equilibrium price and chains profits

equilibrium price and chains profits

Q1 : suppose that the government restricts the total number of new branches that can be opened by all chains . how would this effect the equilibrium price and chains profits?

Q2: how can costa ensure maintaining a profit margin over its competitors for a longer period of time before economic profits becomes zero?

this is the article :

coffee culture thrives in the middle east ,
A euromonitor international survey has suggested that the regional coffee industry continues to thrive despite the economic downturn , which saw most consumers cutting back costs on non-basic commodities .
Michael schaefer , consumer food service analyst at euromonitor , says says the middle east coffee sector , including that of the north african region , is now a multi million dollar industry that has not shown any let-up in its annual growth performance ….. schaefer added that since 2004, overall coffee consumption in the region has posted steady increase with UAE growing by a massive 85 percent , morocco and saudi arabia by over 30 percent , and Egypt by a healthy 20 percent . the figures , he said, indicate a ”strong demand for both at-home and on the go coffee drinking opportunities”.

A. The euromonitor analyst added that while coffee consumption and the presence of coffee shops are not new to the region , it has evolved into a more socially oriented business that attracts people of various age , gender, and cultural background .

” there is no question that the modern coffee shop sector represents something new, providing a social outlet for women ,students , and other young people in stark contrast to the male dominant traditional cafe sector. particularly in more conservative markets like saudi arabia , where alcoholic drinks are banned and social opportunities of any kind are limited , coffee shops have emerged as a major nighttime gathering place ” he said .

B. The euromonitor study focused on the region’s surging young demographics in the GCC , for instance , where the median age is 26 as one of the factors driving the coffee industry to post significant revenues . ” one of the key drivers behind (the coffee industry’s) expansion is a soaring youth population students and young people are a key demographic for coffee chains the world over, and many of the middle east’s most important markets boast very young populations indeed”
says shaefer.

Saudi arabia , one of the largest , markets in the gulf region, enjoys a population of 15 million consumers under the age of 30 years , while egypt is home to over 45 million consumers under the age of 30 years old , according to Euromonitor statistics . these brands savvy young consumers the report noted , have been key to transforming coffee shops into a place to socialize. consequently , coffee shops have also transformed their recipes to cater to their ”hip” clientele in the region by offering a wide array of hot and cold concoctions . starbucks, for instance , sells over 30 blends of coffee, espresso , blended drinks, teas, and the frappuccino range . according to the chain’s spokesperson , the currently offer a whopping list of 87,000 beverages combinations , which include low fat / skimmed milk and decaf , and different types of milk , syrups, and sugar.

C. with its huge client base the middle east has become a favourite destination for globally recognized coffee brands such as US giant starbucks , uk’s costa coffee , and canada’s second cup , to name a few .
In an earlier , interview with arroyo.com , a starbucks spokesperson for the middle east region , said the coffee chain has been operating 300 stores in kuwait , Saudi arabia, UAE , egypt, lebanon ,jordan, qatar, oman and bahrain . about 90 of these stores are located in the UAE , 60 of which are based in dubai , ….. ” we are comfortable with our performance and growth plans , in the region . last year we opened over 26 stores across the middle east region , with 17 stores in UAE alone , and we believe there is plenty of potential for more new stores , . we see a significant growth opportunity in the UAE, and across the region , and we continue to invest in the market ” the starbucks spokesperson said.

In addition to these international brands , schaefer said local operators have contributed to the vibrancy of the coffee business in the region . ” Multiple local chains continue to hold their own Egypt’s cilantro [which caters to the high end market] , for instance, now operates 56 branches there, more than starbucks and costa combined , while in saudi arabia a number of local [stores] enjoy a brisk business .” he said. fierce competition , schaefer mentioned , has ” helped fuel an accelerating process of segmentation , as chains look to differentiate their offerings”.
Key points in the article

the article discusses the impact of the demographic characteristics of the arab world on the booming coffee industry . the surging young population in countries such as kuwait, saudi arabia, the UAE, oman, qatar , bahrain , egypt, jordan, and lebanon. led to a significant change in the coffee industry . new habits emerged since these young people found coffee shops a good place to socialize. the strong growing demand attracts large international coffee chains, each trying to differentiate its products.

Analyzing the news

A. coffee shops are transformed into a new social phenomenon where people of all ages and backgrounds socialise . the idea is old in the arab world , but it took a new turn when women became part of that growing phenomenon .

B. the middle east is offering a very unique opportunity for chains such as costa to expand in the region due to a soaring demand from young population .
many coffee chains have transformed their products to meet the tastes of these young customers.
C. the region attracts international coffee chains because of the potential of the market is so huge that it can absorb hundreds of new branches while maintaining a large profit edge. so, currently , coffeehouses like costa are earning an economic profit . this would suggest that an existing firm could be represented by point A in the figure selling Q1 cups of coffee and charging a price of P1 dollars. the profit maximizing quantity is found at the point where the marginal revenue curve MR 1 intersects the marginal cost curve MC. the price is determined by the demand curve . the firm is earning economic profits equal to the shaded areas . the economic profits earned by coffeehouses like costa explain why other international chains are seeking to expand in the arab region as well .
As the figure shows . new entrants in a market will take some demand away from current firms in the market.

this causes the demand curve to shift to the left from demand curve D1to demand curve D2 . the marginal revenue curve also shifts to the left from MR1 to MR2 . the profit maximising level of output is now Q2, where the new marginal revenue curve intersects the marginal cost curve , MC. the new profit maximising price is p2 . notice that at this point the demand curve D2 is tangent to the average total cost curve ATC and the firm is earning zero profits . at equilibrium , all firms in the market will earn zero profits , this is shown as point E in the figure.
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