Assignment Question
Thinking Like an Economist. Key objective: designing framework for business decision-making with the opportunity cost and the marginal cost consideration. Setting: You are one of a few co-owners of a commercial space of 50,000 sq. ft. in the building in downtown of your selected town in the State of NY (please name it up front in your assignment). You have to come to a common decision like economists what to do with it now. Some of you run own private single-owned businesses and might find this space useful for your own purpose. So far, you have invested $20,000.00 in the renovation of the building. You have to motivate your decision based on the principles of economics. Instruction: Have in mind current market conditions. Use formal language and correct terminology in your discussion of relevant economic concepts, and apply relevant economic tools for problem solving in this real-life imitating simulation. As there might be differences in opinions please support your proposal in the assignment with supporting data and include also one-page memo presenting the summary of your recommendation, the way of your thinking adopted, and the decision to be agreed upon. Some extra research would be helpful. You can adopt a real or a mock example if want to work with more details. Outline: Consider and discuss in the assignment, the issues in your decision making process, such as: • assumptions • trade-offs, values and incentives • rational choice • marginal changes • sunk costs • opportunity cost • factors of production • market forces: demand and supply, market equilibrium • possible externalities • economic variables that can influence your choice • business cycle • please apply economic models. Please refer to the grading rubric posted in Brightspace just above this WA.
Answer
Introduction
In the heart of downtown Syracuse, New York, a group of co-owners faces a crucial decision regarding the utilization of their 50,000 square foot commercial space (Mankiw, 2018). Having invested $20,000.00 in renovation, the co-owners must decide the optimal course of action for the property. This essay will employ the principles of economics to guide the decision-making process, considering factors such as opportunity cost, marginal cost, market conditions, and economic models. In doing so, we aim to arrive at a decision that aligns with the rational, economic approach to maximize benefits while minimizing costs.
Assumptions
Before delving into the decision-making process, it is essential to outline some key assumptions and contextual factors that will inform our analysis:
Market Conditions: We assume that the current market conditions in downtown Syracuse are characterized by demand for commercial spaces (Mankiw, 2018).
Ownership Structure: The co-owners have different backgrounds; some run private, single-owned businesses that could potentially utilize the space (Samuelson & Nordhaus, 2021).
Renovation Costs: An initial investment of $20,000.00 has already been made for the building’s renovation (Frank & Bernanke, 2020).
Trade-offs, Values, and Incentives
Economists recognize that decision-making involves trade-offs. In the case of our commercial space, the primary trade-off is between using the space for one’s own business and leasing it to external tenants. Each co-owner’s values and incentives play a crucial role in this trade-off. Those with established businesses may have a strong incentive to use the space for their own operations, whereas others may prioritize rental income (Mankiw, 2018).
Rational Choice and Marginal Changes
Thinking like an economist means making rational choices by comparing marginal benefits and marginal costs. In this context, the marginal benefits of leasing the space include rental income and potential tax benefits, while the marginal costs may involve ongoing maintenance, property taxes, and opportunity costs. Co-owners should carefully weigh these factors to determine the optimal utilization of the space (Samuelson & Nordhaus, 2021).
Opportunity Cost
The concept of opportunity cost is central to economic decision-making. It refers to the value of the next best alternative foregone when a choice is made. In our case, if a co-owner decides to use the space for their own business, the opportunity cost is the potential rental income they would forgo. Understanding opportunity costs ensures that decisions are made with full awareness of the trade-offs involved (Frank & Bernanke, 2020).
Factors of Production
Utilizing the commercial space efficiently involves considering the factors of production: land, labor, capital, and entrepreneurship. Co-owners must evaluate how these factors can be most productively deployed to generate income or achieve business goals within the space (Mankiw, 2018).
Market Forces
Demand and Supply
To make an informed decision, we must analyze the demand and supply dynamics in the downtown Syracuse commercial real estate market. If demand exceeds supply, leasing the space may yield higher rental income. Conversely, in a market with an oversupply of commercial spaces, co-owners might consider using it for their own businesses to avoid high vacancy rates (Samuelson & Nordhaus, 2021).
Possible Externalities
Economists also consider externalities—unintended consequences of decisions. For example, if one co-owner decides to use the space for a noisy manufacturing operation, it may negatively affect neighboring businesses or property values. Careful consideration of externalities is essential to make a socially responsible decision (Frank & Bernanke, 2020).
Economic Variables and Business Cycle
Economic variables such as interest rates, inflation, and the overall business cycle can influence decision-making. In a low-interest rate environment, financing business expansion or renovation might be more attractive. Co-owners should monitor these economic indicators to make timely decisions (Mankiw, 2018).
Application of Economic Models
Economic models such as cost-benefit analysis and supply and demand curves can provide quantitative insights into decision-making. Co-owners may use these models to estimate potential rental income, calculate the net present value of various options, and forecast market trends (Samuelson & Nordhaus, 2021).
Conclusion and Recommendation
In summary, thinking like an economist requires a systematic approach to decision-making that considers opportunity costs, marginal changes, market forces, and economic models (Frank & Bernanke, 2020). Based on our analysis, we recommend that the co-owners conduct a thorough cost-benefit analysis to compare the potential benefits of leasing the commercial space with the opportunity cost of not using it for their own businesses. Additionally, they should continuously monitor market conditions, externalities, and economic variables to adapt their decision as needed (Mankiw, 2018).
Memo
To: Co-Owners of Downtown Syracuse Commercial Space
From: [Your Name]
Date: [Date]
Subject: Decision-Making Recommendation
I recommend that we conduct a comprehensive cost-benefit analysis to determine the most economically advantageous use of our 50,000 square foot commercial space in downtown Syracuse, New York (Mankiw, 2018). This analysis will allow us to compare the potential rental income from leasing the space with the opportunity cost of not using it for our individual businesses (Frank & Bernanke, 2020).
Our decision-making process should consider the principles of economics, including opportunity cost, rational choice, marginal changes, and market forces (Samuelson & Nordhaus, 2021). Additionally, we should be mindful of possible externalities and keep a close eye on economic variables that could impact our decision (Mankiw, 2018).
Let’s leverage economic models such as cost-benefit analysis and supply and demand curves to quantify our options and make a well-informed decision (Frank & Bernanke, 2020). By adopting this approach, we can maximize the economic benefits of our commercial space while minimizing costs.
Ultimately, the key to our success lies in thinking like economists and making rational choices that align with our collective objectives. Let’s work together to ensure that our decision is based on sound economic principles and leads to the best outcome for all co-owners (Samuelson & Nordhaus, 2021).
[Your Name]
References
Frank, R. H., & Bernanke, B. S. (2020). Principles of Economics. McGraw-Hill Education.
Mankiw, N. G. (2018). Principles of Economics. Cengage Learning.
Samuelson, P. A., & Nordhaus, W. D. (2021). Economics. McGraw-Hill Education.
Frequently Asked Questions (FAQs)
- Why is economic thinking important in deciding the fate of our commercial space in downtown Syracuse, New York?
Economic thinking provides a structured approach to assess the costs and benefits of various choices, helping us make informed decisions that maximize our gains and minimize losses.
- What is opportunity cost, and how does it relate to our decision?
Opportunity cost is the value of the next best alternative that we forgo when making a decision. In our case, it’s the potential rental income we give up by not leasing the space.
- How can we determine the rational choice between using the space for our businesses or leasing it?
We need to compare the marginal benefits (rental income and potential tax benefits) with the marginal costs (maintenance, property taxes, and opportunity costs) to make a rational choice.
- What are the externalities we should be concerned about in our decision?
Externalities could include how our decision impacts neighboring businesses or property values. We must consider these unintended consequences.
- What role do market forces play in our decision-making?
Market forces, such as supply and demand for commercial spaces in downtown Syracuse, can influence the potential rental income and vacancy rates, which should be considered when deciding.
