Vents MagaZine Music and Entertainment Magazine
Related Articles
A market constraint is a scenario where a commercial product or service can’t be sold efficiently in the market due to either under or over-pricing. The free market, as many of us understand it, is the absence of restraint or hurdle that prevents businesses from selling their goods and services at a premium. It doesn’t matter what business you are engaged in. Whether you’re running a coffee shop, restaurant, bookstore, hair salon, general store, book store, hardware store, movie theatre, or bar – there exists a ceiling to the amount that can be charged for a good or service and a floor to the amount that can be earned through them. If a business seeks to exploit this freedom, they run the risk of being driven out of business by competition. Businesses use a variety of marketing practices to try and beat the new competition, some even buy Facebook likes for better marketing to their target audience.
Defining Market Constraint (With Example)
In a market constraint, there is no ceiling or floor. Prices can go as high as they can and businesses can’t earn enough to satisfy the demand. But here’s the problem: we tend to lump all our decisions into categories of income instead of making them more individualized. For instance, the owner of a coffee shop in a given area may realize that he needs to increase the availability of his coffee beans. To do this, he would need to purchase enough coffee beans and then hire a roaster to prepare them appropriately. Depending on how much he wants to charge for his coffee, he can buy a whole truckload of unrefined coffee beans and set aside another truckload just for this purpose.
Here comes the market constraint. The price he figures it will cost to purchase and then hire a roaster to make his coffee depends on what qualities of coffee he wants to serve. So in this case, we have a market constraint, not a ceiling.
Market Constraints Can Eliminate Costs
Let’s say, for example, the owner of the wood plantation figures that he needs to plant more trees. He then purchases a tract of land where he can plant new trees and build a fence around his plantation. If he had bought the trees earlier, he could have gotten a discount but he figured if he buys these trees now, it will be harder to get future discounts from the forest service or other customers. So he figures it will cost him at least a hundred thousand dollars to buy these trees and fence his land. So in this scenario, the market constraint eliminates the price he figures it will cost to purchase the logs.
Capacity Cushions And Market Constraints
In another case, the owner of a lumber mill is figuring out how much it will cost him to increase the capacity of his machines. At the same time, he knows that in the current economy, it will cost him ten million dollars to do this. So he figures he needs to buy some machinery to increase the capacity of his machines while he can still sell each cord of split wood for a price he determines.
So in this example, he figures he needs a capacity cushion of three thousand cubic feet per day for two days straight to get the full benefit of the machine. But two days straight at the current prices is exactly the maximum daily capacity cushion he will be able to obtain. So his calculation is that if he bought some more powerful machines, he could get those extra two days of use and still have enough cushion to get the whole job done. That means he figures he needs to buy a machine called the zero turn splitter and it has the effect of increasing the speed at which the wood rotates. That speed is actually determined by the actual output of the machine.
So the question is: How much more effective capacity cushion can he get from this machine? And if it is the only effective capacity cushion he can get, then what price range does it cost to get the maximum effective capacity from his machine? That is the question that motivates the manufacturer of the zero turn splitter to make it as effective as possible, to beat the competition. The manufacturer knows that if he makes a slightly more efficient splitter, he can sell a lot more machines, even if he sells slightly less efficient ones.
Now the question is: How much more efficient can the zero turn splitter be if the output is actually measured in units per day? This means he can get the maximum effective capacity from his machine and still not be as efficient as the competition because he is selling more effective capacity. Now imagine if the output measured in units per day is measured in cubic feet. That means the hydraulic wood splitter might have to run twenty times as fast to cover the same area. It is not obvious which one the customer would prefer.
