1. What is the relationship between business commerce, business occupation, and the business organization? In what ways do they work together to affect how the business system operates? 2. What the...
1. What is the relationship between business commerce, business occupation, and the business organization? In what ways do they work together to affect how the business system operates?
2. What the principle of diminishing marginal utility?
Why is it important to understand business decision making at the margin?
3. What is a company's business model? What is profitability?
Why is a company's business model a major determinant of its profitability?
4. Action. Find an owner or manager of a small business in your city and try to determine the nature of that company's business model. What are the main components of its business model? What is its competitive advantage? Who are its main competitors?
In business, it is important to make decisions at the margin because decisions that you make affect things at the margin, not for the overall business. Let us say that you are deciding whether to hire an additional worker. This decision affects the margin. You have to determine how much money the employee will make for you (marginal revenue gained by hiring that employee) and weigh it against the cost of hiring that employee (marginal costs). The costs that you have already incurred do not factor into this decision. It is made only on the margins.
One aspect of thinking at the margins is the principle of diminishing marginal utility. This is the idea that a consumer will place a lower and lower value on a good as the consumer buys more of that good. Each unit of the good is less valuable to the consumer than the previous one. It is perhaps easiest to think about this with regard to food. If you are very hungry, you will place a high value on the first item of food that you buy. You really need food and so that item is very valuable to you. After the first item, you are still hungry, but not as hungry as before. So the second item does not have quite the same value for you. The same goes for the third item. By the time you get to the 6th or 7th item of food, you might not place any value on it at all because you might be completely full. Thus, each item of food was less valuable to you than the one before.