Equilibrium Prices of the Grand Cinemas - Essay Example

ESSAY; MICRO AND MACRO ECONOMICS ESSAY; MICRO AND MACRO ECONOMICS Introduction Entertainment has become a major source of happinessin the current generation. Students who are in holidays, or may be enjoying their free time outside the class usually swarm entertainment joints while some resort to movie actions at home. Such entertainment point is the theater Perth’s led by the grand cinemas around the cities. A grand cinema is the prime venue that enriches lives by the use of art of films offered at prime venues along the central business districts or in major residential places1. In most cases, it is a live streaming event that offers the viewers a firsthand experience. The prices are usually categorized according to age where senior members pay more than the young generation while VIP tickets sells more than terraces. The categories have created price discrimination in the market even though the service offered is the same. The industry can be described as a competitive market where entry and exit are free. As more industries make more money, many firms are expected to join the market. But there is less government support as they see no value in the service provision and assumes population growth rate is on the decline. However, it seems all this are based on baseless facts and the reality is that, demand is increasing and so should the supply. Price is majorly determined by the owners and is usually distributed among the population so that they can attract more sales. The market though does experience a lot of competition from other quotas2. This major competitor has been the National Television live streaming that is almost free to the consumers at their door steps. Hence, the less privileged in the society resorts to in house entertainment rather than spend exorbitantly on the grand cinemas. The market is hence denied a lot of revenue reducing their profitability in the industry. Demand and supply are two economic policies that majorly dictate the consumption patterns by the consumers. Data from the governmental surveys shows an increase in population in the near future. The demand would increase as the grand cinemas becomes most satisfactorily. Population census also suggests that the young generations are the majority groups attracted to grand cinemas. The fluctuations are expected to increase the demand adding to the fact that leisure has become a priority to other populace3. Due to the rise in demand and for the market to clear out, supply is expected to increase that will reduce the market equilibrium prices so that the general consumer can gain from the venture. Below is a diagram of that shows the changes in demand and supply grand cinema industry. Price D1 D0 S0 Shift in demand S1 P1 shift in supply P0 Q0 Q1 Quantity The general equilibrium prices of the grand cinemas are represented by price P0 and quantity Q0 that is the market equilibrium conditions. Due to the increase in demand for the entertainments, the demand curve will shift to the right; a movement represented from D0 to D1 from the graph. Since supply is still constant, the general price tickets for the cinemas will rise from P0 to P1. The high prices will make the existing firms to earn a high profit that attracts more entry. As they enter, supply of the cinemas increases to accommodate the excess demand. The result is more ticket sales in the market represented by a movement from Q0 to Q1. Increased quantity lowers demand making the ticket prices to reduce. Pricing strategies used in the movie theater (grand cinemas) The grand cinema can be well be categorized to be operating in the monopolistic market conditions. It is a market where goods are differentiated and are close substitutes hence consumers can easily shift her consumption. Grand cinemas such as cygnet, warwick, burnbury only have to differentiate their products in the market to influence the customers. Another exciting feature that exists in the industry is the free entry and exit that influences prices both in the short run and long run. Therefore, the price strategy employed by these firms can be categorized in two ways. First, is the price determination through general market conditions in a monopolistic competition and internal strategies majorly through price discrimination so that they maximize on their sales. Price determination in a monopolistic condition The firms operate in differentiated products and their demand curve is always sloping. For instance, the grand cinemas are categorized into standard levels and 3D movies. The firms operate as if they are in a monopoly in the short run and maximizes its profits where MR=MC while the marginal revenue is less than the price making the firms to earn abnormal economic profits4. However, since there is free entry, the economic profits will attracts more entrants and firms will charge P=AC and just earn normal profits in the long run. This movement can be represented by the graph below; Short run prices of the grand cinema prices Price MC AC P Abnormal profits AR=D MR Q Quantity The demand curve for the cinemas is represented by Average revenue curve which is equivalent to demand curve. In the short run, the firm operates like a monopoly producing output (supply) where P=MR=MC as shown in the diagram above. This price is above the Average Variable Cost making the organizations to have abnormal profits. Long run prices of the grand cinemas Price MC P Deadweight loss AC Demand in LR MR in LR Quantity Due to the supernormal profits in the short run, firms will be attracted in the market by the high prices and rise in demand, leading to the rise in theaters. Organizations would then resort to compete in quality provision of the cinemas rather than prices (behave like competitive market). They will charge prices that are equivalent to average costs (P=AC) which is the market required conditions (supply). If any firm charges above this price, they will make losses and will exit the industry5. The firms will then just earn normal profits resulting into the deadweight loss to the producers. Price discrimination strategy used by the grand cinemas The grand cinemas have also employed third price discrimination to generate different prices for diverse citizens. The strategy involves grouping various potential customers into groups and charging them different prices. For instance, majority of the cinemas have pegged different prices for adults, seniors and the kids. The adults are made to pay more than the rest since the producers believes they have more income than the children. The industry has also created partitioned to reap the economic profits. They charge more on those who watch the 3D movies than standard movies. These measures help the organization to have multimarket and constant revenue for the business. Below is a diagram of price strategy between those who use the standard movies and 3D movies. Price PD PS Demand MC MR MR Quantity 3D movie standard movie The theaters charges high prices for those who are watching movies in 3D than those viewing the standard movies. These prices are represented by PD and PS. respectively. The producers however have the same cost function regardless which kind of movie an individual watches. They thus maximizes the profits where MR=MC=P for both set of groups. The second price discrimination used by the cinema organization is the second degree price discrimination. The firm charges low prices to those customers who are regular movie attendants. The above behavior can be illustrated in the diagram below Price P1 M P2 P Qm Qp Quantity The firm charges normal prices represented by P1 and offers a movie views at at point M represented by quantity Qm. The company reduces prices for those customers who are regular viewers and charges price P2 offering an increased amount represented by Qp and increasing their demand as shown by a movement from point M to N. This creates two prices for the companies as incomers are charged more. The company can easily differentiate these groups of person that enables them to easily price discriminate. For instance, distinguishing between the senior members in the society and adults from children is not that a difficult task. They can easily use identification cards to determine various age brackets and set their prices as they deem fit. The firms can also discriminate regarding quality of the movie under view6. Since it is a common knowledge that the rich would always spend on high quality products, their demand is inelastic regardless of the prices. Hence, by establishing a 3D movie, they will charge high prices knowing very well the demand is less affected. While for the standard movie, it is charged average prices to attract the low income earners in the society. Price discrimination is actually beneficial to consumers. It is because all the customers are catered for. For instance, the adults are people who are majorly employed or do have a stable income in the economy. As a result, they do have more to spend than neither the seniors nor the children. Therefore, they are charged more to compensate for the less prices paid by the senior members and children7. It is a form of subsidizing for the provision for the movies so that everyone can enjoy them. By partitioning the standard movies and 3D movies, the cinemas can also attract both members of the different class in the society. The 3D movie viewers are made to pay more that compensate for the poor in paying less in standard movies. The movies are the same only satisfaction differs between the two groups. Conclusion The theater industry is a competitive market since there is constant rise in demand that makes the supply end to increase. However, in the short run they are like monopolistic and earn a lot of profits but due to free entry, therefore, the entrants will always be expected. The increased supply is beneficial to consumers as they will enjoy low prices and quality products. In addition, the grand cinema is a good way to provide equitable distribution of resources to the population. The poor and the rich are made to access the same service but at different prices. Therefore, goods reach a majority of the citizens even consumer welfare of the rich is greatly reduced. Part B a) Q = 500-P, thus, P= 500-Q TR = (500-Q) Q = 500Q-Q2 MR = 500-2Q TC = 30000+100Q MC =100 the firm operates as a monopoly thus will charge prices where MR=MC =500-2Q=100 Q=200 But P= 500-Q P= 500-200 = 300 TR = 500(200)-(200)200 =$60,000 TC= 30000+200(100) = $50,000 Profit= 60,000-50,000 =$10,000 b) When the fixed cost increases to $41,000, the general market price rises and customers are willing to pay more that makes VARA to earn above normal profits. These prices attract firms as there is free entry and exit. Demand increases and shift the curve while the average cost curves are the long run monopolistic curves. The price equals to MR=MC=P making VARA to just earn normal profits. Price MC AC P Long run equilibrium market MR AR=D Q Quantity c) Price P MC MR Demand 260-0.4Q Demand 240-0.6Q Demand curve for business class student demand curve The demand curve for business class is steeper than the students showing that they are charged more. The two groups can be easily differentiated by the identity cards making the company to easily price discriminate between them as they board the flights. d) business demand curves = 260-0.4P while for students 240-0.6P while the costs remains the same; Inverse demands P= (2600-10Q)/4 for the business class TR = PQ = (2600Q-10Q2)/4 MR = (2600-20Q)/4 MC =100 P = MR=MC = (2600-20Q)/4= 100 = 2600-20Q=400 = 20Q= 2200 = Q= 110 P = 2600-4(110)/4 = 540 Profit = TR-TC TR = (2600) (110)/4-10(110)(1100/4 =71500-30250 = 41250 TC =30,000+100(110) = 41000 PROFIT= 41250-41000 = 250 For the business class, VARA charges $540 while selling only 110 tickets. this makes the company to earn $250 in profit. for the students; Demand P = (2400-10Q)/6 TR =PQ = (2400Q-10Q2)6 MR = (2400-20Q)/6 MC = 100 P = MR=MC = (2400-20Q)/6= 100 =2400-20Q=600 = 20Q= 1800 = Q=90 P = (2400-10(90)/6 = $250 Profit = TR-TC TR = (2400(90)/6-10(90)90/6 =36000-1350 = 22500 TC = 30000-100(90) = 21000 Profit = 22500-21000 = $1500 VARA would charge price equivalent to $250 for the students while selling 90 tickets. The profit due to students sells is equivalent to $1,500. The airline should stay in the market since they still earn relatively above normal profits and can easily meet her operation costs. e) Total consumer surplus before price discrimination The maximum price that consumers can pay assuming quantity is zero = 500 ½(200×200) = 20000 Consumer surplus for the business class Maximum price= 650 when quantity is zero =½(110×110) = $6050 Consumer surplus for the students Maximum price = 400 ½(150×90) = $6750 Total consumer surplus due to price discrimination = 6050+6750 = $12800 The consumer welfare is maximized before the price discrimination. it is because, before price discrimination, price was equivalent for all consumers making the welfare increase . Price 650 consumer surplus due to business 500 400 consumer surplus of the students 250 Quantity References Klein, Judy. "demand (or supply) curves." Intermediate Microeconomics with Microsoft Excel (2009): 427. 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