Economic Concepts Based in Relation to Laibaz Restaurant - Essay Example

Economic concepts based in relation to Laibaz Restaurant Introduction Bolton is strategically located with a strong sense of heritage and history making it the best destination for entertainment and business activities. Restaurants are among the many business activities in Bolton. In the restaurant industry, industry there tends to be economic ups and downs alongside the rest of the business world. The various business trends ranging from client entertainment to the corporate travel expenses, the financial markets and the social trends influence the social trends within the restaurant industry. The industry is prone to various factors that affect the supply and demand, market structure and profitability (Akerlof 2002, p. 431). This paper will discuss some economic aspects in relation to a Restaurant situated in Bolton; the restaurant to be discussed is Laibaz. The market demand and supply Demand and supply can be regarded as fundamental in economics and act as the backbone for the market economy in restaurant. Demand describes the quantity desired by customers and reflects the willingness by the people to purchase services or products. The demand relationship expresses correlation between quantity demanded and the prices. On the other hand, supply depicts the offerings by the prevailing market. The quantity supplied is the goods producers are to supply based on specified price. Correlation between prices and supply depicts the supply relationship. Therefore, price reflects supply and demand. Relationship between supply and demand determines the resource allocation. The market economy theory demands efficient allocation of resources. According to the law of demand, few people purchase goods when the prices are high, and the opportunity to purchase the goods decreases. The law of supply outlines the quantity of goods purchased at certain prices (Ayers & Robert 2004, p.56). The operations of Liabaz depend on market forces of demand and supply. The changing economy is contributing to the increase in demand. Demand in the restaurant is described in terms of increase in the perceived customer value for the services offered. Demand in restaurants varies from fast food outlets, demand for the ethnic cuisines, accommodation, travelling and the entertainment services. The demand and supply in the restaurant is influenced by the price levels for services and goods. The prices for food and other services should be reasonably accommodating to the customer since the restaurant is small. This will increase the demand (Ayers & Robert 2004, p.58). However, the customers’ income determines the affordability of the services offered in the restaurant. The prices for complementary services like tours and travel will influence the demand for other services like food and accommodation. On the other hand, supply to the services demanded influences the customer satisfaction. The supply for goods and services should be proportionally equivalent to the demand from customers. However, influence of demand and supply depends on the number of the customers, the seasons and effectiveness to attract more customers. The management should assert the demand by offering better services to customers. Assertion of supply depends on the affordability and accessibility of the restaurant services to customers (Akerlof 2002, p. 432). Determination of equilibrium price and quantity Equilibrium refers to the balance between the market demand and supply resulting to stable prices. High supply for services reduces the prices and increases the demand. The equilibrium price results when supply of services in a restaurant matches the demand. It happens when the quantity demanded equals to the quantity supplied. On the other hand, equilibrium quantity refers to the output resulting when quantity supplied is equal to the quantity demanded. When prices for services in the restaurant are above the equilibrium point, the supply for the services will be surplus. The market prices in which the services are supplied equal to the services demanded and depict equilibrium; services sold at the equilibrium price are the equilibrium quantity (Ayers & Robert 2004, p.60). Equilibrium Analysis If Laibaz offers service X for equilibrium, demand for X should be equal to the supply of service X. Equilibrium price of service X is the quantity at which quantity demanded of service X exactly equals to the supply of service X. The determination of equilibrium price and quantity and equilibrium analysis can be achieved through the use of algebraic equations for both demand and supply. It can also be achieved through the combination of supply and demand curves within a single graph and determines the corresponding equilibrium quantity and price graphically (Cagliarini, Tim & Allen 2011, p.102). Algebraic approach It solves the equations for supply and demand simultaneously. Firstly, either the supply or the demand equation is rewritten as a function of the price and the equation is substituted in the other equation that was not rewritten and this solves for the equilibrium price. The equilibrium price is substituted in the rewritten equation for service X (Cagliarini, Tim & Allen 2011, p.104). Graphical approach The supply and demand curves are drawn graphically and the intersection of the two curves determined. Since the graph is drawn from price of service X against the quantity of service X, the intersection of the two curves gives the equilibrium position with the X coordinates representing the equilibrium quantity while the Y coordinate represents the equilibrium price (Cagliarini, Tim & Allen 2011, p.106). Elasticity Elasticity entails the responsiveness of supply and demand with regard to changes in income and prices. It measures the effects of the change in one economic variable to others and describes the ratio of percentage change in variables. Elasticity depicts the degree in which the supply or the demand curve reacts to changes in prices. In a restaurant, elasticity will vary depending on the services offered because some services tend to be more common to consumers than others. The services of greater necessity like food are insensitive to changes in price due to continued consumption despite the increase in prices (Fagnart, Pierrard & Henri 2007, p. 1564). Conversely, increased price for services is of less necessity in deterring consumers because of the high opportunity cost for purchasing the product. Quality services are highly elastic, especially when changes in prices cause sharp changes in quantity supplied or demanded. These services are uncommon and are availed only on demand. An inelastic service in a restaurant setting is described when change in the prices for the services leads to a modest change in demand and supply. Such services are basic in a restaurant setting (Fagnart, Pierrard & Henri 2007, p. 1567). Elasticity of demand and supply Elasticity of demand measures the degree of responsiveness of goods and services to changes in factors affecting the corresponding demand like price and income. The elasticity of supply, on the other hand, measures the extent of response of the goods and services to the factors substituting the production level. When the prevailing prices for goods and services in the restaurant are high, demand for the services is likely to increase in elasticity than for the low prices. Further increase in the prices will decrease the demand. To increase demand in Laibaz, the prices for the services should be low. The increase in supply results to decreased prices for the commodities (Fagnart, Pierrard & Henri 2007, p. 1569). The price elasticity depicts the changes in demand for the restaurant services due to operational expenses. Increase in prices for services reduces the number of customers visiting the restaurant. The income elasticity is depicted by the increased demand for restaurant services due to changes in the income levels. The marketing elasticity depicts the changes due to improved marketing techniques like advertisements, and the cross price elasticity encompasses changes in demand for the services resulting from changes in complementary service prices (Fagnart, Pierrard & Henri 2007, p. 1572). Business Organization and Behavior; Cost, Profits and Revenue Business organization can be regarded as the structure of a business. The business decisions are influenced by different considerations based on management’s goals and objectives. On the other hand, business behavior is defined in terms of scale of investment, location, and the financing patterns (Olney 2009, p.63). Many businesses assume the market power, information and motivation in setting the prices that maximize profits. As a result of the increased competition in the restaurant industry in Bolton, the efficiency in cost, revenue and profits should be evaluated to achieve improvement and comparability in business. Investigation of the potential relationship between the operating costs, the profitability and the revenue should be investigated. The neoclassical microeconomic theory on the organization of the business encompasses the maximization of profits. The returns from the business should be examined for consistency with profit maximization hypothesis. Failure of maximizing profits by any business depicts a loss. However, maximization of profits does not imply that the restaurant operates at the minimum cost, but demand maximization of the revenues (Olney 2009, p.64). The efficiency in profits encompasses the costs and revenues in measuring the efficiency of the business. Computation of the profits constitutes information from the management rather than cost analysis data only. The efficiency in profits is positively correlated to the cost, and the revenue and cost inefficiencies are negatively correlated. Therefore, if the restaurant has high costs, the apparent inefficiency will be compensated by achieving high revenues more than the competitors through the use of different service provision vectors or achieving a greater market power in specialization pricing. Measurement of the costs inefficiency is thus contaminated through the output composition for the output vector for high quality services that may be more costly and less inefficient. The estimation of the frontier profit function allows for the higher revenues received for the differentiation of high outputs in compensating for the incurred high costs (Olney 2009, p.65). Market Structure Market refers to the place where business transactions are carried out. Market structure refers to organizational and other characteristics of the market affecting pricing and nature of competition. It refers to the competitive environment through which a firm operates. Components of a market structure include buyers, sellers, buyer and seller entry barriers, the firm size, product differentiation, completion and the market share. The market structure can be classified based on various factors. The classification is based on the gradual increase in competition from the minimum to the maximum in a monopoly, the oligopoly, the monopolistic competition and the perfect competition (Zhu, Vishal & Mark 2009, p. 453). Monopoly This is the market structure where companies are owned by the state, which restricts entry for any other player. The monopolistic markets have only one firm in operation with large barriers to entry. The barriers prevent other firms from entry into the market. The monopolistic firms have no close substitutes hence no competition. A single seller controls the complete supply of the commodity. The firm coincides with the industry, and the competition is completely negated (Zhu, Vishal & Mark 2009, p. 455). Oligopoly In this market structure, the number of buyers tends to outdo that of sellers. The competition is very high. The number of sellers in oligopoly is small, and the structure entails strategic thinking; few firms dominate under this structure. Many small firms will operate in this market, and oligopolies may be determined using the concentration ratios that measure proportion of the total market shares controlled by other firms. The characteristics of oligopoly structure include interdependence in making the decision (Fagnart, Pierrard & Henri 2007, p. 1575). The interdependence results from the little competition and changes in products; it influences the competitors directly. Advertising is common in oligopolistic markets to gain great market shares and to maximize sales. The group behavior necessitates analysis where the firms in the group are interdependent. The demand curve is indeterminate where mutual independence leads to uncertainty in the firms. Prediction of the consequences of the price-output policy is impossible in the firms, but there exists some elements of monopoly with product differentiation. The price rigidity is common with oligopolistic markets and the rival firms cause many changes in price (Zhu, Vishal & Mark 2009, p. 459). Figure 1; Market Structures Monopolistic competition This market structure encompasses many sellers, many buyers, similar products but the branding tends to be different, and the competition is fierce. Some characteristics of the monopolistic markets include every firm making independent decisions on output and price based on the product and the production cost. Firms in monopolistic competition markets are price makers with the demand curves sloping downwards. Firms under the monopolistic competition markets engage in advertising due to the fierce competition. The monopolistic, competitive firms assume profit maximization due to small firms where the entrepreneurs manage the business. This market structure has many independent firms that compete in the market (Zouache 2008, p. 105). Perfect competition A near perfect competition exists in real life. The staple food from the market is a representation of perfect competition but moves towards oligopoly after branding. A perfectly competitive market comprises of several firms with relatively homogenous products. The entry and exit to the market is free of charge. A perfect competition structure assumes small firms that produce insignificant percentage of the total market. The assumption of many individuals ensures no control of the market price. The perfect entry and exit freedom ensures no sunk costs ensuring that the firms make profits at long run. The assumption of homogenous products ensures perfect substitutes leading to passive price taking by the firms. The perfect knowledge ensures that consumers access information regarding the products and prices at zero cost (Zouache 2008, p. 117). References List Akerlof, A. (2002). Behavioral Macroeconomics and Macroeconomic Behavior, American Economic Review 92(3). pp. 431-433. Ayers, R. M. & Robert Collinge, A. (2004). Macroeconomics: Explore & Apply, Upper Saddle River, NJ, Prentice Hall. pp. 56-60. Cagliarini, A., Tim, R., & Allen, T. (2011). Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness, Journal of Macroeconomics 33(1). pp.102-120. Fagnart, J., Pierrard, O., & Henri, R. (2007). Microeconomic Uncertainty and Macroeconomic Indeterminacy, European Economic Review. pp. 1564-1588. Olney, M. (2009). Microeconomics as a Second Language, Hoboken, NJ, Wiley. pp. 63-70. Zhu, T., Vishal, S., & Mark, D. (2009). Market Structure and Competition in the Retail Discount Industry, Journal of Marketing Research 43(4). pp. 453-466. Zouache, A. (2008). On the Microeconomic Foundations of Macroeconomics in the Hayek-Keynes Controversy, The European Journal of the History of Economic Thought 15(1). pp. 105-127. 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