Economics for Managers: Restaurant Demand, Supply, and Profit Analysis

This report delves into the economic principles relevant to managing a restaurant, focusing on pricing strategies, market competition, and profit maximization. It analyzes the impact of price changes on demand and supply, considering both popular and less popular establishments within a competitive market. The report explores the effects of restricting supply, examining the concept of 'value from exclusivity' and its implications for profit. Furthermore, it investigates the application of price discrimination strategies to increase profitability. The analysis covers various aspects, including the law of demand, market dynamics, and the impact of consumer behavior on pricing decisions, providing a comprehensive overview of economic considerations for restaurant management.

ECONOMICS FOR MANGERS

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION (1)................................................................................................................................1
Impact of price rise on overall demand and supply of a popular restaurant and decrease in
prices of a not so popular food chain. ........................................................................................1
QUESTION (2)................................................................................................................................3
a) Impact on overall profit if a seller in a perfect competitive market restricts the quantity it
sold in the short run.....................................................................................................................3
b) The popular and less popular restaurants in the perfect competition market.........................4
QUESTION (3)................................................................................................................................6
Potential gains and losses to profit if the seller chooses to restrict the quantity supplied under
the ‘value from exclusivity’........................................................................................................6
QUESTION (4)................................................................................................................................7
Business can profit by restricting the quantity it sells, while practising price discrimination
with a subset of consumers.........................................................................................................7
QUESTION (5)................................................................................................................................9
Law of demand............................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
The report is about a popular seafood restaurant in California which emphasizes on the
fact the people who visits first will be given priority and no reservation will be taken. The
restaurant faces tough competition from others serving the same food and tastes to consumers. It
requires managers intervention so as to design policies and procedures which will enable
restaurants to make profits by taking corrective measures. Price and demand of a commodity are
interrelated. And thus when prices increases demands decreases and vice versa. The present
report will show the reasons behind popular restaurants, theatre owners as well as sporting events
needs to raise prices of their commodity if demand increases.
QUESTION (1)
Impact of price rise on overall demand and supply of a popular restaurant and decrease in prices
of a not so popular food chain.
It has been assumed that rise in prices will decrease the demand of products in a
competitive market (Ozga, 2017). The author believes that loyal customers of the popular
restaurant will discontinue to visit the restaurant if prices are raised. Thus, a slightest increase in
food prices will decrease the overall demand of the restaurant which will impact its profit
margins significantly (Pfeffer and Carney, 2017). The various factors which influences demand
of an individual are -:
 Price of the particular commodity
 Income of the consumer (Olivetti and Petrongolo, 2017)
 Tastes, preferences and habits
 Price of related product
 Satisfaction or utility derived from the product.
Though in general terms the popular restaurant needs to raise its prices as it has a competitive
advantage over the other restaurant in terms of price, tastes and preferences which consumer
posses (Pfeffer and Carney, 2017). The popular restaurant has a comparative edge in increasing
prices which will help in maximizing profits and reducing queue outside the restaurant. Visiting
restaurants is a social activity which people undertakes even at a high price in order to meet and
greet family and friends thereby consuming food and receiving services. Another reason to raise
prices by the popular restaurant is to enhance its expansion by the extra profit earned as well as
to meet the growing demand for competition (Olivetti and Petrongolo, 2017). Another aspect
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which should be focus upon is to meet the growing labour costs which emphasis restaurants to
increase food prices.
Similarly the other restaurant which mostly faces empty seats needs to reduce its prices
so as to attract consumers to enhance its profitability and generate revenue to meet expenses
(Pfeffer and Carney, 2017). The other restaurant needs to adopt a strategic formulation of
business policies in order to run efficiently in the competitive market. In order to enhance
demand for the less popular restaurant the owner needs to present itself as food operator in such
a way which enhances consumers to visit and make a remarkable experience with reasonable to
low prices. Visiting restaurants is a social behaviour which at times gives preferences to prices or
tastes and preferences depending upon the consumers and their spending power (Olivetti and
Petrongolo, 2017).
The graph depicts the demand and supply curve of popular restaurant which depicts that a rise in
prices and quantity shifts the demand curve to the right D2 (Olivetti and Petrongolo, 2017). The
above graph shows the shift of demand curve to the right as price increases from $1.20 to $ 1.60
and supply remains the same implying the demand to shift with the quantity increment (Pfeffer
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Illustration 1: Demand and Supply Curve

and Carney, 2017). Thus, if the popular restaurant rises prices it demand will increase which will
impacts its overall profitability.
The above graph depicts decrease in demand (P')with the increase in price and increase in supply
quantity. Thus the less popular restaurant will face decrease demand curve due to high prices
irrespective of the supply which will increase with the prices. Thus when the price changes from
P to P' the quantity increases from Q to Q' and the equilibrium position also changes from E to
E'. Though the demand curve also changes but in a downward motion showing decrease in
demand curve with a shift in right wards direction.
QUESTION (2)
a) Impact on overall profit if a seller in a perfect competitive market restricts the quantity it sold
in the short run.
A perfect competitive market is a place where competition is at high levels and firms are
selling identical products and rendering identical services to customers. In a perfect competition
firms takes a price decided by the market forces and cannot influence the market price of a
product and consumers are assumed to have perfect information related to a product (Watson and
et.al., 2017.).
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Illustration 2: Supply and demand curve

Supposing a seller who operates in a perfect market full of competition generally has less
influence on the price as they are the price takers and usually sees a flat demand curve which
implies they can sell any amount of quantity at a particular price. In the short run, sellers has less
to no influence in a perfect market where price is constant and is determined by the supply and
demand in market.(Source: Watson and et.al., 2017.)
The above graph depicts the flat demand curve witnessed by a seller in a perfect
competition market where he acts as a price taker. Each firm has a flat demand curve as the
impact of buyers is huge. It is assumed that few customers has more value for a particular
product as compared to others and thus an additional unit of it decreases the utility for extra unit
of the product.
b) The popular and less popular restaurants in the perfect competition market.
Both the restaurants are operating in a perfect competition market as other things are
constant and prices have been determined by the market forces which affects demand of the
restaurants. The restaurants have been operating in California and most people visits food chains
serving sea food for social purposes and are ready to pay higher prices for quality of food which
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Illustration 3: Demand curve in a Perfect Competition market (short run)

enhances their tastes. Social interactions are the main reasons behind price hikes (Olivetti and
Petrongolo, 2017). The popular restaurant faces a straight demand curve which implies the prices
are fixed at any amount of quantity it could sell to attract customers and enhance their
experience. The less popular restaurant though having a high price which is set by market forces
can attract customers by selling any quantity with low to high within its perspective (Parker,
2018).
Though in general restaurants can not operate in a perfect competition market as perfect
market assumes that there are many buyers and many sellers which in reality does not exist
(Olivetti and Petrongolo, 2017). There is no entry or exit barriers in the industry is another
assumption of perfect competition. This states, the business concern which are not currently
operating in the market may enter as new sellers as there is no entry barriers just huge capital
investment. (Nilsson, 2017). All those firms which are operating on a low profit margin may
discontinue selling and production processes. Existing firms may also continue to participate at
different production levels as conditions change. The products sold by different sellers is
assumed to be identical and homogeneous implies the buyer has no different choice and has to
buy seller product at the stipulated price (Nayyar, 2017). Lastly, both buyers and sellers are
presumed to have all information regarding the products in a perfect manner. It has been
assumed that buyers and sellers have perfect knowledge and thus know about the prices of their
competitors which is charged to people for a particular commodity(Krain, 2017).
Thus, due to the various assumptions, restaurants in reality operates in a monopolistic
market which has some unique attributes which attracts customers and provide them district
things (Hope, Thomas and Vyas, 2017). Restaurants have many competitors in a monopolistic
market and produces heterogeneous products though have perfect knowledge about the market. It
was found that restaurants generally operate under the conditions of monopolistic competition in
real world where different producers charges different prices. In real market situation, the
producer has a certain power to set up the price accordingly(Grauwe, 2018). A restaurant should
accept customers till the utility level of customers reaches the highest point where marginal
revenue and marginal cost are equal to each other.
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QUESTION (3)
Potential gains and losses to profit if the seller chooses to restrict the quantity supplied under the
‘value from exclusivity’
The exclusive value principle (EVP) relates value creation to "psychic space". Psychic
needs can create enormous margins and other benefits. One can influence price/demand as well a
create, stimulate, or help define a need for customers. Attractive margin results from psychic
needs as opposed to pure utility fulfilment. The business plan to focus on strategies that will help
to increase profitability and production (Barca, 2017). Seafood restaurant does not take
reservations and every day there is a long queue of people for the table during prime hours
effectively and efficiently. It can be said that there is a another restaurant across the street with
comparable food and similar services. The prices are slightly higher than Seafood restaurant. The
seller now choose to restrict quantity supplied while keeping the prices low. It can be said that
when the prices are low, demand is high. The restaurant is also popular that the customer are
enjoying in queues for taking their meal. The seller restrict the quantity supplied under the value
from exclusivity. The principle of value from exclusivity refers to make plan and strategies that
helps to maintain profitability and production for the firm in order to manage brand in the market
effectively. There are various margins can be described from Graph presented below:
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Illustration 4: Demand is high, prices are low

From the above graph it can be said that the situation where the seller wants to restrict
supply while keeping prices low. This will help to manage customers in the market. The sales
will be effective for Seafood that at low prices everyone will purchase products and services
offered by business in the market effectively. The monopoly profits are affected by marginal
revenue and which also affect the total average cost effectively. When the demand is high in the
market, it is the best strategy for every business to keep their prices low to increase productivity
and profits. In this case, the owner has monopoly to sell items within a restriction while keeping
the prices low for customers. This will significantly enhance production and sells, but not has a
emerging impact on profitability (Chauhan and Saini, 2016). The production will increase for the
business as there are so many potential customers believes on restaurant food quality and
services. According to this strategy, it can be stated from graph that marginal cost is high than
the average total cost. This certifies that the production is increased from this monopoly but there
is not much effect on business profitability. Thus, it can be said that when the demand is high in
market, the firm should formulate pricing strategy in order to attract customers in the market in
order to enhance production.
QUESTION (4)
Business can profit by restricting the quantity it sells, while practising price discrimination with a
subset of consumers
A). Price discrimination is a pricing strategy for business owners that charges customers
different prices for the same product or service. In pure price discrimination, the seller charges
each customer the maximum price that he is willing to pay. This is the stage where sellers
maximise their profitability by dividing their customers according to their needs and
requirements. A restaurant should accept customers till the utility level of customers reaches the
highest point where marginal revenue and marginal cost are equal to each other. It is a illegal for
towards customers that it is up to owner whom he want to deliver. It can be said that owner
always focus on higher prices provided by customers. Price discrimination affect the customer
loyalty as well as expectations (Edoho, 2015). Owner adopts this price optimising strategy when
the production is going effective for business, alternatively, owner charge different prices from
customers for each unit which enable to capture all the surplus available for owner by customers
for itself effectively and efficiently. By restricting the quantity supplied owner is able to adopt
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behind the counter or not on the books. The owner does not give priority for special bookings
customers are who are willing to pay more for the products and services. These payments are not
recorded that owner does not pay taxes on them which is benefit for hi and loss for the
government effectively.
It can be concluded from the above graph that price discrimination can be used by owner
in order to maximise profitability level effectively. Price and quantity of products are same and
increasing with each other effectively. In respect to this, owner is able to restrict supply for some
customers and deliver to them who are willing to pay more for that particular product or service
effectively. According to the graph the green line describe surplus point and marginal revenue
which is affected by marginal cost effectively. Consumer surplus is showed in D part in pink
colour box and the yellow one is demonstrating dead weight loss. In addition to this sme part of
dead weight is also covered by marginal revenues. This will be done by keeping the price legal.
The owner will pay tax for the legal price and extra costs will be added to him as a benefit of
price discrimination policy and strategy efficiently (Harris and Vermaak, 2015). When the
demand is high, price will also become higher for the product. In addition to this, customers will
pay more for the product as they are addicted to the business services. This will help owner to
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Illustration 5: Increasing profit by practising price
discrimination

select potential customers who can provide better cost for the product. In this strategy price for
the same product or services changes many times according to the demand and quantity of stock
effectively.
B). Price discrimination is common in many different types of market, whether online or offline,
and even among firm with no market power, it usually reflect the competitive behaviour that
competition policy seek to promote effectively and efficiently. However, the price can be a
discrimination concern for an example, discretionary, exploitative and exclusionary. Price
discrimination activities sometimes become anti-competitive. The seller use this strategy in order
to reduce competition in the market by providing products and services. Target customers who
love products of Seafood will pay more from other consumers in the market in order to use them.
This will help to attract more customers and will increase competitive advantage of firm
effectively and efficiently. The strategy sometimes also become pro-competitive which is a
assessment tool that helps to eliminate barriers by evaluating alternatives and market activities.
This will help government to measure all the competition assessment OECD to reduce issues and
problems effectively (Mottaeva, 2016). Price discrimination is no longer separately prohibited in
Australia.
QUESTION (5)
Law of demand
The law of demand in micro economics states that conditional on all else being equal, for
an example, if the price of products increase the demand will decreases. Conversely, if the price
of product decreases, the demand will increases for the respective product or service effectively.
The reason for this phenomenon is that consumers' opportunity cost increases, so they must give
something else up or switch to a substitute products. As per the case study situation, if the
customer expect that the demand of any product or service will increase in the future than the
demand curve will take a shift. For an example the customer will purchase more quantity of
product till the prices are low or average in order to reduce risk of paying extra next time. The
demand will increase for the product and price will remain same. This is an effective strategy
followed by many organisations in order to enhance their productivity and profitability
(Moutinho and Vargas-Sanchez, 2018). In this case, loyal customers of brand will purchase
products from the fear of increasing prices in the future.
There is an another situation in the case study in which consider what happens if
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consumers are uncertain about how prices will change in the future, and instead use a change
in price today as an indicator of how price will change in the future?. In this case where the
price is uncertain for customers and changes made by organisations in the product price in terms
of increasing and decreasing will attract customer attention towards price and give them a idea
about future price of product effectively. In addition to this, if a product price is increase by
business, will create a perception of increasing price in future as well. Apart from this, if the
price of product decreased by firm, will indicate that the prices can be decrease more. This will
affect the customer behaviour and allow him or her to purchase low price products as they have
fear of increasing prices in the future. This strategy has also positive and negative impact on
business. The demand curve will increase for products with low prices and decrease for high
prices effectively (Zaman, 2016). In respect to this, the business should adopt such changes in
prices when the production is not going well or dead stock is remaining. This will help to reduce
wastage and also provide benefits to owner. Thus, it can be said that demand curve increase
when the price of products are low and decreases when the prices are high. People mostly
purchase items when their prices are decreased by business effectively.
CONCLUSION
The report depicts the importance of demand and supply which impacts the overall
revenue generation of an organization. It impacts all irrespective of their work or size that is
restaurants, theatres, sport events etc. needs to evaluate their market with existing competitors
and thus form strategies in order to enhance their profit margin. It also shows how prices and
quality impacts an image of a restaurant since the popular restaurant has long queues waiting and
the other less popular one has empty seats though serving the same food and has almost identical
taste. Price discrimination is also vital for creating an image in the market full of competition. A
seller needs to set a lower price initially which he could raise afterwards thereby setting an image
in the market. The impact of demand curve on various goods is different and in various market is
different.
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