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Explain why this is false: There are very large numbers of restaurants in major cities such...

Explain why this is false: There are very large numbers of restaurants in major cities such as Los Angeles, and very large numbers of restaurant customers, so it is appropriate to use the supply and demand model to analyze the restaurant market in this sort of city.

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Answer #1

A supply and demand model is applicable to a perfectly competitive market where each sellers is too small to influence market price and sells identical goods or services. Sellers have no pricing power and are price takers. However, even though there are many restaurants in the city, many of them offer slightly differentiated products, either in terms of menu, quality or service, therefore it is a monopolistically competitive market. Sellers have pricing power and face a downward sloping demand curve, rendering a demand-supply analysis inapplicable.

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