This post is somehow inspired by a comm101 lecture on supply chain and inventory turnover, but has little to do with the lecture itself. There is a link between the study of business and the failure of economics and I’d like to examine this correlation.
In economics, when supply of a good falls short and demand remains constant, a new equilibrium should be formed and prices should be increased, ceteris paribus.
Ceteris Paribus. A term that is non-existent in the dictionary of the business world.
In the world of business, or rather, practically, when prices are raised, consumers who intend to purchase the good the once-agreed equilibrium price would go elsewhere to source for substitute goods at a comparatively-lower price. Thus, demand for the good falls and the firm finds itself not being able to sell its goods and generate revenue. Such is the example of the sale of milk in class.
This is a clear example of the failure of economics in the business world.
Ceteris paribus – holding all other factors constant, is a key economic assumption when analyzing models and predicting outcomes. To omit this key term is to undermine the reliability of economic application in business models, which brings me to the conclusion that the study of Business is in fact the study of the failure of economics.
