Long Run Costs and Economies of Scale

If I had the chance to run a business it would be a liquor store. It seems that alcohol is always in demand and would probably be a safe bet if the business was run correctly.

I would start with one small location in a well populated neighbourhood or a busy urban area such as a downtown street with lots of pedestrian traffic. Depending how that location does, there would be interest in expanding the business and opening new locations. How far beyond the city the business would expand again, depends on the success of the business. I would offer a delivery service to homes and parties.

The market is aimed at people who are at the legal drinking age in the province. In the province of Alberta that would be 18.

Opening a new business certainly has its costs. Some examples of fixed costs would be licenses, permits, costs related to the buildings such as utility bills and rent, and salaries.  Long run costs would be the products sold in store. Obviously we would need to look at the size of the store and see how much liquor would be right for the space.

A great example of a successful local liquor store would be Crowfoot Liquor. Their original location is in the Crowfoot area and has now seven stores in the city of Calgary and has locations outside of the city. This is a great strength and the company is working in their economies of scale. They have weekly promotions, so this can help the store decide which products are worth keeping and if there is a preference in price or brand. A weakness of theirs is that they do not offer a delivery service.

http://www.crowfootliquor.com/

Law of Diminishing Returns

Pierre Lemieux’s 2001 article “The Diminishing Returns to Tobacco Legislation” has some interesting points about government intervention in the tobacco industry.

The article mainly points out taxes the government and imposed regulations on packaging over the years. The most notable being that between 1985 and 1995 taxes were increased significantly enough to raise the price of cigarette packs by 52%. There was a drop in consumption by 48% during this time.  There was a further increase in price by 48% between 1995 and 1999 but only a drop in consumption of 11%.

Another considerable change that the government made in the tobacco industry was the inclusion of health warnings on cigarette packets but this action doesn’t seem like it was enough to encourage smokers to quit. Lemieux believes that government involvement in this was “less effective… smokers who were the most easily persuaded have already quit.” I agree with Lemieux because health warnings alone are not enough to stop people that are heavily addicted to tobacco. “As advice, warnings, and threats from authority become more numerous and visible, they tend to be discounted or ignored.”

It seems that looking at the two periods in reduced consumption, the point of diminishing returns is no longer moving. The peak reduction rate was between 1985 and 1995 and it seems, again, like Lemieux points out that most people who were willing to quit already have.

A solution that can help the government’s production would be free assistance to smokers who are willing to try to quit. They can offer free nicotine patches, gum and other products, include coupons in cigarette packets; also free sessions for professional assistance in quitting. The government could also get more involved in production of these products in order to increase revenue.

With tobacco being demanded by addicts, demand in this case would be inelastic. If the price were to increase, then demand would stay the same. Governments take advantage of this by increasing revenue with taxes known as sin taxes. These taxes apply to tobacco products and most alcohol products


Lemieux, Pierre, http://www.pierrelemieux.org/artdiminish.html