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Question: A major retail chain selling DVDs and CDs has closed its shops. Explain the possible...

Question:

A major retail chain selling DVDs and CDs has closed its shops. Explain the possible economic forces that may have led to this result.

Business   Economics   
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Answer #1

A retail chain may close its shops when its short run assets are insufficient to cover its liabilities. In economic terms, when the average variable costs exceed the price for selling the product, the firm cease to operate.   The reasons for this could be the following-

1. working capital ratio = (Account receivables + Cash in hand + investments) / current liabilities

If working capital ratio is less than 1, this means that the the firm has more liabilities to pay for than its current assets. Hence, the firm cease to operate.

2. Change in preferences- with the emergence of internet, people prefer to go for online entertainment. This reduces the demand for DVDs and CDs and hence its sales reduces forcing business to shut.

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