Sunday, July 1, 2012

Timing is key. What you should NOT do when you start a business.

Good morning economists and have a nice week. Today, I would like to discuss the notion of entrepreneurship and more particularly starting a new business.

In 2006, the real estate sector in Cyprus as well as a number of other countries was booming. Banks were quick to provide developers with loans in order to finance the ongoing investments. Then suddenly in 2008 the bubble burst, several developers went out of business and their buildings were seized by creditors. What led to the decline in this particular sector?

We can of course blame the recession but the REAL reason for the decline was the huge increase in the quantity of properties for sale. In the discussion we will refer to what is known in economics as the short run and the long run.

The short run is simply put the time period where there are no new business entrants in the market. In other words, the market operates with the existing suppliers. On the other hand, new businesses can enter the market and supply their products or services in the long run.

There is no specific time frame for the short run and the long run simply because each market is different. We cannot define the short run to be two years for example. If you are a businessman timing is everything. There is an appropriate time to enter the market, and an inappropriate time to enter as well.

Unfortunately, back in 2006 everyone jumped on the real estate bandwagon. Every John, Smith and Andrew (or to put it in Greek every Costis, Yiannis and Pericles) woke up one day and thought "I will be a developer today". Securing loans was not a problem and neither was the demand for properties at the time. When the supply of properties increased dramatically because of this phenomenon, however, there were a large number of properties that remained unsold. There was simply not enough demand to cover the ongoing supply. As a result a lot of developers went bankrupt as they could not make their loan payments.

The moral of the story is this. Careful when deciding to start a business. Study the market. Look at what is happening to demand AND supply as well. Most of the people fail to examine supply. They only care about demand.

And remember! If an idea is obvious to you, chances are that it is obvious to other people as well.

Have a high utility day!


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