Price and Market

ASSIGNMENT 2

ECON1194A

Subject Code:

Price and Market

Subject Name:

RMIT Vietnam, HCMC

Location & Campus

Nguyen Vuong Hoang Anh

Student’s name:

Student ID S3915023

Teacher’s name: Le Vi An Tam

Word count 1492

 TABLE OF CONTENTS

I. Price elasticity of demand 3

II. Diminishing marginal returns and marginal costs 6

III. Perfect competition 9

IV. References 12

V. Appendices 13
I. Price elasticity of demand

1.

My business is a medium sized cafe, one floor, located at Pasteur, District 1, Ho Chi Minh
City. The cafe provides a comfortable studying and working space.

After completing the survey (Appendix 1), we have the following graph:

Formula of my business demand curve: y=(-)2038.5x +59928

=>x=(59928y)/2038.5

Substituting each price value into y, we get the quantity demanded:

As seen in the table, from the 8th price onwards, the quantity demanded is negative (because
the price is higher than the estimated demand); thus, we don’t use these values to calculate
the quantity elasticity.

Δ Qd P0 + P1
As quantity elasticity of demand ( ε p ¿= ×
Δ P Q0 +Q1

We have the following spreadsheet:

Firstly, in law of demand, a higher price reduces quantity demanded, illustrated by the
negative sign of the elasticity of demand. Therefore, as price increases (from 20,000 vnd to
100,000 vnd), quantity demanded decreases (from 19,587 to 2,417). Secondly, responding to
price adjustment, demand can be classified as elastic(|εp|>1), inelastic (|εp|<1) or unitary (|εp|
=1). At prices 1 and 2 (25,000vnd and 30,000vnd), the demand is inelastic because of |εp|<1,
which means that the demand changes by less than the change in price (for 1% increase in
price will lead to only up to 0.6% and 0.85% decrease in Qd respectively). However, the
closer to the “high-end” of the demand curve, the Qd decrease faster than price, proved by |
εp|>1. Mathematically, price elasticity calculates the percentage change in Qd divided by that
in price (Allen & Lerner 1934, p.226-230). Therefore, when the price increases by 1%, Qd
will decrease by more than 1% (the specific ratio for each price level can be observed in the
table above). Therefore, coffee drinker's demand is elastic and customers are price-sensitive.
Conclusively, the higher the price is, the lower the quantity demanded is.

According to Hicks (2020), the relatively high share in income and substitutes is the major
factor of elastic demand. The demand for coffee in Vietnam is very high, the average
monthly consumption of tea and coffee in Vietnam has reached 0.1 kilograms per capita in
2020 (appendix 2). For this reason, it accounts for a significant portion of income. In general,
a cup of sidewalk coffee or bottled coffee is just 15,000 to 30,000 VND, however, in the
coffee shop, it costs up to 100,000 VND. Hence, most Vietnamese would not spend much
money on the high-price coffee shop, especially in the post-pandemic time, people tend to
save more (Ha 2021). Secondly, while still in the epidemic, coffee kiosks, bottled coffee are a
great alternative to coffee shops because people are afraid to gather (Thinh 2022). So, there is
no reason for people to pay much money on a cup of coffee in the cafe.

2.

The market price of a cup of coffee ranges from 25,000vnd to 80,000vnd at coffee shops and
even up to 125,000vnd at food chains (Appendix 3). Based on the location and coffee quality,
and compared with other shops, I decided to increase the price to 30,000VND. Since this
price demand is inelastic (|εp|<1), meaning demand falls less than price increases, this has no
negative effect on a firm's revenue.

The calculation and graph below will explain the above statement:

Current revenue: P1*Q1=25,000*17.13=428,250(vnd)

Forecast revenue: P2*Q2=30,000*14.68=440,400(vnd)

Clearly, the decreased percentage of Qd (up to 0.85%) is lower than the increased percentage
of price (approximately 1%). For this reason, this is an insignificant change of the product's
revenue. In other words, increased income from higher pricing can compensate for lost
revenue when demand for coffee consumers declines slightly.

P
(VND/
cup of
coffee)
: The higher revenue gain
from increase the price
|ε|>1 : The lost revenue because
of the decrease in quantity
demanded
|ε|=1

30,000 |ε|= ~ 0.85 <1

25,000

0
TR 14,68 17,
13 Q (cups/day)
(VND)

440,40
0
428,2
50

0
14,68 17,13
Q (cups/day)

II. Diminishing marginal returns and marginal costs

1.

According to the rule of diminishing marginal returns, if the same amount of variable inputs,
are added to the same amount of fixed inputs, output growth will progressively decrease.
(Cannan 1892, p.53-69)
Based on production function, In this case, the quantity of labor is represented by baristas, the
amount of capital is equipment, and the overall production is customers per day. And in the
peak time, my coffee shop needs to hire double baristas; however, the output is recognized as
lower than double. This situation can be explained that the number of workers is continually
increasing while equipment has not updated sufficiently. This problem leads to the shops not
being well organized since the shop is overloaded with human resources and the workers are
not being allocated to the suitable position. Furthermore, it could be worse when the baristas
cannot find a familiar voice; which seriously affects the quality and progress of work.

2.

In order to test the law of DMR in the short run, we assume:

1. Baristas (L) and coffee machine (K) are the main inputs for the production, affecting
the productivity of the processes.
2. There are 3 baristas in the coffee shop at regular times.
3. There are only 1 coffee machines in the coffee shop
4. Number of customers go to my coffee shop regularly every week.
5. All baristas have the same salary
 Point of
If MP is increasing, diminishi
TP is increasing at ng return
an increasing rate

Number of baristas

Productive phase Diminishing returns

Marginal product labour (MPL) is the relative rate between inputs (numbers of customers)
and outputs (baristas).

At regular times, the coffee shop has 2 baristas. However, in the peak time, we hire triple
baristas to serve more customers.MPL rises and peaks at 12, suggesting that service outputs
rise faster than recruitment rates until the ideal threshold of 3 baristas is reached. At this time,
my café uses the capital capacity and manages staff efficiently. Following that, MPL
decreases, but still positive, signalling that the staff's productivity decreases as a result of
newcomers' blunders or dissent. However, the number of customers continues to rise,
although more slowly than before.
3.

According to the table 1, we have below graphs:

Figure 1: Graph illustrates the relationship between DMR and MC of my cafe.

Marginal costs (MC) calculate change in variable costs over the change in outputs (Tuovila
2022). In this case is the change in costs of baristas over that in the number of customers .
The more output is (MPL), the less MC because the same salary (Assumption 5) spreads over
larger output quantities. Thus, MPL's pattern of DMR is precisely the reverse of MC's (table
1). This relationship reveals whether it is worth hiring an additional worker to expand
production. At the time that MPL is increasing and MC is decreasing, the cafe should hire
more bartenders to optimize capital and human resource. Nevertheless, when MPL reaches
peak and MC falls to bottom, it is a sign for optimal productivity of baristas, which means
that productivity will decline thereafter. To avoid DMR, eliminate redundant labor and
improve, retrofit machines are needed.
III. Perfect competition

Since the beginning of 2020,due to the COVID pandemic, resulting in a sharp decline in the
revenue of many restaurants, especially coffee shops. Coffee shops are forced to limit their
operations, even close, which greatly affected not only sales but also lost a large number of
industry personnel (Mai & Tri 2020). Meanwhile, the demand for coffee shops recovered
after directives banning going out were removed due to high vaccination rates.

Many shops started to reopen, however, labourers were constantly infected which reduced the
operating capacity (Hanh 2022). Additionally, according to VTV (2021), the tight supply of
coffee, high shipping costs, and lack of containers due to the complicated developments of
the COVID-19 epidemic have caused coffee prices to increase continuously since mid-
November 2020For these reasons, supply sources of the coffee shop decrease dramatically.

Since lacking supply would lead the supply curve shift leftward and the demand curve stay
the same, the market price level increases.

P
P
S1
D S0

P1 P1
P P
0 0

Q0 Qty Q1 Qty

Figure 1: Market demand curve vs. Demand curve for a

firm

In a perfectly competitive market, the perfect mobility of factors of production ensures that
all enterprises have equal access to materials, labour, and other inputs . Therefore, products
are identical so there is no incentive for customers to buy the products at a higher price. Due
to this pressure of competing, it pushes small firms to accept market's existing equilibrium
price. Thus, I will increase the price.

Long-run

P D S P MC
S ATC
1
E
P1 1 P1
P0 P0
E
0

Qt Qty
y

Short-run

P
ATC

MC

AVC
P2 Q2
P1 Q1

0
Qty

Demand curve faced by individual firm shows how elastic the demand of coffee shop to price
is, which implies the constant price hence constant MR. Based on the assumption, small firms
are profit maximizers operating in a perfectly competitive market which MR must equal to
MC. In this case, MC has to increase proportionally to MR hence the condition is the increase
in level of outputs. In short-run, the cafe is producing at profit maximization output and
making a normal profit at P=MR=MC=ATC. In long-run, it is producing at at minimum ATC
which can only make normal profit or zero economic profit. Thus, it can achieve both
allocative and productive efficiency when increases both price and output levels.
IV. References
Allen, R & Lerner, A 1934, 'The Concept of Arc Elasticity of Demand', The Oxford Journals,
vol. 1, no. 3, pp. 226-230, viewed 15 April 2022, JSTOR database.

Cannan, E 1892, 'The Origin of the Law of Diminishing Returns, 1813-15', Oxford Journals,
vol. 2, no. 5, pp. 53-69, viewed 15 April 2022, JSTOR database.

Ha, H 2021, 'How Covid changed spending habits of Vietnamese - VnExpress International',
VnExpress International – Latest news, business, travel and analysis from Vietnam,
13 October, viewed 15 April 2022, <https://e.vnexpress.net/news/life/trend/how-
covid-changed-spending-habits-of-vietnamese-4369052.html>.

Hanh, T 2022, 'Nhiều hàng quán ở Hà Nội lao đao vì nhân viên "dính" F0', Lao Dong , 12
March, viewed 15 April 2022, <https://laodong.vn/cong-doan/nhieu-hang-quan-o-ha-
noi-lao-dao-vi-nhan-vien-dinh-f0-1020709.ldo>.

Hicks, C 2020, 'Elasticity vs. Inelasticity of Demand', U.S News, 13 October, viewed 15 April
2022, <https://money.usnews.com/investing/investing-101/articles/elasticity-vs-
inelasticity-of-demand>.

Mai, B & Tri, N 2020, 'COVID-19 khiến nhiều 'ông lớn' ngành đồ uống 'xuống đường'', Tuoi
Tre Online, 6 December, viewed 15 April 2022, <https://tuoitre.vn/covid-19-khien-
nhieu-ong-lon-nganh-do-uong-xuong-duong-20201206153912235.htm>.

Thinh, H 2022, 'Ca nhiễm tăng, TPHCM khẩn cấp yêu cầu hạn chế tụ tập, đến nơi đông
người', Báo điện tử Tiền Phong, 4 March, viewed 15 April 2022,
<https://tienphong.vn/ca-nhiem-tang-tphcm-khan-cap-yeu-cau-han-che-tu-tap-den-
noi-dong-nguoi-post1420800.tpo>.

Tuovila, A 2022, 'Marginal Cost of Production', Investopedia, February, viewed 15 April

2022, <https://www.investopedia.com/terms/m/marginalcostofproduction.asp>.

VTV 2021, 'Giá cà phê có thể đạt đỉnh vào cuối năm?', Bao Dien Tu VTV, 29 November,
viewed 15 April 2022, <https://vtv.vn/kinh-te/gia-ca-phe-co-the-dat-dinh-vao-cuoi-
nam-20211129121116448.htm#:~:text=Gi%C3%A1%20c%C3%A0%20ph%C3%AA
%20t%C4%83ng%20do%20ngu%E1%BB%93n%20cung%20thi%E1%BA%BFu
%20h%E1%BB%A5t&text=%C4%90%E1%BA%A1i%20di%E1%BB%87n%20Hi
%E1%BB%87p%20h%E1%BB%>.

V. Appendices
https://docs.google.com/forms/d/1Eya-ZIPsrVL-
cpMeG9RqfBfbbFuZgS4LV5FVCrbXUUM/edit

Appendix 1: The market survey

Appendix 2:Average monthly consumption of tea and coffee per capita in Vietnam from
2010 to 2020
(in kilograms)
Appendix 3: Market price of types of coffee.