Basing on the law of demand and supply, consumers will always demand goods of lower prices. As the price of food in the restaurant increase, the quantity demanded also reduces. This implies that, if the restaurant increases its price of food, there are high chances that some customers will leave the restaurant to find another restaurant that charges lower than the popular seafood restaurant. Furthermore, considering the law of demand and elasticity of restaurants, a small change in the price of the food charged by the restaurant would lead to a big proportionate change in the quantity of food purchased from the restaurant. In other words, a small proportionate change in the price would cause a big effect on the amount of the customers who come to buy food from the restaurant. This is witnessed in the case where the counterpart restaurant is having few customers.
On assumption that all the two restaurants have exactly the same quality of food and providing identical services, it implies a situation of a perfectly competitive market. However, in a perfectly competitive market, pricing of goods are solely dependent on the prices charged by other firms in the market/ industry. This gives a vivid argument/ reasoning to the preceding statement that if the restaurant increases price of its food, it will definitely loose a big number of customers.
On the other hand, if the counterpart restaurant wishes to increase on the sales and favorably compete with seafood restaurant, it should consider revising its food prices to level with the competitor’s price. This will lead to a big proportionate increase in the sales made by the restaurant. In adjusting the price of food to level with competitor’s price, the restaurant can further provide extra uncharged services which will give it a competitive advantage over the seafood restaurant. It is important to assume in this case that, the customers have perfect information regarding the changes in prices by the entire restaurants. Furthermore, for this to be more realistic and vivid in line with the perfectly competitive market, we assume that the customers incur no extra cost in moving/ switching from one restaurant to another.
From the preceding graph, we realize that a small change in the price of the commodity/ food by the restaurant brings about a big responsiveness of the customers, that is to say, a small slice in the price of the food served by a restaurant brings about a big rise in the number of customers demanding the food. On the other hand, if a firm increase the food price by a small price level, there will be a big response of the customers ie the customers demanding the food will highly reduce.
This absolutely explain the reasons as to why the seafood restaurant is able to have a queue of customers waiting for the table and the other counterpart is having vacant seats. The theory behind the elasticity is that the goods that the two restaurants are selling are assumed to be perfect substitutes. It implies that, shout the counterpart restaurant drop its price, there will be a stiff competition and the seafood restaurant’s competitive advantage will be reduced
Qn. 2a
When a firm is operating in a perfectly competitive market, its output decision is determined by the total cost it incurs and total revenue it earns in producing a given amount of output. At a lower production level, the firm incurs a higher total cost due to a high variable cost given a fixed cost and a variable cost, at early lower production level. It hard to cover the explicit cost due to low revenue earned from the low output. At this production level, there is a high positive marginal productivity. An increase in a unit variable of factor input leads to high marginal output. This therefore induces the producer/ the firm to increase on its production in order to earn more profits. It reaches an intermediate level (the optimal production level). This is the recommended production level where a firm enjoys supernormal profits in the short run. It is assumed that in the long run, profits reduce due to the fact that new entrants are attracted into the market due to the supernormal profits enjoyed by the early entrants. As the new firms enter, the profits tend to lower and hence, an equilibrium is attained where firms earn normal profits.
From the preceding insight, we therefore understand that if the firm restricts it production in perfectly competitive market in the short, it may incur an increasing returns due to the few firms in the market. It assumed that in the short run, the firm has a considerable share of the market unlike in the long run when there are more entrants into the market. However, it is highly uncertain for a firm in a perfectly competitive market to restrict quantity sold. It should aim at maximizing revenue by selling more quantities.
From the preceding graphs, the quantity sold and the profits earned is dependent on the level of production and the costs being incurred in the production. It therefore implies economic profis, loss or normal profits may be earned.
Qn. 2b
To some extent, the two restaurants in the extract are not operating a perfectly competitive market. This is due to the fact that they are able to influence the prices of the commodities that they are selling. In other words, they have a considerable influence in the market. Under a perfectly competitive market, firms have a minimal influence in the industry, that is to, if a firm exits the industry, there is no effect or rather a negligible effect is felt in the market. However, for the two firms in the extract, if one exits the market, then there will dominate and remain as monopolist in the market. This will imply that the firm will solely dictate the price f the food it deals/ sells. On the other hand however, there are features of perfectly competitive market. Among which include free and perfect competition. There are no restrictions and limitations on pricing. Each individual firm has total control of determining its own price prices in relation to the market price. In the extract, the counterpart restaurant decided to charge higher prices for its food and is only affected by the sales/ revenue it that it attains. From our previous analysis, we also assumed that there is no transport costs incurred by the customers in switching from one restaurant to another since it is within the same locality. This implies that the decision by a customer to switch from one restaurant to another is not influenced/ limited or rather affected by the movement or transport costs. There is also perfect knowledge by the customers regarding the quality of the food provided by both restaurants as well as the prices charged. The customers also have ultimate control of the choices they make regarding the food they eat. Another feature that makes it perfectly competitive is that they are dealing in the same type of foods. Implying hat that the foods they are dealing/ selling are perfect substitutes. A change in the price charged for the food by one restaurant influences the customer to either switch to another restaurant or maintain.
Qn. 3a
Monopoly refers to when there is a single supplier in the market dealing in certain products or services. A monopoly sets marginal cost which is the total costs incurred to produce an additional unit of a product or service equal to the marginal revenue which is the total revenue earned from a produce of an additional unit of a product or a service. Price discrimination refers to a situation when a seller of a product sells the same product to different consumers at a different prices.
Qn. 3b
When a seller is a monopolist in the market, there is a high demand for his products since he is the only seller in that market. When seller restricts the quantity it sells in the market, this means the consumers will have to wait in queue to buy or have the product or services offered. Restriction of the quantity sold will cause a shortage in the market and so consumers will have to struggle to have the product or services. This will therefore result into price discrimination in that market because some consumers will have will have to pay an extra cost to have the same product or service and failure to pay the extra cost will make them miss the product or service. The supplier will keep the legal prices the same and yet charging subset of consumers an extra price for them to have the same product and service hence making them to make more profits while maintaining the same prices but restricting the quantity it sells.
Qn. 4b
Price discrimination normally takes place when consumers in different market divisions or segments are charged different prices for the same goods or services. This is effective only if the consumers are not going to resell the products and the service to other consumers to gain a profit
Discrimination can be considered pro-competitive or anti-competitive because it has got considerations namely;
The legal rights are to promote the welfare of the consumers by protecting them from all sort of discrimination in the market. The welfare of the consumers is however subjective to a wide range of choices. Discrimination may also manifest inform of discounts offered to consumers, rebates, promotional strategies which are not uniform and vary.
Qn. 4a
Basically, we can define price discrimination as the process of charging different prices to different customers for the same quality and quantity of goods by the seller basing on certain factors. Price discrimination is a strategy of maximizing profits while keeping all the respective customers of the business satisfied.
Qn. 5
From the basic understanding, demand is the quantity od goods or services a byer/ consumer is willing to buy at a definite price within a given period of time. From the basic definition, the law of demand holds. Keeping other factors constant, the price of goods will always inversely related to the demand. As the prices increase, the quantity demanded of such good will consequently reduce. However, there are always circumstances of variability. It is substantial that demand varies depending on the type of good or service and the time period of demand. First, there are goods that disobey the law of demand, that is to say, as the prices increase, there demand also increase and as the prices reduce, there demand also fall. Some of such goods include inferior goods and luxuries among others. These circumstances arise as a result of Veblen effects and snob effects.
Furthermore, the variability of demand is often dependent on speculations of the buyers or the consumers of the product. For example, when a consumer expects the price of a good or service to increase in the future, they will tend to demand more as compared to normal. This is due to the fear to incur extra expenses in the future. we can relate this to Malthusian theory of money demand. In one of the factor why people hold money is for speculative reasons. He says consumers hold money because of speculative reasons ie, when an opportunity comes in which a good is being sold at a less amount than it is expected in the future, then they be purchase and chose to sell in the later time when the prices are higher. Buyers are always aiming at maximizing satisfaction from the unit of money spent. This implies that they will always want to buy at lowest prices possible.
On the other hand, when the consumers expect the price of a good in question to fall in the near future, they will tend to minimize demand with the an attempt to reserve their money for the future prices which are expected to fall. The logic behind holding/ reducing demand is waiting for the prices to reduce/ fall so that they can be able to purchase more with a definite amount of money.
Applying the examination on demand, if the prevailing demand of a definite good or service is high, there is an implication of scarcity. It therefore means that more scarcity is expected. Thus there will be a shift in the demand curve to the right because of expected increase in the demand, which will subsequently lead to an increase in the prices charged. This is because price of the commodity is inversely related to the price. When there is scarcity, demand will exceed the available goods and thence increasing the price in the future. Similarly, expectation of a fall in demand in the future will imply more good will be available/ abundance will prevail. This consequently, will also lead to a fall in the prices of the commodity in question.
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