1) Assume you own a pizza shop close to the campus at Monroe College. You have o
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Question
1) Assume you own a pizza shop close to the campus at Monroe College. You have owned and operated your pizzeria for more than 10 years. During that time, your annual operating costs have increased from $28,000 per year to $91,000 per year. At the same time, revenues have increased from $250,000 per year to $350,000 based mainly on increasing the price of a slice of pizza from 75 cents to $2.00 per slice. As the college community has grown, so has your competition. Two new pizzerias have opened in a 3 block radius and the college cafeteria now sells a subsidized pizza and soda lunch special for $2.50. Although revenues have increased, your profits are now only 10% of revenues vs 30% you enjoyed in your 1st three years. You are preparing your operating budget for next year and realize that the profit margin will decline even more over the next 2 years to the point where you could lose money in the thrid year. Should you close in the short term or try to find new ways of operating? In your response consider: fixed vs variable costs, labor costs, economies or diseconomies of scale (e.g. should you partner with your competition to lower your raw material costs by ordering larger quantities), what is the industries normal profit return, increasing marketing, etc.
2) Long-run view of competition Do a web search at www.google.com for the website of the corporation of your choice. Find that corporation's annual report to stock-holders on the website. What does the report say about the corporation's view of future business challenges and the market in which it operates? Does this corporation see long-run adjustments as described in the chapter?
Explanation / Answer
1. Initially the shop that you owned was the only one providing Pizza. Which means that you enjoyed monopoly in the market. Thus your profit ratio was much higher. But as the new entrants enter into the market you are ultimately loosing your profit percentage to your competitors since now you have new competitors to provide for the total demand of pizza in your locality. Many times such monopolistic situation also helps in earning abnormal profits. But as new entrants enter into the market you will have to take much careful decisions like you cannot charge more or else your competitor will lower their price and take an advantage of it. This means that in the long run you will earn normal or average accounting profits. As competition increases the choice among the consumers increases and your business will depend on the choice of the consumers. Thus rather than shutting down the business in the short run you should make business modules in the long run like providing and inventing some unique pizza styles which will be only your patent and will give something innovative to the customers. Similarly providing the customers with new meal options, renovating the pizza house inorder to attract more customers. Giving away freebies, taking orders via internet, giving free home delivery etc should be able to attract new customers for you and maintain brand loyalty of the existing customers. This will help in increasing profit in the long run. Further you may consider in joining hands with all or any of your competitor. This will help you in enjoying economies of scale with larger orders, cutting down the labour costs etc. These ideas will help in establishing for the long run market and earn long term profit.
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