Managerial Economics: Analysis of a Cafe in Perfect Competition Market

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

Running Head: Managerial Economics 2
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

Running Head: Managerial Economics 3
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

Running Head: Managerial Economics 4
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: