Question

Melbourne is well-known to be a dynamic city with numerous cafes. Since you enrolled in BUS5POE, there has been a lockdown in Melbourne and Victoria. Assume that cafes are in perfect competition in Melbourne and the initial market price of a take-out coffee is 5 dollars. Assume that cafes are authorized to open if they want during the lockdown. Provide a graphical representation of this shock and explain how the lockdown will impact: a. The supply curve of take-out coffees (answer in 70-130 words) b. The demand curve of take-out coffees (answer in 70-130 words) c. The equilibrium in the market for take-out coffees (answer in 70-130 words) You can draw diagrams in MS Word or on paper. In the latter case just make a good quality photo and insert it in this Word file to the relevant question.

Answer 1

Market is a system wherein the sellers and buyers interact with each other and exchange a good or service ( from seller) for a price (money paid by the buyer). The market may be a local market place or far off places, now -a-days with the rapid growth of technology and innovations , e-commerce has grown at a very rapid rate and is making greater strides, it is particularly making its presence felt in the present pandemic times when online trading and online buying has become more convenient and easier.

One of the major factors that determines a market is the number of buyers and sellers who constitute the market . The larger the number of sellers , the lesser is their power as individual firms to influence the price of the product since each firm would be supplying only a miniscule amount of the total market supply of the commodity or service. On the other hand the lesser the number of sellers ( or a single seller monopoly market) , the greater is the competition among them and the higher is the individual firm’s capacity to influence the price.

In case of buyers, a large number of buyers have lesser capacity to negotiate for a better price than a single buyer—as in case of monopsony market.

In the present case study, coffee cafes market has been state to be a perfectly competitive market , implying that the sellers of take-away coffee are very large in number , so large that an individual seller of take-away coffee cannot influence the price of the coffee, this is because each individual café shop is producing only a smaller portion of the total market supply (output) of the number of takeaway coffees produced .

Similarly there are a large number of buyers for the café , hence a single buyer is not able to independently influence the price of the take away cafes.

The market equilibrium of the café price is set on the basis of the industry supply of café and the market demand for cafés.

a.

In the diagram below , the supply curve of the take away cafes is shown, S is the market supply curve of the takeaway cafes, it is shown as perfectly elastic since the market form is perfectly competitive market where there are numerous suppliers of take away coffee and hence it is assumed that supply extends to infinity, a situation where for a given price $5, in this case study, the suppliers are prepared to sell any amount of the commodity but for a slightly lower price the supply could fall to zero. It has to be understood that such a situation is more theoretical or mythical And is considered an exceptional market situation.

Since Perfect competition allows free entry and exit of firms into the industry, a situation of lock down will force some firms ( probably newer firms) to leave the industry since they may be unable to survive the loss due to lock down , when fewer buyers would be prepared to consume take away café. This will not affect the market supply , since there are a very large number of firms supplying takeaway coffee and since they are allowed to open even during lock down there would be café that would continue to do business in spite of the restrictions.

b.

In the above diagram D1 is the initial ( market ) demand curve for takeaway coffee, $5 being price. Since price is constant and determined by the industry as well as the market demand , the individual buyer has no power to influence the price . The demand curve shifts to the left to D since the lockdown has forced many buyers to decrease their demand for coffee , the market demand for takeaway coffee decreases, price remaining the same at $5. This decrease will not affect the supply since perfect competition is assumed in the take away coffee market in Melbourne. The buyers are more influenced by the lock down restrictions and are cautious about their health and hence many may not venture out to buy take away coffee. However, since the authorities have allowed take away outlets to operate if they wish , fewer buyers may be willing to consume coffee in spite of the imposed lock down.

c.

In the above diagram , the market equilibrium is assumed to be at the initial position of E1 where the market supply curve, which is perfectly elastic , S, intersects the initial demand curve D1. Given the fact that there is perfect competition in the take away coffee market, the market supply will be perfectly elastic and a change in the demand will result only in a change in the equilibrium quantity – Q1 being the initial quantity , a decrease in demand from D1 to D will result in newer equilibrium at E where the supply curve intersects the newer demand curve D and the equilibrium quantity falls to Q.

This is because there maybe some buyers and sellers who may not buy or sell during lock down , but since there is perfect competition in the take away coffee market, the supply remains unchanged as there may be many other sellers who may be willing to supply ( since authorities are allowing the opening of cafes) and hence the price remains the same, at $5, without changing .

This is an exceptional situation, not generally related to practical market scenario.