Monday, July 11, 2011
Silver Spring Econ: In the Long Run Pier 1 is Dead
Pier 1 in dowtown Silver Spring is closing (see Silver Spring Singular). One of the many signs advertising going out of business sales says "Lost our Lease". My econ intuition says this is a textbook case of when a business might decide to shut down.
In econ 101, we call a lease on the building a fixed cost, since Pier 1 will have to pay the rent until the end of the lease regardless if it is open or closed.
So supposed not including the lease that Silver Spring Pier 1 makes $10,000 a month in profit. It would continue to stay open.
If the lease costs $15,000 a month, then the store is losing $5,000 a month (15-10 =5). However, losing 5,000 a month is better than having an empty store and losing $10,000 a month to pay the rent.
So my guess is that Pier 1 lost its lease because they chose not renew it. Pier 1 likely stayed open for a while (economists call this the short run) even though it was losing money since it had fixed costs. In the long run Pier 1 decided to close since it couldn't make a profit after fixed costs (so in the long run it would shut down).