BUSN112: Managing Markets - Barber Shop Economic Analysis

This report provides a legal and economic analysis of establishing a barber shop in Sydney, New South Wales, Australia. It examines relevant regulations, including the Consumer and Competition Act 2010, the Hairdressers Act 2003, and hygiene standards from NSW Health. The analysis delves into market structures, specifically monopolistic competition, and explores pricing strategies. Furthermore, it analyzes supply and demand dynamics and the elasticity of demand within this market, supported by relevant figures and diagrams. The report concludes by highlighting the importance of adhering to regulations and understanding economic principles for the successful operation of a barber shop. The report references multiple sources to support its claims and findings.

Running head: MANAGING MARKETS
Managing Markets
Name of the Student
Name of the University
Author Note

1MANAGING MARKETS
Abstract
The Smith Hairdressers is a barbershop that will shortly be opened in Sydney, New South Wales,
Australia. A legal and economic analysis of setting up a barber shop is conducted by identifying
the important regulations and economic aspects and analysing them in the following order:
 Consumer and Competition Act 2010,
 Hairdressers Act 2003 No 62, NSW legislation and
 Hairdressing and barbers – hygiene standards, NSW Government Health.
It further proceeds to conduct an analysis of the following economic concepts:
 Market and Pricing,
 Supply and Demand and
 Elasticity Analysis of setting up the business in the existing environment.

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Relevant Regulations for the barber shop
In case of a barber shop, there are various legislations that need to be followed properly
to ensure that the business complies with all necessary regulations in an appropriate manner.
These are relevant to ensure that the business does not run into any trouble with the authorities
while also making sure that it maintains a good reputation in the market (Kotey 2014). The first
most important that has been identified is the Consumer and Competition Act 2010. It has been
identified as important because of the various important aspects that it covers like product safety
and labelling, not being involved in unfair market practices, price monitoring and industry codes
(Legislation.gov.au. 2019). As a new business starting out in the country, it is very important to
build reputation in the initial days. Hence, the business needs to make sure that it does not
involve in any unfair trade practices like unfair pricing, unethical business processes and
anything that may damage the goodwill. It is also undertaken to make sure that people believe in
the quality and safety of the product. The other important legislation that has been identified is
the Hairdressers Act 2003 No 62. This regulation is important as it suggests what a person must
do to be recognized as a qualified hairdresser (Legislation.nsw.gov.au 2018). Without satisfying
the criteria, one cannot act as a hairdresser for fee, gain or reward in New South Wales as it
involves a maximum penalty of 20 penalty units. This act also covers the persons that cannot be
considered to be covered under the definition of a hairdresser. Hence, knowing this act is very
important as entering into practice without appropriate qualifications like the “Certificate III in
Hairdressing” will lead to problems with the authorities. It also helps with understanding whether
an apprentice can be employed by the business or not and under what particular circumstances.
The final regulation that has been identified as to be important is the hygiene standards that need
to be followed by barbers and hairdressers in accordance with the guidelines of the NSW

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government. It is important as information about aspects like the requirements that need to be
met by the premises, type of floor to be used in the shop, materials to be used in all the surfaces
of the shop and the fact that the shop should have adequate ventilation are all mentioned in this
regulation (Health.nsw.gov.au. 2013). Other basic requirements like clean water, waste disposal
bin and the quality of items that can be used in the shop have all been specifically mentioned
under these regulations. Additional information is provided about the hygiene procedures that are
to be followed by all barbers before and after attending a client and other aspects like conducting
a procedure, touching a client’s surroundings, removal of gloves and after getting exposed to a
body substance are all mentioned in these regulations. As a business that involves direct physical
contact with the customers, it is important for the business to ensure that extremely high
standards of hygiene are maintained by it and hence it needs to follow these guidelines.
Market Structures and Pricing
The market structure of hairdressing salon or barber shop in local vicinity falls under
monopolistic competition even if the structure of the market looks quite similar to perfectly
competitive market in various ways. There exists low barriers to entry which encourages
numerous firms to enter the market and thereby intensifying the competition level. In case of
monopolistic competition the customers are convinced by the sellers that the products they are
offering are entirely different from those products which the other sellers are offering them
(Images.pcmac.org, 2019). In this way they compete with one another, instead of sacrificing in
terms of lower price (Balistreri and Rutherford, 2013). Similarly, firms like hairdressing saloons
or barber shops compete with each other by involving in non-price competition. They keep on
attracting more and more consumers on the basis of favourable location of the shop or as they
have better appealing surroundings or due to more convenient hours. Some hair salons charge

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MR
SUPPLY=MC
DEMAND= AR
E
E
M
Q
M
P
M
P
Q QUANTITY
PRICE
higher price for same haircut than others. The costlier shops will claim that they know the latest
hair style and their work is superior to the less expensive shop, thereby making their haircuts
different from the cheaper salons. Thus, their ability to convince the customers about their
differentiated product enable then to influence the price they charge. Hence, the price offered by
different hairdressing salons is different.
Supply and Demand
The discussion about the market structure and pricing shows that a hairdressing salon
firm follows monopolistic competition. In monopolistic competition, equilibrium occurs at the
point where Marginal Revenue (MR) equalizes with Marginal Cost (MC) but in general
equilibrium occurs where Demand of the product is equal to Supply of the product (Nikaido,
2015).
Figure 1: Price and Quantity

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Source: Created by the Author
The above figure shows that in case of monopolistic competition, the equilibrium takes
place at point EM where MR intersects with MC curve. At this point the equilibrium price is PM
and equilibrium price QM. In general, equilibrium is considered at the point where Supply curve
meets Demand Curve. In the above graph, the supply and demand curve cuts each other at the
point E where equilibrium price is P and equilibrium quantity is Q. From the figure it is clear that
PM is greater than P (PM > P) but QM is less than Q (QM <Q). Thus, in case of monopolistic
competition, the price offered is more with respect to quantity in comparison to competitive
market. Hence, hairdressing salon or barber shop being monopolistic competitive firm charges
high price for comparatively lower quantity.
Elasticity
Elasticity of demand measures the responsiveness of the quantity demanded due to the
change in its price. The demand curve of Monopolistic Competitor not completely flat but rather
it is downward sloping ((Nocco, Ottaviano, and Salto, 2014). This implies that monopolistic
competitive firm either can increase the price of its product without losing all its consumers or
gain more customers by price reduction. The demand curve of any monopolistic competitive firm
is more elastic compared to perfect monopolistic firms because of the availability of substitute
product. This shown by the figure below.

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Q2Q1
P2
P1
PRICE
QUANTITY
Figure 2: Demand Curve of Monopolistic Competition
Source: Created by Author
As a barber shop is categorized as a monopolistic competitor, it can be said that if the
shop raises the price for hairdressing then some of its customers may not opt for its service at all
while others will select some other salon, but the shop will still retain some trustworthy
customers. Hence, it can be said that, being a monopolistic competitor, the hairdressing salon
might not lose as many customers like a perfectly competitive firm but it will obviously lose
more customers compared to a pure monopolistic firm when it rises the price of the product.
Thus elasticity of demand for the monopolistic competitor (barber shop or hairdressing salon) is
more than monopoly firm but less than perfect competition which is perfectly elastic.

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References
Balistreri, E.J. and Rutherford, T.F., 2013. Computing general equilibrium theories of
monopolistic competition and heterogeneous firms. In Handbook of computable general
equilibrium modeling (Vol. 1, pp. 1513-1570). Elsevier.
Health.nsw.gov.au. 2013. Hairdressing and barbers - hygiene standards - Fact sheets. [online]
Available at: https://www.health.nsw.gov.au/environment/factsheets/Pages/hairdressing-
hygiene.aspx [Accessed 31 Aug. 2019].
Images.pcmac.org 2019. [online] Images.pcmac.org. Available at:
http://images.pcmac.org/SiSFiles/Schools/TN/BedfordCounty/CommunityHigh/Uploads/
DocumentsCategories/Documents/Four_Models_of_Market_Structure.pdf [Accessed 30 Aug.
2019].
Kotey, B., 2014. Small business innovation in the hostile environment of Australia's drought
stricken rural communities. Australasian Journal of Regional Studies, The, 20(2), p.325.
Legislation.gov.au. 2019. Competition and Consumer Act 2010. [online] Available at:
https://www.legislation.gov.au/Details/C2011C00003 [Accessed 31 Aug. 2019].
Legislation.nsw.gov.au. 2018. NSW Legislation. [online] Available at:
https://www.legislation.nsw.gov.au/#/view/act/2003/62 [Accessed 31 Aug. 2019].
Nikaido, H., 2015. Monopolistic Competition and Effective Demand.(PSME-6). Princeton
University Press.
Nocco, A., Ottaviano, G.I. and Salto, M., 2014. Monopolistic competition and optimum product
selection. American Economic Review, 104(5), pp.304-09.

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