Wednesday, November 19, 2008

Two Quick Recommendations

The first recommendation is from the U.K. newspaper, The Telegraph (HT to Carpe Diem) and is about everyone's favorite inflation story, Zimbabwe. (The country is looking at rates in the billions per cent per month.) There are a number of lessons from this story. The easiest is the link between money and prices as epitomized in the equation of exchange M x V = Q x P or (M x V)/Q = P which makes a quick explanation of how a money supply that has no connection to real output only results in price fluctuations.

But the other lesson is that money is defined by function. When it loses its ability to function - medium of exchange, store of value, measure of value - it no longer serves a role in the economy. That would explain why consumers in Zimbabwe are resulting to other currencies or to barter.

The second story is from yesterday's issue of The Wall Street Journal and explains how chain restaurants are attacking their costs in order to deal with higher commodity and labor prices and faltering demand. Some of the examples (IHOP and Applebees) seem to be easy approaches, like consolidating vendors to achieve discounts. Others deal with reducing portions or making decisions about how other resources are used (Church's).

Lessons that can be used here go back to competitive pressures on producers. Producers can change the price and/or change the product in a competitive market. Changes in product can be quantitative or qualitative. Changes in the suppliers (from who supplies to how often) may affect both quantity and quality. The question you can put to your students is "Do you think this type of change in production represents an example of entrepreneurial innovation, or something else?"

I look forward to hearing from you.

2 comments:

monica f. said...

As a student, I would like to answer your question. I don't think that this change in production represents entrepreneurial innovation because the methods of reducing costs and consolidating have always been there. Due to the current state of the economy there is even more pressure to keep sales high and minimize costs so buisnesses have to rethink their spending. Which in the end comes down to consolidating and reducing portions. Thus this shows that the change in production stems from the self interests of businesses.

Tim Schilling said...

My first instinct is to agree with you. But Joseph Shumpeter defined entrepreneurship five ways:
1. Introduction of a good or new quality of good.
2. Introduction of new production method.
3. Opening a new market.
4. Discovery/conquest of a new source of raw materials.
5. Reorganizing an industry (ex. monopoly or breakup).

Let me ask this, "Would things like consolidating suppliers fit under new production methods?"
"Does using new suppliers fit under the category of a new quality of good?"

I'm interested in your thoughts and I invite others.