Economic Analysis Section of a Business Proposal - Example

Economic analysis section of a business proposal of the business, background, objective and goals The business to be set up is a restaurant thatwould operate in the fine dining segment. The name of the restaurant would be La Prime. The main objective of the restaurant is to generate profits by providing high quality food and services to the customers in a consistent manner. The target segment for La Prime is the upper class i.e. the niche segment. Therefore, the restaurant will be opened up with high class services and state of the art ambience and infrastructure. The initial goal of the business would be to capture a regional market share. The restaurant business is planned to be expanded later in the national and international markets on the basis of the profitability of the restaurant and prospects of the markets. The restaurant business generally functions in a market of monopolistic competition. In the monopolistic competition market, many sellers sell various types of products relevant to the industry. The main characteristic of monopolistic competition market is that the products are differentiated from each other and the consumers are more influenced by the product differences as compared to the difference in prices. In a restaurant industry, a new seller can obtain the permits and licenses to open up a new restaurant and set up his own restaurant to offer any cuisine or food from all around the world. The success of a restaurant business depends on factors of consumer preference like food, location, service, ambience etc. which is typical of a monopolistic competition market according to the principles of economics. In monopolistic competitive markets, the relative resource mobility is higher and the restaurants can enter or exit the market with comparative ease as compared to other types of markets like oligopoly and perfect competitive markets. There are very less restrictions in the restaurants industry. The government regulations are there to monitor and control the food industry, but the prevailing laws are much easily manageable. Also, other barriers to entry like start-up costs, and locations can be easily managed by a new business. The restaurant products are examples of elastic goods. Most customers are likely to eat in restaurants less with an increase in the prices of the restaurant products. The factor of substitute products is high for restaurant businesses. Therefore the elasticity of these products is higher. The consumers can easily switch brands in response to changes in pricing because there are a number of substitutes available in the market. The main substitutes for restaurant meals are other restaurants and home cooked food. These factors make the restaurant products highly elastic goods. The pricing changes in a monopolistic competitive market make the products elastic in nature because consumers switch to substitute products (Krugman and Obstfeld, 2008). The similar theory can be applied to restaurant businesses. If there are more substitute products for a good, the elasticity of the product would be higher. As there are a number of substitutes available for restaurants, the products are elastic in nature. In a monopolistic competitive market like the restaurant industry, buyers and sellers have extensive knowledge. The buyers and sellers have to keep sufficient information about the market because the market is characterized by a large number of competitors who have their market positions based on the differentiation of their products and services. For the prices in a monopolistic competitive market, there always exists a relatively elastic demand curve. There are a number of outputs which are offered in a narrow range of prices. The pricing decisions largely affect the competitive position of a restaurant in the food industry. An increase in price may often lead to the customer looking for substitute goods in the market. The high availability of substitute good in this market makes the sellers have less control over the pricing decisions. The prices are often fixed by keeping in mind the influences of the customers. Apart from the pricing decisions, non-pricing decisions are also significant in this market. Employing suitable advertising strategies and choosing prime locations for setting up the restaurants would be important non pricing strategies for the restaurant businesses. In monopolistic competitive markets, the products are similar but not identical. In restaurant business product differentiation is a key differentiating factor between two restaurants. However, the restaurant businesses can also differentiate themselves on the basis of services like waiting time, augmented service facilities etc. In monopolistic competitive markets, the businesses have less control over the quantity and pricing decisions. The restaurant businesses have a limited control over the pricing decisions. A differentiated market like monopolistic competition nullifies the concept of single market price maintenance. The products being differentiated the demand curve is downward sloping. The original marginal revenue (MR) curve lies below the demand curve. A profit maximizing restaurant business would sell the quantity in which the Marginal Revenue (MR) would be equal to the Marginal Cost (MC) of the restaurant. At the point where MR=MC, the restaurant may sell its products at the output quantity where it would intersect the demand curve. This price is more than the price at the point of quantity where MR =MC. To sell more products in this industry, the restaurant may lower the prices. This would mean that the marginal revenues from the additional products would be lesser than the price of each product. A proper monitoring of the marginal costs and marginal revenues can help the business to devise suitable strategies for maximizing profits. Since the entry barrier is low, the new firms are likely to enter the market more easily. As the new businesses will enter this industry, the availability of substitute goods would become higher for the existing companies. This would reduce the demands of the existing restaurant businesses and thus the demand curve would be shifted to the left. A shift in the demand curve would also influence a shift in the marginal revenue curve as well. The restaurant businesses often lose by changing the prices. Suppose an output of Qmc is produced by a restaurant at a price of Pmc, and the price is equal to the average total cost. Lowering the price to P1 can cause the restaurant to incur a loss because the price is lower than the average total cost (ATC) incurred in the business as shown in the diagram below. (Source: Goodwin, Nelson, Ackerman and Weisskopf, 2009).  Therefore, though the restaurant business operating in the monopolistic competition market is free to set its own prices, it should consider the fact that an increase in the prices may cause the customers to switch to a substitute good available in the market while a decrease in the prices may lead to subsequent loss for the business. The variable costs of a restaurant may include the cost of goods sold, marketing and advertising expenses, employee payroll, management bonus, employee payroll, paper and stationery, cleaning expenses, etc. The variable costs would be directly impacted by the changes in the business activities and strategies. The fixed cost may include depreciation of fixed assets, controllable expenses, rent, salaries, equipment, insurance etc. The fixed costs are more independent of changes in business operations and strategies as compared to variable costs. Fixed cost items Price in units Rent 30,000 Salary 50,000 Fixed assets 60,000 Insurance 25,000 Depreciation 25,000 Total fixed cost 190,000 Variable cost items Price in units Raw materials 35,000 Stationery 15,000 Cleaning expenses 20,000 Marketing and advertising expenses 15,000 Management bonus 15,000 Total variable cost 100,000 References Goodwin, N., Nelson, J., Ackerman, F. & Weisskopf, T. (2009). Microeconomics in Context (2nd Ed.). New York: Sharpe. Krugman, P. & Obstfeld, M. (2008). International Economics: Theory and Policy. Boston: Addison-Wesley. Read More