Q) Analyze the fast food industry from the point of view of perfect competition. Include the concepts of profits, utility, costs, and market structure to explain the prices charged by fast food retailers. How does this differ from a monopoly? You must refer to your chosen firm when describing these features. This essay will attempt to analyze the fast food industry from the point of view of perfect competition and monopolies. Firstly it will define perfect competition and state its assumptions. Secondly it will analyze perfect competition and how profits, utility, costs and market structure and the effect this will have upon prices charged by fast food retailers. Thirdly it will define a monopoly and how this is dissimilar from perfect competition. Fourthly it will analyze monopolies and how profits, utility, costs and market structure and the effect this will have upon prices charged by fast food retailers. Finally I will sum up the key points in the main body of this essay and state my opinion on the subject.
Sloman J (2007) states ‘ perfect competition is a market structure where there are many firms; where there is freedom of entry into the industry; where all firms produce an identical product; and where all firms are price takers.’
Firms within perfect competition make normal profit which is the lowest level of profit needed to keep the firm in production while still attracting new firm to the industry see figure 1.However in the short run firms within perfect competition can make supernormal profit which is any profit made above normal profit. If firms in the short run make supernormal profit in the long run more firms will enter the market causing increased competition which will bring a firm profit back to normal as the Average Revenue(AR is the average income per unit sold)= Marginal Revenue(MR is the revenue gain from an extra unit sold) curve falls to the average cost shown in figure 2. The concept of profit has an effect on the price firms set in perfect competition because firms within perfect competition make a normal profit which therefore means the price would be set at Price(P)=Average total cost(ATC which is the average fixed and variable costs) .An example of this is McDonald’s and KFC were making supernormal but were when subway entered the market there was more competition and increased choice for consumers so all three firms made normal profit.
Anderton A (2006) states ‘Utility is the satisfaction derived from consuming a good.’ Utility is achieved because P=Marginal Cost(MC is the cost from the production of an extra unit of output) which makes firms with in perfect competition allocatively efficiency which means where is not possible to make one person better off out making someone else worse off. Utility is increased in perfect competition compared to a monopoly as consumer surplus and economic welfare is higher. Powell R (2003) states ‘consumer surplus is the difference between the maximum price a consumer is prepared to pay and the actual price he or she need pay.’ When consumer welfare/utility is increased so is consumer surplus, which is shown within perfect competition is shown in figure 3. The concept of utility has an effect on the price firms set in perfect competition because within competition utility is achieved when P=MC which occurs in perfect competition .An example of increased consumer surplus is when McDonald’s introduced the saver menu which reduce the price of chips, soft drinks etc which would increase consumer surplus and therefore increase consumer welfare/utility.
One of the conditions of perfect competition is freedom for firms to enter or exit the market which makes it a perfectly contestable market which is a market where firms are free to enter or exit a industry without incurring little or any costs. Begg D (2008) states ‘By free entry, we mean that all firms, including both incumbents and potential entrants, have access to the same…