1. The Business
The business I intend on opening will be a 4 star, 18 hole golf course located in northern Florida. The course will reside on top of 140 acres of hilly terrain in a thick wooded area. It will feature challenging obstacles including hundreds of trees, 7 ponds, a running stream and 62 sand traps all placed strategically throughout the course. Of the 18 holes, there are four par 3’s, ten par 4’s and four par 5’s for a total yardage of 6583 yards. The course has a USGA par rating of 71.3 and a slope rating of 125. Pin placement for all 18 holes will be changed on a daily basis, making each round of golf a truly unique experience. The course is part of, and follows all the rules of the United States Golf Association (USGA). This allows golfers of all skill levels to have handicap ratings so they can play against each other on a level playing field. Among other things, the course also features a pro shop which sells all types of golf equipment and golf lessons from the golf professional. The course has a half way house that sells meals, a 340 yard driving range and a putting green.
For a price of $60 anybody can play a round of golf. The $60 green fee includes 18-holes of golf, cart rental, complimentary use of the driving range, putting green and a meal + beverage at the half-way house.
The demand for golfing is price-elastic. The price elasticity of demand between the prices of $80 and $60 is 2.33.
__((6-3)/(6+3) ÷ 2) × 100___
= |-2.333| = 2.33
((60-80)/(60+80) ÷ 2) × 100
Golfing is a recreational activity and can be considered a luxury; therefore it is a normal good. As income rises, the consumption of rounds of golf increases. Likewise, as income decreases, the consumption of rounds of golf decreases.
Golf balls and golf clubs are compliments to golfing. A decrease in price of either of these two items will increase the desire to golf. An increase in price of either of these two items will decrease the desire to golf.
Horseback riding and tennis are substitutes to golfing.
2.Short-Run Production Costs Table (original sample of 20 people multiplied by a factor of 20)
The fixed cost is represented by the daily cost of the loan payment, property tax, utilities, and course maintenance/equipment. The total of these costs is $1545 a day.
A 5 million dollar loan was taken out with a 5% down payment to build the golf course and to purchase all the equipment. A 30-year fixed rate loan charges an interest rate of 5.5%. This translates to a monthly payment of 28,000 or about $920 a day.
After doing some research on existing golf courses of similar size, I found that the yearly property tax would cost $100,000 a year or about $75 a day.
The main utilities include water, electricity and gas. About 80,000 gallons of water are needed daily to irrigate the golf course; all the other water used is negligible. The daily cost for water is $120. The daily cost for all other utilities including gas and electricity is $30. Total daily amount spent on utilities is $150.
Maintaining the golf course includes, cutting the grass, planting new grass/trees, fueling and maintaining the equipment costs $200 a day.
In order to manage this golf course, the owner had to give up his career as a stock broker for Merrill Lynch where he was making $200 a day.
Total Fixed Cost
Total fixed cost per day is $1545.
The variable cost is represented by the cost associated from employee wages and additional golfers.
The golf course will have a minimum of 10 people working at all times. The Golf Professional makes $180 a day, his/her job is to supervise the entire golf operation and provide lessons. The golf Shop Manager makes $100 a day and his/her job is to work as a clerk in the pro shop, answer telephone calls, and make t-time reservations. The golf course Starter/Ranger makes $120 a day, his/her job is to provide each golfer with a golf cart, and is responsible for making sure that all golfers tee-off at their specific tee times and maintain a steady pace. The Starter must also clean and refuel each golf cart at the end of the day. A minimum of 6 Greenskeepers whom each make $100 a day work to that maintain the golf course. The greenskeepers’ duties include, repairing the golf course, mowing the grass, reseeding, trimming the trees, cleaning the driving range, and changing the pin positions. The final member employed at the golf course is the cook who makes $100 a day, and his/her job is to cook lunch for the golfers when they come though the half-way house. Total employee cost is a minimum of $1100 per day.
On busy days with many golfers, additional employees are needed. There are a limited number of golf carts available and for every 20 golfers an Assistant Starter is needed. Assistant Starters make $70 a day and their job is to assist the starter in his/her duties and ensure that golf carts are always refueled and cleaned for upcoming golfers. An additional Greenskeeper is needed for every 60 golfers to repair the divots, ball marks and other damage caused by extra golfers.
Each additional golfer costs the course an additional $10 for the fuel they’ve used in the golf cart, their lunch and the damage they’ve done to the golf course.
Total Variable Cost
Variable costs can range anywhere from the minimum employee cost of $1100 to $2700 daily.
Maximum profit occurs when Quantity = 120 and Price = $60. This produces total revenue of $7200 and a total profit of $2555. (Theoretically, maximum profits occur when the MC and MR curves intersect and are equal to each other. At this intersection, the total quantity is 96 and the price demanded at this is quantity is $70. This produces a total revenue and profit of $6720 and $2320 respectively. This is very close to my actual maximum profit. The reason for this variation is because my initial survey of only 20 people does not accurately depict the markets demand curve and therefore the profit at MC=MR is off by 5%. Still close though!)
4A. Perfect Competition – Shutdown or Produce?
In a perfectly competitive market, economic profit can be made when the market price is above the price at which average total cost and marginal cost are equal to each other. Provided there is sufficient demand, I will make an economic profit as long as the market price for a game of golf is above $38. If the going rate for a game of golf is exactly $38, I can provide 110 games of golf each day and make normal profit. If the price demanded for a game of golf is between $32 and $38 (MC = AVC and MC = ATC) I will still produce, but it will be at an economic loss. However, once the price of a game of golf drops below $32, (where MC = AVC) I will shut-down and lose a total of $1545 which is my daily fixed cost. In the short-run, I will occasionally have to temporarily shut-down or produce at a loss on days with bad weather or when other events may interrupt the normal market demand for golf. However, if I am constantly producing at a loss or am having to shut down frequently, I will consider leaving the industry all-together in the long-run.
4B Monopolistic Competition
If my golf course was part of a monolithic competition I would focus on advertising and product differentiation. Part of what would make my course unique would be the dynamics of the course itself. My golf course will feature large putting greens, and the pin position (hole placement) will be moved around anywhere from a couple inches up to 50 feet, on a daily basis. Likewise, the tee box (starting point) on each hole will also be moved around anywhere from 20 – 300 feet every week. By changing the pin position and the tee box location, golfers are encouraged to take a different pathway to the hole. These slight alterations truly make each game of golf a unique experience. This allows golfers to challenge themselves by learning new techniques and strategies. It is also a great incentive for golfers to visit the course again in the future. Another aspect that will differentiate my golf course from my competitors will be the large amount of events. I will host numerous tournaments each year where golfers will pay an additional fee to compete against each other in teams or among themselves. They will compete for money, prizes or can donate the funds raised to a cause. The golf course will also be open to private outings, where people can rent out the course for up to a full day.
My Golf course will be situated in Florida, in a popular tourist area. I will take advantage of this and will advertise everywhere for tourists to see. I will have advertisements at the airport, the car rental business, in hotels and along the highway. I will also go as far to make sure my golf course is advertised in the “in flight” magazines (on the airplanes) so that tourists will read about my golf course first.
If my golf course was in an oligopoly I would use several types of strategic behaviors to increase business and profits. I will strive to differentiate my golf course and make it a unique experience; however I must always be looking for new ideas because all the other courses will inevitably copy my ideas. Likewise, I will also keep a tight watch and will closely monitor my competitor’s prices and actions. My prices will need to be within range of theirs to keep business levels and profits up. I will frequently golf at other neighboring golf courses and if needed, I may steal their ideas to enhance my own business. I may even go to an extreme and hire associates who would visit other golf courses and secretly extract information about by asking lots of questions. I call these my “undercover golfers”.
Forming collusion, although illegal, would certainly help increase profits for myself and my competitor/s. Golf is a luxury and is inelastic which means that an increase in price would increase total profit. Also, our golf courses reside in a heavily tourist area and vacationers are usually willing to spend more for a better experience. The owner of another large golf course that has comparable market share and I could form a collusion and raise our prices from $60 to $100 and we would both generate more profit. By forming this collusion, we would essentially create a monopoly and would dominate the local golfing industry. If both myself and the owner of another firm charge a high-price of $100 a round, we could both create economic profits of $4000. However if one of us decides to break the collusion and charge a lower price of $75 a round they will make a daily economic profit of $5000, where as the other would only make a daily economic profit of $2500. If both of us break the collusion and charge the lower price, we will each only make a daily profit of $12500. This event would be the nash equilibrium.
5. Government Action
If my business does succeed and make extraordinary profits, it is likely that the government will want to tax me in whatever way possible to take their share. I will expect to pay a premium on interest rates, insurance rates and property tax. They will also throw all kinds of licensing at me. Some of the people working at my golf course will need a degree and/or certification. The head Greenskeepers and Golf Professional will both need specific licenses which will require training that I will have to compensate for. If I choose to sell alcoholic beverages such as beer at the half-way house, I will need to obtain a liquor license. The government may even force me to hire Union workers who will need to be paid higher wages. Since golf is a recreational activity, the government may recognize that the benefit of providing a low-cost recreational activity to the citizens is greater than the benefit of allowing me to produce extraordinary profits. To accomplish this, they could create a price ceiling on the amount that I would charge for a game and would thereby negatively affect my profits. Another option would be to subsidize my industry course by paying me sufficient wages so that I keep my prices lower.
It is unlikely that globalization will have any type of negative effect on my business. My business is a recreational service, and unlike producers, I am not threatened by foreign companies who can manufacture and sell products in our economy at lower prices. Globalization should actually assist my business. Instead of buying expensive domestic capital/machinery such as golf carts, lawn mowers and leaf blowers, I will have the opportunity to purchase less expensive foreign counterparts. Globalization will also indirectly help me by decreasing the price of golf related goods. Item’s like golf bags, golf clubs and golf balls are all compliments to golf, and because they will be more affordable, more people will buy them and use them at my course. I also might even be able to hire labor at lower costs because of globalization. People who have emigrated from foreign countries to the United States will often work at lower wages. Both of these techniques will work toward my business by lowering total operating costs and hence, increasing profits.