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Chapter 13: Problem 7

There are many wheat farms in the United States, and there are also more than 2,000 Panera Bread restaurants. Why, then, does a Panera restaurant face a downwardsloping demand curve, while a wheat farmer faces a horizontal demand curve?

Short Answer

Expert verified
A Panera restaurant operates in a monopolistic competition setting, allowing it some power to manipulate prices, hence, it faces a downward sloping demand curve, signifying the inverse relationship between price and demand. On the other hand, wheat farmers operate in a perfectly competitive market where consumers view all wheat as identical. Hence, these farmers have no power to affect the market price, leading to a horizontal (perfectly elastic) demand curve.

Step by step solution

01

Understanding Demand Curves

In an economic context, a demand curve is a graph illustrating the relationship between price and quantity of a certain good or service demanded by the market. A downward sloping demand curve signifies that as prices decrease, the quantity demanded increases and vice versa.
02

Analyzing Panera's Market Type

Panera operates in a quasi-monopolistic competitive market. This means that while there are other competitors, each firm, including Panera, differentiates its product in some way from the others, creating some level of market power and allowing it to manipulate prices to a certain extent. This differentiation results in a downward-sloping demand curve, as higher prices would lead to lower demand and vice versa.
03

Understanding Perfect Competition

In a perfectly competitive market, no single producer or consumer can influence the price. All producers sell an identical product and consumers are aware of the prices that other producers offer. Therefore, these firms are price-takers and cannot affect the prevailing market price.
04

Wheat Farmer's Demand Curve

Wheat farmers operate within a perfectly competitive market, where consumers view all wheat as identical, regardless of which farmer produces it. Thus, each wheat farmer faces a horizontal (perfectly elastic) demand curve. This means, if a farmer raises their wheat price, consumers will buy from other farmers, causing a drastic fall in the farmer's sales to near zero, because competition drives the price.

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Most popular questions from this chapter

A skeptic says, "Marketing research and brand management are unnecessary. If a company wants to find out what customers want, it should simply look at what they're already buying." Do you agree with this comment? Explain.

Under what circumstances might a monopolistically competitive firm continue to earn an economic profit as new firms enter its market?

Draw a graph that shows the effect on a firm's profit when it increases spending on advertising but the increased advertising has no effect on the demand for the firm's product.

JustFab is an online fashion retailer that analyzes information about customers obtained from its Web site to gauge the clothing they like most and the frequency of their purchases. This information has enabled the company to respond quickly to changes in fashion trends and to better control its inventory. The type of customer data JustFab gathers is not available to retailers that sell only in brickand-mortar stores. Briefly explain the contribution that JustFab's use of customer data can make to its marketing efforts.

In \(1916,\) Ford Motor Company produced 500,000 Model T Fords, at a price of \(\$ 440\) each. The company made a profit of \(\$ 60\) million that year. Henry Ford told a newspaper reporter that he intended to reduce the price of the Model \(\mathrm{T}\) to \(\$ 360\), and he expected to sell 800,000 cars at that price. Ford said, "Less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make." a. Did Ford expect the total revenue he received from selling Model Ts to rise or fall following the price cut? b. Use the information given above to calculate the price elasticity of demand for Model Ts. Use the midpoint formula to make your calculation. (See Chapter 6 , page \(186,\) if you need a refresher on the midpoint formula.) c. What would the average total cost of producing 800,000 Model Ts have to be for Ford to make as much profit selling 800,000 Model Ts as it made selling 500,000 Model Ts? Is this smaller or larger than the average total cost of producing 500,000 Model Ts? d. Assume that Ford would make the same total profit when selling 800,000 cars as when selling 500,000 cars. Was Henry Ford correct in saying he would make less profit per car when selling 800,000 cars than when selling 500.000 cars?
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