAC curve where AC1 are total costs for AC1 and AC2 are costs for AC2.

Next step would be to get enough profit to hire good designer and accountant. That is desirable but sometimes it is something that can lead to bankruptcy as the owner gets more time and loses the day-to-day possibility to influence in the company. That leads to increased bureaucracy and diseconomies of scale develop. Small businesses are very sensitive to that and the profit can diminish quickly. On the graph it illustrates AC3 curve and AC3 costs that are higher despite increased output.

My example of successful business would be the Lily’s Fashion Creatures-small designing studio in NW Calgary. Successful policy in achieving minimum efficient scale helped the owner to expand from one shop to two shops one of them in downtown. The owner is very active and never gives up in the attempts to find the ways to get new and more customers. Though she is not fully uses the Internet recourses she is well-known through word of mouth.

Please feel free to check her webpage below;

http://www.canpages.ca/website/business/4350105?website=http%3A%2F%2Fwww.lilysfashion.biz

 

 

 

 

 



Diminishing returns for Tobacco

 

 

I totally agree with the point in article “The diminishing returns to tobacco legislation” that the point of diminishing returns for tobacco products is over and the further aggressive intervention would have a contrary effect. Because of its addictive nature the demand elasticity of tobacco products, especially cigarettes, is relatively low at about 0.4 to 0.6. For that inelastic demand the rising prices could lead to higher revenue (in our graph from R1 to R2). That was used by the governments as the guide for imposing the high taxes on tobacco. We can see it the example of the demand and supply curve. For inelastic demand the big jump in price could lead to only small reduction of the quantity demanded. We can see it from the graph.

But there always is the point on the demand curve after which the revenue is diminishing. In the article there are some reasons why that happened in tobacco consumption. When the prices started to grow there was some percentage of people who were at the point that it caused them to reduce smoking or quit like youth, low-income smokers who started to smoke recently and those who wanted to quit. Together with the goal achieved the high price on cigarettes brought higher revenue to the government. But the elasticity curve is different from demand curve in the terms that it is always more elastic at the beginning and inelastic at the end. There is always the unitary elastic point in between them where the revenue is the highest. That was the spot which the government achieved. Next steps were not so successful because the curve was in the different part of the elastic curve. That is illustrated in the article by the following data: from 1985 to 1995 in the United States, real prices of tobacco products increased by some 52 percent, mainly because of taxes, while cigarette consumption dropped by 18 percent; from 1995 to 1999, real prices jumped by another 48 percent, but consumption receded by only 11 percent. And as we can see the next increase of taxes will give even smaller effect.

The understanding of that caused the government to use the regulatory power like prohibition of smoking in public places, warnings on cigarette packs, prohibition to display tobacco products in the stores, etc.

But all these precautions can cause opposite effect because when we do something too much the society is trying to protest against it. That is the problem the government faces. There are already facts of illegal cigarettes contraband from other less regulated countries or, what is even worse, the attempt to substitute tobacco products by marijuana.

One of the possibilities to improve the health of the nation could be the proper education at the schools, developing the role models for children.

 The example from my life could be the story of my husband’s school years. All teens are facing the times when they are listening only themselves in attempts to be more independent. My husband’s dad one day brought him to the pub where all alcoholics in the city were gathering. He showed him it and just asked: “Do you think this is the life they were dreaming for? No, they just become addictive to the bad habit.” It feels too harsh for me and I never had that kind of experience but apparently this is the life and teens should know all the consequences to be able to choose the right values. It definitely should be more gently but one real story can do more than thousand words.

 

Tourism industry in Canada

Changing demographics, shifting travel patterns and volatile economic conditions are increasing the pressure on industry stakeholders to develop effective campaigns and business strategies. (source:www.tourism.gc.ca)

Trips by Canadians in Canada, by province and territory (Person-trips (destination))
	2006	2007	2008	2009	2010
	Person-trips (destination)
	thousands
Canada	207,470	214,559	214,498	227,121	229,158
Newfoundland and Labrador	3,068	2,939	3,006	3,256	3,500
Prince Edward Island	1,018	1,057	1,082	1,196	1,091
Nova Scotia	7,318	7,087	7,131	7,604	8,115
New Brunswick	5,254	5,349	4,937	5,358	5,458
Quebec	57,278	57,240	58,410	62,736	60,169
Ontario	83,036	86,903	84,995	88,412	90,174
Manitoba	7,275	7,294	7,109	7,935	7,984
Saskatchewan	7,874	8,164	8,028	8,464	8,624
Alberta	17,364	20,052	20,601	20,398	21,558
British Columbia	17,908	18,418	19,126	21,619	22,380
Yukon/Northwest Territories/Nunavut	77E	56E	74E	144E	F
E : use with caution.

Source: statistics Canada

 As we can see from the table during the recession in 2008 the overall amount of trips slowed down. Government revenue attributable to tourism activities in Canada declined 3.7% to $19.2 billion in 2009. This was the first decrease since 2003. Source: ctatistics Canada)

It started to rise when the economy recovered that can lead to the conclusion that tourism industry has high elasticity of demand and income elasticity However, outbound travel is currently expanding at a faster pace than domestic travel is, fuelled by a strong Canadian dollar and better value for money. The cross-elasticity shows that lower prices for overseas destinations will decrease domestic travel. Availability of many substitutions makes that industry more cross- elastic.

While the Canadian market is expected to continue to strengthen through 2011, rising travel costs could well dampen the recovery, with increasing airfares, gas prices and hotel rates all expected to take their toll. The table below shows that Canada is experiencing slowdown in foreign visitors while there is an increase in domestic travelers.

One of the explanations is aging population. There is a rapid growth in the seniors’ market segment as the baby-boom generation reached 65 years of age in 2011. It is estimated that seniors will represent 25 percent of Canada's overall population by 2026. Most of baby-boomers have the vacation property in Canada where they spend more time now.

 

The tourism labour market is characterized as a seasonal, fragmented, multi-faceted service industry, with a large number of entry-level jobs. The seasonal nature of the tourism industry is contributing to the development of dual labour markets, comprised of core workers and
peripheral ones. In many cases, employees view tourism as a gateway into the labour market.Approximately 60 percent of tourism employment is within the food and beverage, and accommodation sectors (see below). These are the areas most in need of a stable and skilled workforce. And perhaps that was a reason why total tourism employment in Canada is falling.

 Source:Statistics Canada National Tourism Indicators.

 

To extend my knowledge in elastic demand I was analyzing three articles published in Globe and Mail regarding that topic.

There is a science in the part of pricing the product right to get the most in the revenue. And it is tricky as the price change can have totally different result depending of the elasticity of the market.  For example in the article the U.S. market is compared with Canadian market. The U.S. market is more elastic because more companies are competing with each other there and as a result more substitutes are available. Another example is the underestimated revenue. If the prices are too low and the demand is still high we are losing the revenue. ¹

 That is because the demand curve for the product can be elastic at the upper top, unitary elastic close to the center and inelastic at the lower bottom part. Actually when the curve is unitary elastic the revenue is the highest. It can be shown by graph 1 Demand curve and graph 2 Revenue curve.

Graph1 Demand curve

Graph 2 Revenue curve

Please note that the revenue is the highest at the unitary elastic demand point.

Next let’s look at another example. In the article “Our peak oil premium” Professors Murray and King show that since 2005, world oil supply has become far less responsive to increasing demand – in econo-speak, its price elasticity has fallen sharply. “As a result,” they write, “prices swing wildly in response to small changes in demand.” There is the example of inelastic demand for oil where the small fluctuations in the quantity  demanded from  Q1 to Q2 can cause a big changes in the prices from P1 to P2. The oil doesn’t have the substitutes and this contributes to the inelastic demand curve E1.

Opposite example is the market demand for potash. In the article “A bumper year for crops, a rocky patch for Potash shares”  as an example of elastic demand curve we found the following :“ While the potash oligopoly can try to keep prices artificially high in a falling grain price environment, farmers are savvy buyers of crop inputs and their potash demand can be sufficiently elastic to eventually bring potash prices more in line with other [agricultural]commodities,” Mr. Winslow wrote in a report last week. That is illustrated by elastic demand curve E2 on the Graph 3 where big changes in the quantity demanded from Q3 to Q4 changes the price from P3 to P4 mostly as a result of substitutes from other countries.

Grafh 3