Perfect competition describes the idealized state of the economy. This is a hypothetical situation in which prices in the market are influenced by supply and demand, but individual sellers and buyers cannot influence the price. If the seller sets a higher price, it will lose customers who prefer buying goods from competitions offering a lower price. In other words, perfect competition is the opposite of a monopoly. It is important to note that, unlike the latter, the former does not exist in the real economy (Hayes, 2019). However, these theoretical markets are studied to understand the effect of supply and demand, as well as to compare other markets with this benchmark. In addition, many of its features are observed in specific industries. One of the examples close to the state of perfect competition is the restaurant business.

Hayes (2019) highlights several key features of perfect competition. First, all companies sell the same products. Secondly, there is a vast number of equal sellers and buyers with a low market share. Thirdly, all participants have equal and full access to information. Fourth, the lack of control and barriers to entry or exit from the market. Fifth, effective and cheap mobility of goods. If at least one of the above factors is missing, the competition is called imperfect; the most common example of the latter is monopolistic competition.

It is evident that the restaurant industry has several common features with perfect competition, including a large number of companies, full access to information, and relatively easy transportation. Nonetheless, the good is not a perfect substitute between different restaurants; instead, they offer differentiated products. Furthermore, in order to enter the restaurant market, one needs to obtain several government licenses, such as the food service establishment permit. Thus, while the restaurants do tend to display characteristics of perfect competition, the industry still belongs to monopolistic competition.

The maximum profit is achieved when total revenue (TR) exceeds than the total cost (TC). As stated above, in conditions of perfect competition, the price in the market is established under the influence of supply and demand, and the firm cannot influence this price. What the firm can change is the output at the market price. This behavior affects total revenue, expenses, and, consequently, profit (“Profit maximization,” n.d.). In the short run, a perfectly competitive firm maximizes its profits by releasing a quantity of the product at which marginal revenue (MR) and marginal costs (MC) are equal. Accordingly, if MR > MC, the restaurant can increase its profit by increasing output. If the restaurant is producing at a quantity where MR < MC, it can increase profit by reducing output (“Profit maximization,” n.d.).

Restaurants may open on Mondays for several reasons. In perfect competition, a separate restaurant cannot attract customers by installing a lower price. Undoubtedly, in such circumstances, every buyer is critical to the firm, even if their number on Monday is much lower than on other days. In addition, if the restaurant is closed on Monday, it may scare off potential customers who think that it is abandoned. Finally, restaurants allow their employees to start a week with a lower number of visitors in order not to overload them with a large amount of work after the weekend. This allows workers to maintain performance and increases overall productivity.

The decision to open a restaurant on Monday or not should be based on the ratio of profits on Monday and total expenses necessary to open a restaurant on that day. If the number of customers on Monday is sufficient to cover the costs, one needs to open the restaurant. Sometimes, even losing money on Mondays can be a right business decision if it helps to attract new consumers, especially those who are likely to return to the restaurant on another working day, Friday night, or weekends.

In the long-run, restaurants in the perfect competition will not earn any economic profits. However, they still experience profits in the short run. Taking into consideration that there are no barriers to entry, all this attracts new competitor restaurants to join the industry (Hall, 2018). In the long-run, an increase in the number of firms in the market will lead to a further reduction in prices, as a result of which an equilibrium is established at which firms do not earn an economic profit. The long-run benefits of running a restaurant include an opportunity to leave the industry immediately as soon as profit is zero.

A list of the variable costs and fixed costs of a McDonald’s franchise is given below:

In the long run, all costs and factors of production are variable. Therefore, a McDonald’s franchise will be able to adjust them in order to affect the long-run input ad output.

References
• Hall, M. (2018, January 16). Why are there no profits in a perfectly competitive market? Retrieved from https://www.investopedia.com/ask/answers/031815/why-are-there-no-profits-perfectly-competitive-market.asp
• Hayes, A. (2019, April 11). Perfect competition. Retrieved from https://www.investopedia.com/terms/p/perfectcompetition.asp
• Profit maximization in a perfectly competitive market. (n.d.). Retrieved from https://courses.lumenlearning.com/wm-microeconomics/chapter/profit-maximization-in-a-perfectly-competitive-market/