Discussion: Is Economics Relevant to Human Resource Management?
HRM is one of the fastest-growing disciplines in business. Business leaders are calling for HR professionals who understand how economics affects the attracting, motivating, developing, and retaining of top talent. Choose one of the concepts introduced in this module and explain how knowledge of this principle can improve human resource management in organizations. Give an example from your own experience if possible.
As always, include a reference to support your own initial response, but keep in mind that a URL (a website address) is not a reference, so do not insert just a URL.
Module 1 – Resources
Principles of Economics and Entrepreneurship
Module 1, Part 1: Basic Principles of Economics
· supply, demand, and equilibrium (covered on the home page)
· how actors in a market behave to minimize opportunity costs and maximize profits and utility
· changes in consumer behavior in response to price changes (elasticity)
Opportunity costs
As was mentioned in the discussion on supply and demand, economics assumes that humans have an insatiable appetite for goods and services. Decisions must be made in how to allocate a finite supply at an acceptable price, and this is often done by determining how much or how little of the good to supply—or to consume. Often, these decisions involve some kind of sacrifice. In economics, these sacrifices are called opportunity costs.
In short, when we choose Option A, we forgo the benefit we could gain from Option B. In manufacturing, if a firm makes a given product, the opportunity cost would be the potential profit they could make from using their facilities to manufacture another product. Thus, opportunity costs are the cost of the choices we make—when production, time, or money are limited.
Here is an example: When you decided to enroll in a master’s program, your choice involved some sacrifices. You may have found that you had to limit overtime work opportunities, give up a moonlighting job, or even pass up a promotion in order to have time to study. Lost wages are the opportunity cost you incur in order to increase your earning potential in the future. Perhaps your opportunity costs were not financial, but personal. Perhaps you had to give up singing in the church choir, coaching your son’s baseball team, or taking vacations. The point is, whatever you had to give up for a while to pursue your degree is an opportunity cost.
Fixed and Variable Costs
Business firms exist to earn a profit. Profits are increased when revenues (income) are maximized and costs are minimized. Executives and top leadership teams spend a lot of time thinking about how to control costs. They will frequently talk about fixed and variable costs when planning how to make operations more efficient and cost-effective.
The following is a short video explaining the difference between fixed and variable costs.
Byerly, N. (2020, July 31).
Difference between fixed and variable costs [Video]
. YouTube.
Price Elasticity of Demand
Elasticity of demand explains buyer behavior in response to price changes. This is a concern that you will run into often in business. Brand managers want to know how much less consumers will buy if they hike the price of a product by 5%. Production managers want to know how price changes will affect their labor and materials requirements on the assembly line. Marketers want to know how effective a price reduction will be at attracting new buyers. All of these concerns can be addressed by analyzing the sensitivity of demand for a product in the face of a price change.
Knowing the price elasticity of demand also helps in making decisions about pricing policy. It should be clear that if demand is elastic, revenue will increase by reducing the price, but if demand is inelastic, revenue will be gained by raising price. Firms attempt to reduce the consumer’s perception of elasticity through advertising and other promotional activities.
Products with Elastic and Inelastic Demand
It is helpful to know the factors that can affect price elasticity for a given product:
·
Substitutes. If there are substitutes for the product, a consumer may just switch products in response to a price change. The more the available substitutes, the greater the elasticity. When thinking about substitutes, it is good to think broadly. For example, if the price of steak goes up, consumers may not only switch to hamburger, but they may switch away from beef altogether and eat more chicken—or macaroni and cheese. Advertising is often geared toward creating an image of “uniqueness” of a product and reducing the number of perceived substitutes.
·
Luxury. If a good or service is seen as a “splurge” item, it tends to be more elastic. Again, the goal of advertising is to create a feeling that the consumer “must have” the product. Note, however, that this can depend on the income level of the consumer. For the very wealthy, luxury items may be viewed as necessities. Since they have the income to pay higher prices, these luxury items can be relatively inelastic.
·
Habit. Habitually demanded products are less elastic. Think of how cigarette smokers continue to smoke in spite of rising prices.
·
Proportion of income. The less expensive the item, the lower the
elasticity. A 25 cent rise in the cost of a fast food hamburger is likely to have much less of an effect on consumption than a $2,500 rise in the price of a car.
·
Brand loyalty. To some degree, high loyalty to a specific brand reduces elasticity. Frequent flyer and other loyalty programs are designed to increase brand loyalty and reduce switching brands due to price.
·
Life cycle. When a product is new to a market, there may be few substitutes and elasticity is low. As the product “ages” and competitors bring similar products to the market, there is greater choice and it is common to see sales, discounts, and rebates to stimulate consumption.
·
Absolute price. When a product is very expensive, even a small percentage change in price will make it prohibitively expensive to more buyers. If the price of a product is a tiny percentage of the buyer’s overall spending power, then a change in price will have less impact.
·
Importance of use. In our previous example, we examined the elasticity of demand for cookies. A buyer may enjoy a cookie, but it doesn’t fulfill a critical need the way a snow shovel after a blizzard or a life-saving drug does. In general, the more important the product’s use, the more
inelastic the demand will be.
·
Competitive dynamics. Goods that are produced by a monopoly generally have inelastic demand, while products that exist in a competitive marketplace have
elastic demand. This is because a competitive marketplace will create more options for the buyer.
With these considerations in mind, take a moment to see if you can figure out which of the following products have elastic demand and which have inelastic demand. It may be helpful to remember that when the buyer is insensitive to price, demand is
inelastic.
GASOLINE
Gasoline (Generic Need)
The demand for gasoline generally is fairly
inelastic. Car travel requires gasoline. The substitutes for car travel offer less convenience and control. Much car travel is necessary for people to move between activities and cannot be reduced to save money.
Gas from a Specific Station
The demand for gasoline from any single gas station, or chain of gas stations, is highly elastic. Buyers can choose between comparable products based on price. There are often many stations in a small geographic area that are equally convenient.
COLLEGE TEXTBOOKS
Traditional Textbooks
Generally, an instructor assigns a textbook to the student, and the student who wants access to the learning materials must buy it, regardless of the price. Because the student can’t easily identify another textbook or resource that will ensure the same content and grade for the class, he has no substitutes and must buy the book at any price. Thus the demand is
inelastic.
New Textbook Distribution Channels
Increasingly, students have new options to buy the same textbooks from different distribution channels at different price points. The introduction of new distribution channels is increasing options for buyers and having an impact on the price elasticity for publishers.
COFFEE
Specialty Coffee Drinks
Many coffee shops have developed branded drinks and specialized experiences in order to reduce substitutes and build customer loyalty. While black coffee is available almost universally, there are few substitutes for a Starbucks Java Chip Frappuccino. Demand for such products is more
inelastic.
Black Coffee
Coffee is generally widely available at a level of quality that meets the needs of most buyers. The combination of a low price, relative to the buyer’s spending power, and the fact that the product is sold by many different suppliers in a competitive market make the demand highly
elastic.
TICKETS
Concert Tickets
Only Taylor Swift can offer a Taylor Swift concert. She holds a monopoly on the creation and delivery of that experience. There is no substitute, and loyal fans are willing to pay for the experience. Because it is a scarce resource and the delivery is tightly controlled by a single provider, access to concerts has
inelastic demand.
Airline Tickets
Airline tickets are sold in a fiercely competitive market. Buyers can easily compare prices, and buyers experience the services provided by competitors as being very similar. Buyers can often choose not to travel it the cost is too high, or to substitute travel by car or train. This makes the demand
elastic.
HEALTH
Medical Procedures
Essential medical procedures have inelastic demand. The patient will pay what she can or what she must. In general, products that significantly affect health and well-being have
inelastic demand.
Soft Drinks
Soft drinks and many other nonessential items have highly
elastic demand. There is competition among every brand and type of soda, and there are many substitutes for the entire category of soft drinks.
