Economics For Business Industry Essay

Questions:

Give 2 examples of technological changes that have occurred in your industry within the last 20 years, and briefly describe how that change has benefited firms in the industry.
Describe the method of production in your industry for a typical firm. That is, is the method of production highly capital intensive? Is it labour intensive? Does a typical firm operate on a large scale?
Cafes – a typical caf? is a typical firm
Name three fixed costs and three variable costs in your industry.
How can firms in your industry increase production in the short run?
Draw a diagram (not copy & paste; you need to draw and label it) showing AVC, ATC and MC for the short run for firms in your industry. No need to include AFC. Explain the shapes of these curves - what economic principle is behind their shapes? Explain where the MC cuts the AVC and ATC curves. (use your own words to demonstrate your understanding of these principles)
If firms in your industry thought that demand was going to increase in the future by a significant amount – say, by 50% or more – they would need to change the scale of their operation. Briefly explain which of the resource inputs to their production process would probably take the longest to change, to be able to increase production by such a large amount? (please name a specific input, not the category of input type). Therefore, explain how long you think the short run would be likely to be for your industry?
Are economies of scale important to the firms in your industry? Explain why, or why not. Give two examples of economies of scale in your industry.

Cafes and coffee shops

Are diseconomies of scale possible in your industry? Explain. Give an example of a diseconomy of scale for a firm in your industry.

Draw a long run cost curve for firms in your industry and explain its shape.

Students should draw their own graph (NOT copy & paste) no need for numbers – this is a conceptual question

Explain how your industry compares against each of the important conditions that define a perfectly competitive market structure. Is your industry a perfectly competitive industry?

How does each firm in a perfectly competitive industry decide the price they will charge, and the quantity they will sell?

Is it possible for firms in a perfectly competitive industry to make an economic profit or an economic loss in the short run? Explain, using a diagram.

Is it possible for a firm in a perfectly competitive industry to make an economic profit or an economic loss in the long run? Explain, using a diagram.Discuss the efficiency of the grain industry.

What do the results you have discussed in the questions above suggest to you about these issues for the grain industry-:

How desirable the grain growing industry is for new firms to enter the industry, opening up new areas as grain growing farms

A firm spending significant sums to advertise their product (eg television advertising campaign; widespread national promotion

A firm spending a small amount to advertise their product (eg local newspaper advert; small scale promotion of their product)

Whether the firm would have the funds to be able to spend significant sums of money on research & development, in order to develop better (cheaper) production processes.

Whether a grain farm would have the funds to be able to spend significant money on research & development, in order to develop better (more desired) versions of the product for their customer.

Explain how your industry compares against each of the important conditions that define a monopoly market structure. Is your industry a monopoly industry?

How does each firm in a monopoly industry decide the price they will charge, and the quantity they will sell? Consider the cases of a private monopoly and a regulated monopoly.

Is it possible for a firm in a monopoly industry to make an economic profit or an economic loss in the short run? Explain, using a diagram. Consider the cases of a private monopoly and a regulated monopoly.

Is it possible for a firm in a monopoly industry to make an economic profit or an economic loss in the long run? Explain, using a diagram. Consider the cases of a private monopoly and a regulated monopoly.

How does the economic efficiency of the water supply industry compare to the economic efficiency of a perfectly competitive industry?

(please discuss in terms of productive efficiency, allocative efficiency and dynamic efficiency)

What do the results you have discussed in the questions above suggest to you about these issues for the water supply industry-:

Explain how your industry compares against each of the important conditions that define a monopolistic competition market structure. Which of the four industries included in the assignment is a monopolistic competition industry?

How does each firm in a monopolistic competition industry decide the price they will charge, and the quantity they will sell?

Is it possible for a firm in a monopolistic competition industry to make an economic profit or an economic loss in the short run? Explain, using a diagram.

Is it possible for a firm in a monopolistic competition industry to make an economic profit or an economic loss in the long run? Explain, using a diagram.

How does the economic efficiency of the caf? and coffee shop industry compare to the economic efficiency of a perfectly competitive industry?

(please discuss in terms of productive efficiency, allocative efficiency and dynamic efficiency)

What do the results you have discussed in the questions above suggest to you about these issues for the caf? and coffee shops industry-:

Explain how your industry compares against each of the important conditions that define an oligopoly market structure. Which of the four industries included in the assignment is an oligopoly industry?

Answers:

Introduction

1.The technological change in the industry of Cafes and Coffee shops has been witnessed to be moderate and also it has aimed at the efficient parts. This shows how the industry has reached its level of maturity. The first example of technological change is witnessed in the marketing and promotion sector, where the strong online presence of the operators is clearly evident. Use of online review sites such as Zomato has helped the consumers to choose what suits their requirement best. Secondly, the change is found in supply chain, where online order of fresh produce and other goods has helped them to minimize waste (Blanchard, 2011).
2.The industry of cafes and coffee shops are highly labor intensive. All the processes involved here are in huge requirement of labor. Most of the processes of these cafes and coffee houses are coffee making, food preparation, cleaning and customer services. The share of wages is the second highest in industry revenue. The capital intensity in this type of industry is based on the scale of business. Normally, the typical firm operates in a small scale, but if there are cafes which work in economies of scale they are highly capital intensive too (Blanchard, 2011). Like that own number of coffee machines and other specialized equipments.
3.The fixed costs majorly involved in these types of industries are rent, franchisee costs and maintenance costs. The operations require premises, which are normally leased in these types of industries, so rent has o be incurred. Also, most of the units work taking a franchisee of a large scale unit. This industry require few machines, which are used to process food and drinks, so there has to be continuous maintenance of these. The variable cost includes the expense of purchases, wages and other utilities which are basically dependent on the consumption of services (IBIS, 2016). More the customer base more is the expense incurred.
4.In this type of industry popularity is the main tool which drives customers. In order to increase production in the long run the units need to focus their popularity among the consumers. In the last five years the profit ratio has considerably decreased due to increase in competition and increase in rent costs. So in order to maintain the production level and profit margins these units need to provide the customers with more food options (Krugman & Robin, 2012). This will not only increase the profit margins but will also provide them with an image, and help increase production in the long run.
5. AVC:
We see that the AVC and ATC curve tend to have a u-shape, as shown in the figure above. It means that they fall in the beginning and then they rise as the level of output increase. ATC is obviously higher as it includes FC also. MC also tends to have a U-Shape. However the bottom of the MC curve occurs earlier, so, the upward sloping part of MC is more important. The figure above shows a typical MC curve along with ATC and AVC curves. MC curve cuts both the curves at their lowest points (Collinge, 2003).
6. If a situation arises where the demand is expected to increase by 50% then, the scale of operations would also be required to change. The main resource input which will take the longest to change would be installation to new equipments which will help the firm to increase the production. A fixed run period is the one where the firm can bring changes in the fixed costs. Normally, a period of 12 months is an average for any firm in this type of industry to bring about the changes in the equipments (IBIS, 2016).
7.The scale of production is not very large. Economies of scale are both important and also not important in this type of industry. They are important as they help the firm to reduce cost and help the firm make a brand image. This is possible only if they are involved in large scale production. But if they are involved in small scale production then they would not require economies of scale (Levi, 2014). The examples of economies of scale are Starbucks, barista, cafe coffee day, etc
8. Diseconomies of scale refer to the situation where the forces cause the larger firms to produce goods and services at the increased cost per unit. That is, if the firm starts economies of scale, instead of reducing the cost, they notice that the cost per unit increases (Levi, 2014). It is possible to have diseconomies of scale in this type of industry. The most famous example for diseconomies of scale in the industry of cafes and coffee shops is Starbucks, where they decided to close up to 600 shops in US, due to rise in costs of operations.
9. The long run cost curve tends to be U-Shaped. That is the cost in long run first declines as output increases and beyond a certain point it increases. The shape of a LAC curve depends on return on scales. The return on scale increases with the increase in output and after a while when the return of scale decreases the curve tend to move upwards, showing increase in costs (Petri, 2008). It is so because the output increases first with economies of scale and later when the resources are utilized the output starts to fall, resulting in increase in cost per unit. A normal LAC curve would look like:
10. A perfectly competitive market is the market where there exists numerous numbers of buyers and sellers, and all the people are well informed about the prices and goods and also the firms have relatively small market share. The most common example of perfect competition is agriculture. Perfect competition is also referred to as pure competition sometimes. The market price of the goods is beyond the control of the buyers and sellers. The coffee shop industry is almost a perfect competitive market because there are many competitors, many consumers and also it involves low costs of entry and exit.
11. It is one of the characteristics of perfect competitive markets that all the buyers and sellers are well informed about the price of the goods and services. The price of a commodity in a perfect competitive market is determined by the demand and supply forces. All the firms aim at profit maximization. The rule for profit maximization in a perfect completion market is that it produces the quantity where marginal revenue is equal to the marginal cost of the last unit which is to be produced and sold. If it moves from the rule then the rate of earning profit will fall.
12.In the short run a firm in the perfect competition can maximize the profits because marginal revenue will be equal to the marginal cost. MR is termed as the slope of the revenue curve that is even equal to the demand curve and price. Therefore, in the short-run the economic profit can be positive, zero or negative. When price is higher than the average total cost then the form makes a profit. However, if the price is less than the average cost then there is a los in the market. Yes, it is possible for a firm in perfect competition to have both profits and loss in the short run. If in a perfect competitive market the price of the product is more than the average total cost, then the producer will have positive economic benefits, and where the average total costs exceeds the revenue, the producer will have losses. In order to maximize profits in a perfect competitive market, marginal revenue should equal marginal costs. The marginal cost curve of a perfect competitive market is a supply curve as price equals marginal costs. The diagrams for loss and profits shall be like:

13. In the case of perfect competitive market a firm can have profit or losses only in the short run. However, in the long run the profit and losses are eliminated because of the presence of innumerable firms producing products that are divisible and homogeneous. There are no barriers when it comes to the entry of the firms and all the consumers have the information about it. Therefore, all chances of long-run profit are washed away.
14. With 52.2 % of the Products and services segmentation being Wheat based products in Australia, the means of efficiency could be the matter of improvisation, though the primary crop of Australia has sustained means of infrastructure to handle the crop-related parameters. The increased demand for wheat in the period of 2010-2011 saw a steep fall in the production of Wheat. However, the later years saw farmers yielding profits with increased production of Wheat. The state of cultivation of Wheat hence has to be considered on the foremost and effective practice as compared to lesser crops in demand throughout Australia. Hence, the report affirms that the increased demand and farming infrastructure is one of the futile resources in Australia.
15. With the highlight on the various records apprehended from the Wheat Industry, there is promising scope for new entrants and openings. The factor of the high demand wheat crop has sustained the demand for more than a decade that stabilizes the market share of the crop. However, the success factors of the New Entrants are more divided than the Market share of the Wheat Crop across Australia. These are attributed to various other factors such as market positioning, marketing activities, and many of the larger contexts of Business development. Since the nature of the crop being the rawest of the kind, there are indeed limitations on the aspects of advertising and marketing (IBIS, 2016). But, the scope of innovative approach and other special efforts could yield a better prospect for the new entrants in the Grain Industry. Since, the Grain Industry is one amongst the most established business in Australia; there are more scope of refined research and development.
16.In case of a monopoly market, there is a single seller having the dominance over products. Therefore, it is upon the seller to create a specific situation that will enable to have a grasp over the market. The seller is single and the consumers are bound to take the product from him thereby enhancing the position of the seller. A single seller can influence the market. No, it is not a monopoly industry because various players are present in the coffee production.
17. Monopoly means single seller and having a command over the inputs. Therefore, the seller can take enormous benefit of the market structure by fixing the prices. As there is availability of a single seller therefore traits like dominance over price, creation of scarcity that is artificial is seen in this form. Hence, the market leader is only one and price is fixed by the seller in the market.

A regulated monopoly is one that is regulated by the government that helps to safeguard the interest of the consumers. For example, monopolies have the power of market to ascertain the prices in competitive market. The regulation is done through price capping, competition through yardstick and limiting the growth of monopoly power.

Private monopoly is one where the market power is utilized to derive the maximum gain from the consumers. It will cater to the requirement of the customer at a specified price. The production costs are kept lower and the mix of products are seen to cater to the customers’ needs. This means it can charge profits and maximize the revenue and gains.


18. It is generally believed that monopolist always earn profits .In the short-run, if the demand is not sufficient monopolist can make losses. At times of recession or depression or any kind of crises demand for goods decreases and monopolist has to suffer losses .But if the losses continued for a long time then the monopolist will shut down his present business in the long run .But in the short run he will continue in his present business so long as his price is greater than the average variable cost. When losses exceed total fixed costs and the monopolist will not be able to cover his variable cost fully, the monopolist would stop production in the short-run (Mankiw & Taylor, 2011).

19.It is generally believed that monopolist always earn profit and when it comes to the long run it is expected that the firm will have profit in the long run otherwise the production will be stopped. An individual form has a control over the market and hence, likes to capture the market. This ensures that the monopoly business is targeted for making profits in the long run otherwise it is difficult to carry on the business.

20.As reported, the Agricultural industry is one amongst the key markets for Australian Water Supply and hence the relevance of the economic efficiency is directly related to the Agricultural aspects. Sine Agriculture is significantly related to the Agricultural sector, the influence of Water availability has a direct implication on the prospects of Agriculture. Hence, the irreconcilable efforts cannot be derived from the two distinct industrial domains that satisfy the condition of sustaining dynamic efficiency (Colander, 2008). Since the Water Supply industry is heavily dependent on the irrigational aspects of Agriculture, any lack of lower demand would directly influence the growth of the Water Supply industry that depicts the stake of Productive and Allocative efficiency by increasing the prospects in other industries .

21.Water Supply Industry forms the backbone of Australian Infrastructure that spreads into the Agricultural and Industrial sectors. Hence, the prospects of continued profits and new venture are indispensable attributes as noticed through the state of economics in Australia. However, the lack of rain and seasonal disturbance opens up the need for more efficient and calculated areas that could be penetrated by new entrants. However, since the Water Supply Industry in Australia is significantly centralized, there could be lesser chance of instant success and growth, though the external drives such as Human Population and Climatic condition are expected to increase the range in Water supply Industry that rounds up at 28.0% of Profit.

22. A monopolistic competition market structure is the one where there are number of buyers and sellers, selling similar but not identical goods, so the firms here compete on other factors excluding price. In a monopolistic market the sellers have a little power to influence their price, which they do so according to demand. There is sometimes collusion to fix prices (Snowdon & Wane, 2005). The industry of cafes and coffee shops possess all the characteristics mentioned above. Big coffee houses like Starbucks is the most common example of monopolistic competition in this type of industry.

23. In the case of monopolistic competition there are large number of sellers and sell products that are differentiated. It has some features of monopoly and perfect competition. Each firm occupies a smaller chunk of the market and any action by one rival leads to an action by another. Therefore, no single firm is in a position to influence the market. The buyers are large and all firms are price takers and not price makers. This enables to have a price that is uniform in nature. Therefore, the price is decided as per the product and the market scenario.

24. When it comes to the short-run, a firm in monopolistic competition can maximize profit or minimize the losses by production of the quantity that is related to when marginal revenue is equal to the marginal cost. When the average cost is less than the market price then the firm in the short run earns an economic profit (Gartner, 2006). Moreover, if the average cost is higher than the market price then the firm will have losses.

25. In the long run, the industry will have an economic profit and other firms will enter the industry with a lure of profit and ultimately lessen the profits for other firm. When more firm will enter there will be a decline in the profit and hence normal profit will be enjoyed by the industry. On having innumerable firms, there will be a loss more specifically the inefficient ones and will eliminate them form the overall industry and hence, normal profit will be shared by others (Romer, 2008).

26. Only the long run of a perfect competition exhibit optimal levels of economic efficiency. In the short run the in perfect competition it is not a good market to spend on research and development. But in the long run they create an environment for the research and innovation to flourish. In the cafe and coffee industry, not too much of research and innovation is required, and hence in short run they will not be much economic efficient (Varian, 2009). But in the long run the cafe and coffee shop industry possess the same economic efficiencies as that of a perfect competition market.

27. caf? and coffee shops industry-:

It would be a challenge for a new firm to create a position in the existing market, but making good promotion of the cafe may help to attract new customers.

Promotion is the key which helps the cafes and coffee shops to create an image.

A little promotion will provide only short term benefits and not for a long term

Only the cafes and coffee shops which follow the economies of scale will be able to spend large sums on research.

Small scale coffee houses are not too fund efficient to develop more desired versions of the product. But the large brands can spend significant amounts on the same.

28. Oligopoly market is the market where there are few firms selling a product so that there is intense competition among them. They sell either differentiated or homogenous products. In this type of competition the firms are interdependent on each other. Under this type of competition they avoid price war and choose other factors such as product differentiation in order to create more market (Junankar, 2013). The oligopoly market exists only among the large scale cafes and coffee houses. The small cafes and coffee houses mostly resemble perfect competitive markets, since they are more driven by supply and demand forces (Varian, 2009).

References

Ayers, R. M & Collinge, R. A 2003, Microeconomics. Pearson.

Blanchard, O 2011, Macroeconomics, Englewood Cliffs: Prentice Hall

Colander, D 2008, Microeconomics, McGraw-Hill Paperback.

Dawson, G 2006, Economics and Economic Change, Prentice Hall.

Dwivedi, D.N 2001, Macroeconomics: theory and policy, New Delhi: Tata McGraw-Hill.

Gartner, M 2006, Macroeconomics, Pearson Education Limited

IBIS 2016, ‘Pick-me-up: Industry revenue grows despite increased competition’, IBIS industry report H4511B.

IBIS 2016, ‘Return of the kid: El Nino conditions will likely reduce rainfall, lowering industry yields’, IBISWorld Industry Report A014.

Junankar, P 2013, Australia: The Miracle Economy. IZA Discussion Papers 7505, Institute for the Study of Labor (IZA).

Krugman, P & Robin W 2012, Microeconomics: Second Edition in Modules, Worth Publishers page

Levi, M 2014, The Macroeconomic Environment of Business (Core Concepts and Curious Connections), New Jersey, USA: World Scientific Publishing

Mankiw, N.G.; Taylor, M.P 2011, Economics, Andover: Cengage Learning

Petri, F 2004, General Equilibrium, Capital and Macroeconomics, Cheltenham: Edward Elgar.

Romer, C D 2008, Business Cycles, Oxford University Press

Snowdon, B & Vane, H. R 2005, Modern Macroeconomics: Its Origins, Development And Current State, Edward Elgar Publishing

Varian, H. R 2009, Intermediate Microeconomics: A Modern Approach, W. W. Norton & Company.

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