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I am trying to understand the economics of small local buisnesses like cafes, tea shops etc. I observe that they get 90% of their customer in certain rush hour/ time periods. Yet they keep the shop open the whole day. It doesn't make sense to me. Wouldn't it be better to only keep the working times as to when the maximum number of people come?

Is there any hidden economic reasons I am missing?

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    $\begingroup$ Do you have some data to support the observation about 90% of customers? That seems exaggerated. Also, just because store has a rush hour that does not mean on a margin it does not earn enough to stay open $\endgroup$
    – 1muflon1 ♦
    Commented Sep 19, 2022 at 18:04
  • $\begingroup$ Okay perhaps an overexaggeration but I Really have noticed that most of the time the small buisnesses I visit are very empty. So, it would seem cheaper to only make the workers work for the time where people actually come @1muflon1 $\endgroup$
    – Brian
    Commented Sep 19, 2022 at 18:09

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From economic perspective it makes sense to stay open as long as the marginal revenue is higher than marginal cost of staying open. All fixed costs are de facto sunk in the short-run. In addition, since the number of customers store gets within hour is random, what matters is that the expected marginal revenue is higher than marginal cost.

For example, if some hot-dog stand sells hot-dogs for \$10 and marginal costs for operating per hour is \$20, having a 67% chance of having only 3 customers (each having single hot-dog) per hour will be sufficient to keep the store open (assuming for the simplicity that either 3 people show up or nobody will).

In the example above you could observe hot-dog stand having no customers for 1/3 of a day and it would still make perfect sense for the stand to operate 24/7.

Above is of course just an example. Depending on parameters of the problem (marginal revenue, marginal costs etc), you can construct examples where it makes sense to keep store open even if probability of having a customers per hour is very low. For example, suppose its a jewellery store that gets marginal revenue of \$1000 per sale but has marginal costs of only \$50. Then a probability of having single sale 5% per hour (vs no sale per hour), would be sufficient to keep the store open (5% probability of one sale means you would expect to see about one customer per day).

Even if shop would be profitable enough just being open during rush hour it would be irrational not being open other hours as long as expected marginal revenue is higher than marginal costs.

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  • $\begingroup$ Number of customer store gets in an hour is random.... true but qualitatively there are some times where number is large and others where it is not $\endgroup$
    – Brian
    Commented Sep 19, 2022 at 19:34
  • $\begingroup$ @TrystwithFreedom yes and my answer explained why, during the times where the number of customers is small, it is still worth while to keep the store open. Note I was giving just simple examples, theory explained above would work for times where there are 1000 customers vs times where only 1 or none customers. $\endgroup$
    – 1muflon1 ♦
    Commented Sep 19, 2022 at 21:36
  • $\begingroup$ Why do you use "marginal costs" in place of costs everywhere? I read the whole answer cutting out the "marginal" in my head and still everything more or less made sense $\endgroup$
    – Brian
    Commented Sep 19, 2022 at 21:37
  • $\begingroup$ @TrystwithFreedom because fixed costs are sunk ex post so they dont matter for decision making. At least not in short run. $\endgroup$
    – 1muflon1 ♦
    Commented Sep 19, 2022 at 21:37
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    $\begingroup$ @TrystwithFreedom well I wouldn't say that it is always better to work with marginal quantities because of course in long run you want to take into account fixed costs, but generally speaking rational decisions are made on a margin, so if your goal is to make rational decisions you should think about margins as opposed to totals most of the time $\endgroup$
    – 1muflon1 ♦
    Commented Sep 19, 2022 at 21:47
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  • They get some customers at other times anyway.

  • Being open more relieves potential customers from having to think about whether the store is open, so more of them will visit the store.

    I suspect this is a big effect. You might also consider why buses cover unprofitable routes and don't only run at rush hour.

  • Many of their costs are fixed and don't increase if they stay open longer.

  • There may be regulations discouraging businesses from hiring part-time employees instead of full-time.

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