Right now I could be playing with my chickens because they’re so cute but instead I’m doing my homework; the ‘opportunity cost’ of me doing my homework is not being able to play with my chickens. But I do choose to do my homework instead of playing with my chickens because I think it’s ultimately the better choice.
Every business is built based on an owner’s incentive to make a profit. However, economic decisions are just one of many obstacles that plague business owners. In After a Blizzard, What’s a Fair Price for a Shovel, Rafi Mohammed explores a topic that affects businesses economically and morally. Here is the scenario he poses:
“Suppose you own a hardware store. There’s been a heavy snowfall throughout the night and you know the moment your store opens at 8 AM, the limited supply of snow shovels will sell out. Should you raise price?” (Harvard Business Review)
In essence, since people must clear the snow from their driveway, demand for shovels after a storm increases. However, since so many people are in need of a shovel at one time, there is a shortage of shovels, meaning there are not enough shovels to sell to all of the people in need of the product.
After presenting the inquiry, Mohammed continues by adding a list of questions to consider:
“If price is held steady, is it fair that those who show up right when the store opens get to purchase at less than the market clearing price? What about those who can’t arrive at 8 AM because they are working or tending to children? Or should the storeowner follow the mantra of economists to raise price until the market clears? In other words, allocate the limited supply of shovels to those who value them the most (i.e., are willing to pay a high price)” (Harvard Business Review).
Given that there are a variety of different options as to how these questions can be answered, business owners choose what they want to do after weighing the opportunity cost of each decision. For example, if a storeowner was to sell the shovels only to the people who will pay the most for them, many shoppers would stop peeping into the store. Some people would rather see prices at a steady rate, so if the owner wants to exhaust his or her customers of all their cash, many shoppers will buy from a nearby competitor. A business owner must realize that his own self-interest lies in the hands of the consumer.
Next, Mohammed moves on to present more issues that plague a storeowner when contemplating raising shovel prices after a storm:
“Is it worth it to potentially alienate customers for a quick profit windfall? Or, to take another view of the situation, if storeowners take the risk of purchasing a large inventory of shovels for the winter season, don’t they deserve to profit? After all, what if they purchase too many shovels and have to liquidate inventory at the end of the season at a money-losing price? If that happens, how many customers will say, “I’ll pay you more than the clearance price because I appreciate that you had shovels ready in case of a blizzard?” Nada. Is it fair to store owners to take all of the risk but not fully profit from their investment?” (Harvard Business Review)
In his array of questions, Mohammed makes some intuitive assertions. He is correct that there is a major possibility the storeowner could end up not profiting from his or her investment in shovels if prices are not raised. However, since “the customer is always right,” storeowners must be prepared to take a hit from a bad investment. The United States operates in a free market economy driven by consumer sovereignty; if the consumer wants to buy a shovel, sell him one. If there are not enough shovels to sell, get more. The benefit of living in such an economy is that there is always ways to modify a product or policy to increase the potential earnings of a business. Whether it’s changing the specialization or fighting off competitors, every business always has ways to improve. However, no business will ever flourish if it does not satisfy its customers.
In conclusion, a storeowner must not raise the price of shovels right after a storm. While the extra cash seems appealing, it is neither fair to the consumers nor beneficial to the business to raise the prices. Satisfying the consumer must be a business’s number one priority in order to earn a hefty profit.