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Running head: Final Business Proposal 1

Final Business Proposal Anthony Haywood ECO/561 November 19, 2012 Dr. Jerry King

FINAL BUSINESS PROPOSAL

2 Introduction

Providence, Rhode Island, has a rich culinary history and the Federal Hill neighborhood is renowned for Italian cuisine. The product I have chosen to develop is a homemade pasta sauce, Federal Hills Finest, which brings a little bit of the Federal Hill experience to the dinner table. This business can begin as a home-based business including marketing, web-based promotion and product manufacturing. This business proposal outlines the economic considerations associated with entry of this product into the current market. Examination of Elasticity of Demand and Market Structure Federal Hills Finest pasta sauce is a home made traditional pasta sauce made with only the freshest ingredients in keeping with the rich Italian American cultural traditions. Italians take great pride in cooking, and there is great debate regarding who has the best sauce. There are countless different types of readily prepared pasta sauces all one has to do is take a trip down the pasta aisle at the supermarket. This sets the stage for Perfect Competition structure, many companies selling the same product so no one can affect price change. Pasta sauce is pasta sauce, and there are a lot of people selling it some companies larger than others. The products differ only in one major area, taste. Having so many companies selling the same product the market dictates price.
According to Brue, Flynn, and McConnell, (2009) the larger the number of substitute goods that are available, the greater the price elasticity of demand (P. 120).

Company Structure Best Suited for This Business In starting a business such as this, the choice of business structure best suited for this endeavor is The Limited Liability Company (LLC). There are many reasons for why an LLC is desirable ranging aside from the obvious protections from liability for the owners and often overlooked reason is control of the business. According to Rutledge (2012) By organizing as an LLC rather

FINAL BUSINESS PROPOSAL

than a corporation, the statute provides a form of a stock restriction agreement to preclude strangers to the venture from exercising voting control (p. 38-39). There are disadvantages to registering as an LLC which usually arise from taxation with an LLC which can be addressed by prudent planning and meeting with a tax professional prior to starting up the venture. Fixed and Variable Costs Associated with Operation of the Business Startup costs fall into two categories fixed and variable. Fixed costs include all of the costs not subject to change such as LLC fees, rent, and utilities. Variable costs include ingredients, packaging, shipping, mixing, and labor. Differentiation This product has the potential for differentiation by branching out as a product line, for example different styles of sauce, other associated products such as grated cheese. The role of marketing is also a hugely important piece of the business, it moves from selling pasta sauce to selling the brand Federal Hills Finest. It is through aggressive marketing and brand recognition along with product differentiation that will make the business thrive. Profits can be maximized when there is differentiation of the product and expansion of the product line. Thomadsen (2012) found The conventional wisdom that one firms product line expansion decreases its rivals profits is deeply embedded in the marketing, economics, and strategy literature streams (P. 358).

Increasing Revenue In order to maximize revenue in any business it is crucial to understand the role of Price equilibrium. A clever business owner compares his prices and those of his competitor frequently and the objective is to create an increase in demand and keep supply constant. Maximizing profits is a short-term approach using the marginal-revenue-marginal-cost approach (Brue,

FINAL BUSINESS PROPOSAL

Flynn, & McConnell, 2009, p. 182). This measures how increasing output contributes to revenue. The Federal Hills Finest company ideally wants operate where Marginal Revenue (MR) where is higher than Marginal Cost (MC) translating into greater revenues and reduced costs per unit. To calculate this we need to know our fixed and variable costs and total revenue for a specific period of time. Determining Profit Maximizing Quantity The point where the marginal profit becomes negative will determine Profit maximizing quantity. One of the biggest determinants of pricing and performance are production costs. The production cost is a synthetic qualitative and quantitative indicator that shows the efficiency of the entire economic activity of the agent by its size, content, structure and dynamics. This cost is an economic category which is subject to the existence of commodity production (eanu, 2011, P. 155). Additional strategies include determining per unit labor cost, keeping current with the latest technology with the overall goal of reducing production costs. The mix of Pricing and Non Pricing Strategies In a pure competition market it is difficult to remain competitive without a plan, products or services are easily replaced with similar products or services. Inelastic products or services fare better because of the specialty of their nature. A successful strategy for companies to stand out in a pure competition environment is brand familiarity. Along with familiarity is making sure to deliver a quality good or service and standing behind that good or service. A pure competition environment precludes the notion of raising or lowering prices the competitors maintain prices at the current market price.

FINAL BUSINESS PROPOSAL

Conclusion An individual looking to start a business needs to be aware of several key economic concepts before embarking on a business venture. There are key economic features to be considered before developing a business plan as part of the research phase. One needs to understand demand elasticity, what type of market the business will operate in, and the costs both fixed and variable. These concepts if satisfied should lead the prospective entrepreneur into examining ways to maximize profits, marginal analysis and looking at profit maximizing quantity. Economic concepts are crucial to the ultimate success or failure of a venture.

FINAL BUSINESS PROPOSAL

References Brue, S., Flynn, S., & McConnell, C. (2009). Economics (18th Ed.). Retrieved from The University of Phoenix eBook Collection database Rutledge, T. E. (2012). State Law & State Taxation Corner. Journal Of Passthrough Entities, 15(4), 37-73. Thomadsen, R. (2012). Seeking an Expanding Competitor: How Product Line Expansion Can Increase All Firms' Profits. Journal Of Marketing Research (JMR), 49(3), 349-360. doi:10.1509/jmr.10.0164 eanu, . (2011). THE INCREASING OF THE ECONOMIC EFFICIENCY BY REDUCING THE PRODUCTION COSTS. Hyperion International Journal Of Econophysics & New Economy, 4(1), 153-160.