In the ever expanding market of foods and services one has to wonder, what makes a restaurant successful?

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Introduction:        

In the ever expanding market of foods and services one has to wonder, what makes a restaurant successful? How is it possible that a chain like McDonald’s, whose food is less than what most consider quality, can be a dominating force in the market? How is it possible that a restaurant can charge over fifty dollars for a steak and ten dollars for a glass of wine and have customers glad to pay it? It is a cultivation of principles of economics, namely supply and demand. When these principles are applied to a restaurant in the proper manner, that is to say all aspects of a restaurant have been assessed and an appropriate decision is made upon the assessed information, a profit is bound to accumulate.

        

Investigation:

A comprehension of simple concepts of economics is crucial in understanding how they affect a business for better or for worse. Since supply and demand are the main concerns of restaurant owners, their evaluation will reveal a great deal about the economics behind their decisions.

        Demand is the amount of a good or service that consumers are willing and able to buy at a certain price (Billings 111). Say there is a product called a widget that normally sells for ten dollars. If we were to move the price up from ten dollars to twenty dollars, the demand for the widget will lessen because the consumer is not willing to pay or is not able to pay that amount. Conversely, if the price were to drop from ten dollars to five dollars, the demand would increase as more are able and willing to make a purchase.  A simple demand curve illustrates the demand schedule.

Figure 1: Demand Schedule for Widgets

        The demand can shift completely without a change in price. Say that people never have seen a widget but upon purchasing one, they fall in love with them. This causes the demand to increase as more people want widgets simply because they are great. This would cause the curve in the above demand schedule to shift to the right. On the opposite end, the curve can shift to the left; that is the demand is lessened without any change in price. Say widgets are too much of a hassle to own and people just don’t purchase them. All points on the schedule shift to the left.

Figure 2: Demand Schedule Shifts to Both the Right and Left

Now obviously, the demand is affected by other factors. People will not keep buying widgets at one price. The law of diminishing marginal utility states that people do not necessarily want more and more of the same product at a constant price if, sooner or later, the satisfaction (utility) of each additional unit becomes less and less (Schwartz 179). Applying this rule to widgets we can see how if a widget were to be two dollars, the demand would be overwhelming. Everyone could attain a widget and use one. However the widget would lose their utility and therefore their demand would lessen. Another way everyone could attain a widget would be if the income of a population were to increase. With more money, more goods can be bought; a shift in the demand schedule to the right.

Finally we can address the elasticity of demand. The elasticity of demand is the measure of the degree to which the quantity demanded for a good or service will change when price for the same good or service changes. In other words, the shift in demand as widget goes from ten dollars to twenty dollars. To get a better view of the idea of elasticity, look at the graph below. We see two different demand schedules for widgets. The curve labeled W1 has a steeper slope and therefore is less elastic than W2. The demand does not shift as much with a varying price. Curve W2 on the other hand has a greater variance in response to price changes.

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Figure 3: Elasticity of Demand in Widgets

With a foundation in the principles of demand, we can now move on to supply side economics. Supply is the amount of goods and services producers are willing and able to offer for sale at a certain price (Billings 118).  Say our wonderful widget is in high demand by the public, the natural tendency for the producer is to increase the price to gain more money. Similarly, if the demand were low, the supplier would offer widgets at a lower price. In short, since not many want widgets, not many widgets are ...

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