Managerial Economics: Analysis of a Cafe in Perfect Competition Market

This article analyzes the perfect competition market for a cafe through economic analysis. It covers topics such as price elasticity, total revenue, fixed cost, variable cost, marginal cost, economies of scale, and total profit.

Running Head: Managerial Economics 1
Managerial Economics
Student Name
3/6/2020

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Contents
Introduction.................................................................................................................................................3
Overview of the company...........................................................................................................................3
Number of meals sold and price charged....................................................................................................3
Price Elasticity of demand...........................................................................................................................4
Total Revenue..............................................................................................................................................5
Possible challenges......................................................................................................................................5
Fixed Cost, Variable cost and Marginal Cost................................................................................................5
Cost of Inputs..............................................................................................................................................7
Total Cost and Unit Cost..............................................................................................................................8
Diminishing Marginal Product.....................................................................................................................9
Economies and Diseconomies of scale......................................................................................................10
Total Profit and Profit per Unit..................................................................................................................11
References.................................................................................................................................................13

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Introduction
The economic analysis essentially deals with the maximization of leisure time, income,
health, happiness, all of which are usually reduced to a definition of utility subject to constraints.
Such constraints or scarcity is defined as a tradeoff. Perfect competition is a kind of demand
where many buyers and sellers sell the same or same thing. Free entry is also available and
companies exist. The market is well open to both the buyers and sellers (Bauer, & Zanjani,
2016).
In the following part the perfect competition market for one of the café will be analyzed
through which it can be analyzed the existence and growth of the company in the perfect
competition market to the certain extent (Borenstein, 2016).
Overview of the company
Café bar is one of the small café where the variety of coffee is offered to the consumers.
There are certain assumptions that is required to be considered before making the profit chart.
Therefore, in perfect competition there are:
 A large number of sellers as well as buyers
 Maximization of profit
 Consumers as well as firms have perfect knowledge of the market
 The product are similar to each other
 There is free entry or exit of the firms in such type of market (Chen, & Koebel, 2017).
Number of meals sold and price charged
In Café Bar only coffee is being served to the consumers. Therefore, it is assumed that
the Café Bar delivers only one variety of coffee in a month. Therefore, the price of the coffee
will be charged similar to the prices of other cafes. The café does not charge high price from the

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consumers to survive in the perfect competition market. Therefore, the café charge $ 10 for
coffee (Dinopoulos, & Unel, 2017).
Price Elasticity of demand
Price elasticity economists use to explain how supply or demand changes in the light of
price changes to understand the real economy's workings. For example, some goods are highly
elastic and cause significant shifts in their price movements in their request or supply. In order to
analyze the price elasticity of demand of Café Bar, it has been identified that the café comes in
perfect competition market in which all the products are the perfect substitute of each other.
Therefore, the demand of coffee in the market is highly elastic which represent that if Café Bar
tries to increase its price then the demands of its product can decreases. It is shown in the below
table:
Ol
d New % Change
Price of Coffee 25 30 20%
Quantity Demanded of coffee 98 70 -29%
Price Elasticity of Demand = % change in quantity demanded/ % change in price
Price Elasticity of Demand = 1.428571429 Ed > 1
Total Revenue
In perfect competition the firms are generally seeks to produce the quantity that helps in
maximizing the profit. Therefore, in Café Bar, the total revenue is depending on the total number
of quantity demanded and price charged. It is explained in the below table:

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Old New
Price of Coffee 25 30
Quantity Demanded of coffee 98 70
Total Revenue 2450 2100
The table represents that if the price of coffee increases the quantity decreases that would
affect the total revenue of Café Bar to the certain extent (Hill, 2016).
Possible challenges
The number of challenges can be increase for Café Bar due to the influence of social
media. For instance, the online marketing plays a vital role for Café Bar to sustain in the perfect
competitive market. However, the online market is huge. Therefore, the café can face the
challenge in managing the online marketing for its business (Labandeira, Labeaga, & López-
Otero, 2017)
Fixed Cost, Variable cost and Marginal Cost
There are many economic players in a perfectly competitive market but none have the power
to determine the retail price for a single product. Prices per unit are completely controlled by
supply-and-demand market forces, and at this predefined market price, each business in the
industry will sell its product (Pagoulatos, & Sorensen, 2017).
 Fixed expenditures (FCs) are not related to the sum of earned income (Q). For Instance,
rent and regular salaries are part of fixed costs.

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 Expenses that rise with the quantity of the production generated (Q) are variable costs
(VC). Examples of variable costs include salaries per hour, component rate and raw
materials used in production.
 Marginal Cost is refer to the added cost that is gained by producing one additional unit of
output (Si, Zhang, & Hu, 2017).
The Fixed Cost, Variable Cost and Marginal Cost of Café Bar are represented in the below table:
Quantity Fixed Cost Variable Cost Marginal Cost
0 30 0
4 30 15 3.75
6 30 20 2.5
8 30 23 1.5
10 30 27 2
12 30 32 2.5
14 30 38 3
16 30 40 1
18 30 46 3
20 30 50 2

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1 2 3 4 5 6 7 8 9 10
0
10
20
30
40
50
60
70
80
90
FC, VC, MC
Marginal Cost
Variable Cost
Fixed Cost
Axis Title
The table of Café Bar represents that if café will produce 16 units, the marginal cost of
the coffee will be $1 that can help the café to reduce the overall cost to the certain extent.
Cost of Inputs
In order to analyze the cost of input for Café Bar, it has been found that the demand and
supply of inputs is constant due to the reason of short spam such as a month. Therefore, the cost
of inputs does not have any influence over the revenue of the Café Bar (Dinopoulos, & Unel,
2017).
Total Cost and Unit Cost
Quan
tity Total Cost Fixed Cost Variable Cost
Marginal
Cost Average Cost
0
$
30.00
$
30.00
$
- - -
4 $ $ $ $ $

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45.00 30.00 15.00 3.75 11.25
6
$
50.00
$
30.00
$
20.00
$
2.50
$
8.33
8
$
53.00
$
30.00
$
23.00
$
1.50
$
6.63
10
$
57.00
$
30.00
$
27.00
$
2.00
$
5.70
12
$
62.00
$
30.00
$
32.00
$
2.50
$
5.17
14
$
68.00
$
30.00
$
38.00
$
3.00
$
4.86
16
$
70.00
$
30.00
$
40.00
$
1.00
$
4.38
18
$
76.00
$
30.00
$
46.00
$
3.00
$
4.22
20
$
80.00
$
30.00
$
50.00
$
2.00
$
4.00
In order to analyze the total cost and average cost of Café Bar, it has been found that the
café will get $4 as an average cost on maximum production of unit which is 20 units. It

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represents that the café can control over its average cost through delivering large quantity in the
perfect competition (Pagoulatos, & Sorensen, 2017).
Diminishing Marginal Product
A change in one variable while other inputs are retained can lead to an increase in
performance. However, this change is not clear. In the initial stages the increase in output may be
important, but additional input units may result in slower output development. After some time,
the production will stop or even decrease (Hill, 2016).
The diminishing marginal value of Café Bar is explained in the below table:
Quantity Total Product Marginal Product
0 - -
4 60 6
6 72 9
8 90 6
10 102 9
12 120 20
14 160 15
16 190 15

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18 220 10
20 240 12
The table represents that after total production of $190, the marginal return of the product
will decreases which can affect the total revenue of the café to the certain extent.
Economies and Diseconomies of scale
 Economics of sales are attained if a Café Bar’s sales increase. As a consequence, the
organization's savings are growing, which allow the company to purchase bulk raw
materials. This helps the café achieve profits. It can be occur through raising funds at low
rate of interest and focus over the marketing strategies. It is also required to invest
amount on updated coffee machine to deliver quality product (Dinopoulos, & Unel,
2017).
 However, if Café Bar invest huge amount in its business that can enhance the overall cost
of the café which can create diseconomies of scale to the certain extent. It can be created
due to mismanagement of the café, lack of motivation as well as poor communication
(Hill, 2016).
Total Profit and Profit per Unit
Quantity Total Cost
0 30
4 45
6 50

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8 53
10 57
12 62
14 68
16 70
18 76
20 80
108 591
Total Cost = 591
Total Revenue =2450
Profit = TC - TR

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Total Profit = 1859
Profit Per Unit = 17.213
It represent that the café has earned sufficient profit per product that can help them to
grow in the perfect competitive market (Si, Zhang, & Hu, 2017).

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References
Bauer, D., & Zanjani, G. (2016). The marginal cost of risk, risk measures, and capital
allocation. Management Science, 62(5), 1431-1457.
Borenstein, S. (2016). The economics of fixed cost recovery by utilities. The Electricity
Journal, 29(7), 5-12.
Chen, X., & Koebel, B. M. (2017). Fixed cost, variable cost, markups and returns to
scale. Annals of Economics and Statistics/Annales d'Économie et de Statistique, (127),
61-94.
Dinopoulos, E., & Unel, B. (2017). Managerial capital, occupational choice and inequality in a
global economy. Canadian Journal of Economics/Revue canadienne
d'économique, 50(2), 365-397.
Hill, S. (2016). Managerial economics: the analysis of business decisions. Macmillan
International Higher Education.
Labandeira, X., Labeaga, J. M., & López-Otero, X. (2017). A meta-analysis on the price
elasticity of energy demand. Energy Policy, 102, 549-568.
Pagoulatos, E., & Sorensen, R. (2017). What Determines the Elasticity of Industry
Demand?. Journal of Agricultural & Food Industrial Organization, 15(2).
Si, X. S., Zhang, Z. X., & Hu, C. H. (2017). Variable Cost-Based Maintenance and Inventory
Model. In Data-driven Remaining Useful Life Prognosis Techniques (pp. 419-430).
Springer, Berlin, Heidelberg.