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The aim of this report is to demonstrate my knowledge of economic concepts. The main coursework objectives are; to demonstrate the understanding of basic economic theories relating to the needs of both businesses and their customers, with particular reference to theory of demand including Utility Theory, Theory of Costs and Theory of the Firm. The second objective is to describe theories of Demand and Supply, and their implications for consumer choice.
In all industries including the Tourism and Hospitality sector it is important that economic theories such as; Market Structure, Supply & Demand, Price Cuts, Specific Tax, Utility theory and Long run theory are carried out.
All businesses have a market structure. Market structure refers to the features of a market, which can affect the performance of the firms in that market. There are four market structures Perfect Competition, Imperfect Competition, Oligopoly and Monopoly. The main elements that can determine within which market structure a business operates includes; the number and size of firms, entry and exit conditions, degree of price control and the product type.
As there are a number of other firms competing with Petes' Stack, with the possibility of others joining in the competition, Petes' Stack operates in a Monopolistic competition/Imperfect competition market style.
"Monopolistic competition is a market in which there are a number of firms making similar products." Stanlake & Grant, 15 p17
As stated, there will be many other firms producing similar products yet each will be unique and somehow different from others in the industry. For example, the business in this case study, may offer slightly different bar meals than his competition, he may offer meals made with organic ingredients for instance.
Imperfect competition is where there are many firms competing with each other and where there is freedom for new firms to enter the industry.
Monopolistic/Imperfect Competition market structures contain elements which are the same under a Perfect Competition market structure. Both structures have buyers and sellers and both have the ability of entry and exit. However, Monopolistic firms have product differentiation.
1.0 Supply & Demand Influences
Economic considerations that could influence supply of alcoholic beverages in Petes' Stack would be the Conditions of Supply. These conditions include factors of production such as costs, profitability of other goods (substitutes in supply, goods in joint supply), unpredictable events/natural causes and technological changes.
Factors of production are considered as they can influence the firms supply of alcoholic beverages. If the firms supplier does not have the resources available to produce what is specified, it will discourage customers to return to the venue therefore custom would be lost.
A change in any of the conditions of supply will lead to a shift in what is known as the supply curve.
The economic considerations other than price that could influence the demand for alcoholic beverages in Petes' Stack would be the Conditions of Demand. These conditions include taste, income and distribution of income.
Our tastes are continually changing. A change of taste in favour of a good, leads to an increase in demand. Therefore, a change of taste against a good can result in a decrease in demand.
The diagram on the left shows the effect of a change in taste in favour of a good on its demand. The right shows the effect of a change in taste against a good on its demand.
A change in income can influence the conditions of demand in both a positive and negative way. An increase in income results in an increase in demand therefore, a decrease in income results in a decrease in demand.
"The higher the level of demand, the higher level of output and employment."
Stanlake & Grant, 15 p
This would influence the demand for alcoholic beverages in Petes' Stack as the consumers would have more disposable income so therefore more money to spend.
The distribution of income will also be a factor that will influence the demand. Changes in the distribution of income will shift the demand curves for products bought mostly by those households with increasing incomes to the right and it will shift the demand curves for products purchased mostly by households with decreasing incomes to the left.
The final example, which will influence the demand for alcoholic beverages, is the Price. An increase in the price of a substitute for a commodity shifts the demand curve for the commodity to the right. More will therefore be purchased at each price. A decrease in the price of a complementary commodity will shift a commodity's demand curve to the right, and again more will be purchased at each price.
.0 The Benefits of Price Cuts
If the prices of products available to consumers were lowered, there will be a greater demand, therefore it could be beneficial to the firm as their total revenue would increase.
"Price elasticity of demand is the responsiveness of quantity demanded to a change in price." Morris, 00 Lecture Notes, Robert Gordon University
Price Changes will lead to a movement along the demand curve.
The diagram shows that the price change in price p1 to p causes movement along the demand curve Q1 to Q.
When greater total revenue is produced the price is elastic, therefore the alcoholic beverages are elastic goods.
Further benefits of price cuts include the relief of tied up money in relation to the stock holding. Price cuts would enable Petes' Stack to sell off problem stock quicker and avoids stock loss.
Finally, price cuts would be beneficial in attracting more custom to the venue. If a competitor was to open premises nearby, Petes' Stack needs to be able to offer the customer special offers and discounts to keep existing customers and to attract new ones.
.0 The Implications of a New Specific Tax
"An example of a specific tax is the exercise duty on Whiskey and other spirits. A specific tax causes a parallel shift to the right of the supply curve." Stanlake & Grant, 15 p7
It can also be defined as, "an indirect tax of a fixed sum per unit sum per unit sold." Sloman, 11 p8
When public houses order stock, beer for instance, they get a fixed sum per unit. Petes' Stack will then sell off this stock at a higher price. The implication of a new specific tax on beer for Petes' Stacks customers would be an increase in the total price of beer.
The diagram on the left shows the effects of a specific tax on the supply curve. The right shows the effect of a specific tax on the price and quantity.
The full burden of tax does not always fall on the customer as it depends on elasticity or supply and demand of the commodity. Therefore, in certain circumstances the business itself may have to pay the new tax.
4.0 The Utility Theory
There are two types of Utility Theory Total Utility and Marginal Utility.
"The satisfaction that a consumer receives from consuming a commodity is called its utility. Total Utility refers to the total satisfaction resulting from the consumption of a commodity by a consumer. Marginal Utility refers to the change in satisfaction resulting from consuming a little more or a little less of a commodity." Lipsey, Steiner, Purvis, Courant 10 p157
Relating Utility Theory to Petes' Stack, it is the alcohol that gives the customer satisfaction. However, when consumers overindulge in the commodity and it has opposing results on the body, this results in Negative Utility. This relates to the Law of Diminishing Marginal Utility where the greater the volume consumed, the less likely you are to get enjoyment from the product.
There is also what is known as the Rational Consumers, this is a customer who aims to get the best value for money. This type of consumer will think before they make any purchase considering all advantages and disadvantages.
5.0 The Case for Expansion of Petes' Stack
When a business expands their unit costs decrease, this is known as Economies of Scale.
"When increasing the scale of production leads to a lower cost per unit of output." Sloman, 11 p150
When operating a public house there are many factors which have to be considered such as the division of labour and the technical economies. This means that the business needs the right people, in the right place, at the right time. Colleagues must be able to carry out their jobs to a good satisfactory standard with the appropriate level of training whether this is at their induction or on going received. As for the technical economies, there has to be an increased use of machinery, this can save on practical labour costs of staff.
Trading economies should be carried out, this is where the venue buys in bulk and receives discounted goods. By doing this, Petes' Stack could keep customers satisfied by offering special promotions or discounts on such profits yet still profit making.
Financial economies are carried out such as the payment of goods to sell, staff wages, gas and electrical bills and the rent of the premises for example.
The owners or management of Petes' Stack could consider extending the business into the empty adjacent premises or acquiring a public house across the road. Before deciding, the management should consider various methods of consumer research to collect their ideas and opinions about the proposals.
6.0 Conclusion
To conclude, knowledge of economic concepts have been demonstrated throughout this report with the following points
ɨ The Market Structure and the Implications of it within which it operates
ɨ The Economic Considerations other than Price that would Influence Supply and Demand
ɨ The circumstances in which Price Cuts would be Beneficial
ɨ The Imposition of a New Specific Tax
ɨ The Case for Expansion
In addition, throughout the report a basic understanding of the economic theories relating to the needs of both the business and its customers have been demonstrated.
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