Equilibrium Price, Elasticity, Business Organization and Market Structure - Essay Example

?MARKET DEMAND AND SUPPLY, EQUILIBRIUM PRICE, ELASTI BUSINESS ORGANIZATION AND MARKET STRUCTURE By Table of Contents Introduction 3 Introduction The main aim of any business is to survive the market conditions while maximising on the profits. Restaurant business, which falls under fast food businesses, is greatly affected by market conditions, which determine its profitability. The price, quality of services as well as the location of a restaurant affect its success. This is because the above factors affect customer satisfaction, which determines if a restaurant will be able to retain a customer and attract others. The major factors affecting the restaurant business are the price and quality. The price and quality are in turn determined by several factors such as demand and supply. This paper focuses on how different factors and concepts can affect the operations of a restaurant business located in Bolton. The concepts that will be considered include market demand and supply, concepts of elasticity of demand and supply, determination of equilibrium, business organisation and behavior, and the market structure. Market Demand and Supply Analysis of demand and supply gives insights into how markets operate. Additionally, the demand and supply concepts explain how sellers are able to allocate prices to goods and services. Restaurant businesses deal with provision of goods and services. The restaurant industry is greatly influenced by the supply and demand forces. In a restaurant business, there is a need for balancing of resources, which are often scarce. Understanding supply and demand factors and their application in the restaurant business is crucial since it affects the sales and purchases and, hence, crucial decisions in a business. Supply and demand varies from place to place as well as with time (Parsa, et al., 2005; Taylor and Weerapana, 2011). The supply in a restaurant business is determined by several factors, which include the price of the goods. Tastes and preference of the consumers is another factor affecting the restaurant business. The number of consumers varies and this determines the quantity of foods that restaurants require to make. Additionally, the income level of people living around the restaurant, who comprise the prospective customers, determines the quantities of foods restaurants require to prepare. In Bolton, the number of restaurants is quite high. The commodity price, which is in this case food, is determined by both supply and demand. The commodity prices greatly affect the profitability of restaurants. Commodities such as vegetables and meat are affected by food production. When the prices for commodities are low, restaurants can reduce the prices of their foods without compromising on the profitability of the business. However, when commodity prices are high, it becomes hard to attract customers through price reduction since this would lead to losses (Greco, 2005; Taylor and Weerapana, 2011). The supply and demand affect the price of commodities in restaurant business. If the supply of raw food is less, the demand will be more resulting in increased prices. High prices for raw foods will reflect in the restaurant menu. For the restaurant at Bolton, the manager must assess how the price of the different ingredients required will affect the sales. Additionally, the manager must consider the economic statues of the customers to determine the ingredients to use. If the customers are willing to pay much, the manager should focus on upgrading the ingredients to improve the quality. In Bolton, the economic situation is considerably good and people are willing to spend much at eating out. Therefore, it would be advisable for the manager to focus on quality. Customers are likely to be interested more in the quality than in the price (McEachern, 2011). There must be ways of attracting customers and retaining them. Since the number of restaurants is considerably high, consumers will be tempted to try out different outlets. Therefore, a business must invent ways of ensuring that customers are not tempted to switch to other restaurant. Additionally, the restaurant business falls under the monopolistic competition market structure; there is no interaction between firms. The manager should focus on biding the customers to the restaurant by enhancing quality. Additionally, the monopolistic nature of the restaurant businesses enables the business owners to fix prices for the products without being influenced much by their competitors. Concept of Elasticity, Elasticity of Demand and Supply Price elasticity acts as a measure of demand and supply. Changes in demand affect the supply. Elasticity in demand measures how the demand changes with the change in price. In restaurant business, the number of substitutes mainly affects the price. Numerous ingredients can be used to substitute each other. If the numbers of substitutes is great, the prices tend to be elastic. While fixing the menu prices, the manager of the restaurant should consider the number of substitutes for the different options. If there are substitutes, the prices of the substitutes should not vary greatly since there is likelihood of customers switching to other options. Additionally, competitor restaurants might have similar options but at lower prices which will result in switching to other restaurants. However, the restaurant can still ensure it retains its customers without lowering the prices by ensuring that the quality of the food and services is good (Greco, 2005; Taylor and Weerapana, 2011). When fixing the prices for the foods the manager should consider whether they are considered luxuries or necessities. For luxuries, the price tends to be more elastic depending on the income proportion of the residents. However, the prices for the necessities should demonstrate inelasticity. Another factor likely to affect the elasticity of the demand and supply is the government policies. If the taxes on certain commodities are high, the supply is likely to decrease resulting in shortage. This might have no immediate effect on the demand. However, the price for the foods prepared using the ingredient or commodity in question is likely to increase (Tucker, 2010). In a booming economy, the price of foods is not a concern of the consumers. However, the recent global economic crisis affected the economy of several countries including the U.K. Consumers in Bolton are thus likely to be concerned about the prices until the economy begins to rebound. However, considering that most residents of Bolton earn considerable salaries, the manager should consider expanding the menu since price might not be too much of a concern. Income tends to be elastic and it affects the demand. The salary increases over time, which results in increased spending and, hence, a change in demand. With increased income, people will have more disposable finances, which is a boost to restaurant industry since more people will be willing to eat in restaurants. Additionally, change in income will affect the taste of the customers. If the economy of Bolton is improving, then people will develop taste for luxurious foods. Therefore, the manager should consider how the income of the residents is expected to change. This will ensure that the menu designed reflects the spending culture of the residents (Greco, 2005). In the recent past, there has been increasing demand for health meals. Although most restaurants concern themselves with fast foods, the manager of the Bolton restaurant should consider including fruits as well as vegetables in the menu to entice customers. Restaurant business falls under monopolistic competition. Monopolistic competition makes the demand curves more elastic. This is because there are several close substitutes. In monopolistic competition, equilibrium entails price output combination. The restaurant will be relatively elastic with a slightly sloping demand curve. This is because the quantity affects the price but at a reduced rate. Additionally, each restaurant is free to sell a wide range of meals at a narrow range of prices. The elasticity in demand is caused by the competition resulting from the several closely related substitutes. Elasticity of demand cannot be perfect since restaurants have different output. The restaurant will have some control over the price and can alter the price slightly. The price for restaurants is the average revenue and is greater than the marginal revenue due to demand elasticity (Taylor and Weerapana, 2011). The manager should focus on producing the highest quality meals that will fetch high market price, which will result in profit maximisation. However, the manager should consider other factors such as production technology, production cost, and the market demand for different commodities, the maximum possible profit, and other cost conditions (Tucker, 2010). In the long run, the manager should aim at achieving an equilibrium, which enables maximisation of profits. At this point, the price equals the average cost. However, monopolistic firms have control over the price and are able to fix prices that are higher than the marginal cost. Nevertheless, these results in inefficiency since the resource utilisation is not maximised (Greco, 2005). Business Organisation and Behaviour, Costs, Revenue and Profits For any business to be successful, it must focus on creating value for its customers, employees, and other stakeholders. Created value is mainly measured in terms of the profits made. For a restaurant to create value for the customers, it must focus on the quality of services and the foods. For the restaurant to be successful, the quality of the food offered must be attractive and consistent. This can only be possible if the manager and the employees understand the needs of the customers. To understand the needs, the management should come up with ways of obtaining feedback from the customers to ensure that the quality of services and the products meets the customers’ need. Being able to deliver outstanding services and quality food will enable the restaurant create revenues and ensure increase value of the shareholders (Tucker, 2010). Employees play a crucial role in ensuring the success of a business. In case of restaurant business, the quality of food and services highly depends on the employees (McEachern, 2011) Therefore, the employees should be skilled and motivated to ensure they provide quality services. The skillfulness can be enhanced through frequent training to ensure that the employees are conversant with upcoming needs of customers. Additionally, the management can design an appropriate hiring system to ensure that the employees hired have relevant skills. Another way of ensuring the employees offer quality services is through motivation. Motivated employees will focus on improving quality of the food prepared as well as the ways they deal with the customers. Motivation can be enhanced through frequent training and good salaries. Valuing the opinions of the employees by involving them in decision-making indicates respect, which motivates the employees (Parsa, et al., 2005). To create the value of investors, the restaurant must focus on increasing the revenue growth and the profit margins. This is only possible if the restaurant is able to deliver good quality food and services to the customer. The restaurant can satisfy the needs of the customers by enhancing quality, which results in increased willingness of the customers to purchase commodities. Additionally satisfaction ensures customer retention. The Bolton restaurant should ensure that the meals are of consistent quality and are provided in a clean and friendly environment (Parsa, et al., 2005). When a business is successful, the investors or shareholders are able to receive consistent returns. Although the manager should focus on ensuring that the value of the shareholders wealth is improved and that returns on assets are increased, the main goal should be creating value for the primary stakeholders. The primary stakeholders are the customers and the employees (Taylor and Weerapana, 2011). The value of a business is measured using different aspects. Some managers lay too much focus on creating wealth and end up decreasing the value of a business. The value of a restaurant business is measured using the tangible assets such as building and the intangible assets such as the employee’s expertise. The intangible assets are very crucial in the creation of revenue. Though the intangible assets contribute to success of the restaurant business, they do not play a great role on the short-term wealth creation. The manager in the restaurant should focus on ensuring that the customers spend more in the restaurant, which is made possible through customer satisfaction. The price of the meals and the quality of services are thus crucial in revenue creation. Additionally, the manager can increase the value of the employees through frequent training (Haghighi, et al., 2012). Internal and External Environment Factors Affecting Restaurant Business in Bolton The success of the restaurant business is determined by internal as well as external factors. The external factors might be beyond the management control. However, the management should have strategies of controlling the internal factors to their advantage. The internal factors mainly deal with the operational efficiency and determine the competitiveness of a business. Restaurant business requires creativeness. The management of the Bolton restaurant should focus on ensuring that the quality of their products, the pricing and marketing plans to increase their competitive advantage. The competitiveness could be achieved through enhancing teamwork between the different departments in the hotel to ensure that quality of the meals and other services provided is outstanding (Tucker, 2010). For efficiency, the manager should ensure that the cash flow is sufficient to ensure that the payroll and the overhead expenses are catered for. Additionally, the manager should develop marketing strategies to entice customers to eat in their restaurant. The marketability of the restaurant mainly depends on meeting the expectations of the customers. In Bolton, where residents earn considerably high salary, the demand for quality is high. Word of mouth is a crucial marketing tool for restaurant industry. To ensure that the Bolton restaurant maximises on this strategy, the manager should emphasise the quality so that the current customers can recommend their friends and families to visit the restaurant. Additionally, the management should consider using other marketing strategies such as advertisements to increase awareness of their products. This could be done through social websites such as Facebook (Parsa, et al., 2005). Economic factor greatly affect the performance of restaurants. Since most people in Bolton consider restaurants a luxury, their willingness to eat in restaurants is greatly determined by the amount of disposable income they have. Therefore, the level of economic growth greatly influences the performance of restaurant businesses. Domestic, European and international components and relate to a business case study. Restaurant business tends to be competitive due to the existence of numerous restaurants. For a restaurant business to be able to compete effectively, it is important that it have a plane outlining the market conditions. The market conditions greatly affect the profitability (Greco, 2005; McEachern, 2011). Market Structure: Monopolistic Competition In Bolton, restaurant industry in characterized by existence of many competing restaurants. Additionally, there are different products which are close substitutes to each other. The demand curve for monopolistic competition is never flat. Additionally the restaurants do not react to the actions of each other (Taylor and Weerapana, 2011). This is because there are several restaurants. In Bolton, the number of restaurants is quite high resulting in competition. Additionally, the restaurants offer similar incentives. For example, if a firm decides to entice customers through reducing price, the demand for their products will increase. However, changing the price has little effect on demand for small restaurants similar to the one under discussion. In other words, changing the price does not raise the demand curve. The best way for the Bolton restaurant is to make their meals unique through enhanced quality to increase the demand for their product. Monopolistic competition is a blend between the perfect competition and monopoly. As a perfect competition, several competitive businesses characterise monopolistic competition. As a monopoly competition, the firms in monopolistic competition have some control on the market (Haghighi, et al., 2012). Conclusion Restaurant business have a monopolistic market structure since the industry is characterised by several but closely related substitutes. The industry is driven by demand, which is determined by the level of income of the residents. In Bolton, the local economy is considerably good, and residents have enough money at their disposal to use for meals at restaurants. For the restaurant under discussion to be successful, the manager must focus on managing the demand for profit maximization. This is through ensuring that the quantity supplied is utilised maximally. Additionally, the manager should focus on ensuring the quality of services; the meal must be outstanding to attract new customers and retain the existing ones. The price of the meals should reflect the quality. Consumption rate affects the demand and supply. When the consumption is high, the demand is considered high. At high demand, the management can consider increasing the prices. The demand for restaurant products is highly dependent on the income of residents. Therefore, the manager should consider the kind of customers to expect when designing the menu and prices. Another factor to focus on should be the cost. The output from the restaurant operations should be able to pay for all the inputs used such as labor and the ingredients. Bibliography Greco, A., 2005. Cross Elasticity Of Supply: Seldom Heard Of And Seldom Taught. Journal For Economic Educators, 5(1), pp. 1-6. Haghighi, M., Dorosti, A., Rahnama, A. , and Hoseinpour, A., 2012. Evaluation of factors affecting customer loyalty in the restaurant industry. African Journal of Business Management , 6(14), pp. 5039-5046. McEachern, W., 2011. Economics: A Contemporary Introduction. 9 ed. New York: Cengage Learning. Parsa, H., Self, J., and King, T., 2005. Why Restaurants Fail. Cornell University, 46(3), pp. 304-322. Taylor, J., and Weerapana, A., 2011. Principles of Microeconomics. 7 ed. New York: Cengage Learning. Tucker, I., 2010. Economics for Today. 7 ed. New York: Cengage Learning. Read More