It is not as if certain branches of industry yield more return than others. This is on account of the investors. After all, virtually every business needs capital: for machines, for research or for day-to-day operational management. Aside from banks and the entrepreneurs directly, it is professional investors and- in the case of listed businesses- large groups of private investors who price
price of the competitor in competition
profit costs
demand curve
numbers sold
strengthen that capital. As soon as a branch of industry appears to yield a more favourable return on the invested capital in the long term, more investors will plough their money into this. This supply of capital will cause that branch of industry to grow, as a result of which prices, and with that the profit margins, will fall.
A possible answer to the question on how to derive profit is offered by elementary microeconomic theory. This concerns the demand curve for a product or service. If the price is high, the quantities sold will be small, and if the price is low, more products or services will be sold. This relationship is called the demand curve.
In a situation with competitors where everyone sells more or less the same product, you have to go along with the others. Because if your prices are higher than those of your competitor, everyone will go to him, and if your prices are lower you will deprive yourself and the competitor may also lower his prices. The price multiplied by the numbers sold is your turnover, and if you deduct your costs from that you are left with a( small) profit, as demonstrated in the first diagram of Figure 2. This typically applies to raw materials such as pig iron and diesel, objects such as lighters and cotton wool, and services provided by hairdressers, smaller restaurants and cleaning companies.
price profit costs
monopoly
demand curve
numbers sold price profit
costs
monopoly with skimming the market
demand curve
numbers sold
Figure 2. The effect of the demand curve with competition and in a monopoly
If you are selling a unique product, or if you know of another way to ensure customers choose you instead of your competitor, you will have a kind of monopoly. In that case, you are free to determine at which price you wish to sell your product. That price comes with a certain demand, which is how you can optimise your profits( second diagram). If you start off with a higher price and then slowly bring it down, you can make an even bigger profit. This is known as skimming the market( third diagram). Apple sold the first iPhone for approximately 300 dollars, and then graduately lowered the price.
So it is vital to distinguish yourself from the competition, in other words, to create a small monopoly. This principle is described by W. Chan Kim and Renée Mauborgne in their book Blue Ocean Strategy 3. Instead of competing on existing markets, the so-termed ' red oceans ' where sharks fight each other for every morsel of food, you should find yourself a piece of blue ocean without competitors, and build up your business there. They propose a practical method whereby- assuming an existing product or service- you can look at which aspects you
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