Question

Consider the following scenarios:
Scenario A: Pizza is produced in slightly higher quantities, with slightly lower prices than in Scenario B. All pizza is of the same brand, served in similar types of restaurants, with no variation in quality.
Scenario B: Pizza is produced in slightly less quantities, with slightly higher prices than in Scenario A. Consumers have more variety and choice, with many different types and styles of pizza made at different restaurants.
a) For each Scenario, identify the type of market structure and comment on the level of efficiency (Draw diagrams that show levels of output and ATC for each Scenario to help explain your answer). b) Which Scenario is likely to make consumers better off? (Explain the reasons for your answer).   

Answer 1

In scenario A, there is homogeneous products i.e we cannot differentiate the products. this is a feature of the perfectly competitive market. Hence scenario A is a Perfectly competitive market.

Hence the demand curve in this market is horizontal which leads to equilibrium at the lowest point of ATC in the long run ( P= ATC => profit = 0), i.e. in the long run the producers will produce efficiently as Q = minimum efficient scale of production which is nothing but at the lowest point of ATC.

In scenario B, consumers have more choices of variety which means that there is product differentiation and also there is a substitute available. This is a feature of monopolistic competitive market.

This market has features of both monopoly and competitive market. hence the demand curve is downward sloping but flatter than that of monopoly.

It cannot produce at the lowest ATC as the demand curve is downward sloping, hence i the long run it will produce in the economies of scale region ( P = ATC => profit =0). This P= ATC will happen only in the downward region of ATC due to the downward sloping of the demand curve.

Hence the production is not efficient rather there is excess capacity.

B)

since the production in scenario A is at the minimum efficient scale but In B it is not. Hence the consumer surplus in scenario A is higher than in scenario B. this means that consumer will be better off in scenario A