Question

3. Coffee shops in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar. a. How could you argue that this market is not competitive? b. Could each coffee shop face a demand curve that is not perfectly elastic? c. How profitable do you expect coffee shops to be in the long run?

Answer 1

Answer.)

a.) Most coffee shops have effectively small geographic range and they do not attract consumers from very far away, and thus do not compete with the coffee shops across town

b.) Yes; if they have some degree of market power ( e.g. they can charge slightly higher prices since consumers will not stop at every coffee shop in town to find the cheapest tea) then they will not face perfectly elastic demand.

c.) Coffee shops in long run would only be earning normal profits as presence of economic profits would certainly attract new coffee shops in that area and this will reduce economic profits to Normal profits.