FIRM 2

The Problem

Mr. Arturo Dalandon has always acknowledged that his auto-repair shop is the best
among the rest especially in their neighborhood. He’s confident in the quality of the
services that they provide. At the beginning of the company’s operations, the demand of
their services was higher than the supply of labor they can offer to meet these demands.
Recently, he’s been wondering why his workers have been feeling bored which can be
deduced from the decrease of customers who are willing to avail their services thus, giving
more time for the workers to be idle at work.

The firm is facing several problems. One of these is that despite having a high
demand at the beginning of operations due to the cheap price offer, Mr. Arturo did not find
alternative ways to increase the supply of labor in order to cope with the demand of the
market. As a business owner, his goal should always aim at achieving profit maximization
but he did not do so. Secondly, when 3 new neighborhoods were built along with a highway
that passed through his town, Mr. Arturo did not bother changing the market price offering
of their services. Economically speaking, once a population grows, it immediately attracts
more competitors for business owners and that is why businesses should lower their prices
in order to still get a significant percentage of the market share. The law of demand states
that “as the price of a good or service decreases, quantity demanded increases; conversely,
as the price of a good or service increases, quantity demanded decreases”. This is the main
dilemma that Mr. Arturo is facing since most of his competitors have lower prices
compared to his. Lastly, Mr. Arturo is so focused on satisfying his self-interest that he
refuses to change his prices just because he wants it to remain the same. In this scenario,
the market has the power to determine the price and if a business does not conform to the
price standard then it won’t be able to operate efficiently.

To give a better visualization of the firm’s problem, another real world example is
when a well-established salon shop gradually becomes surrounded by new competitors
since the demand for salon services have risen in the market. These new competitors then
offer affordable yet quality services and packages while the well-established salon shop is
banking on its “brand name” and popularity thus, refusing to lower the prices of their
services. Eventually, customers will tend to avail more services from the new competitors
in the long run due to the law of demand.

Evaluation and Analysis of the Problem

 As an economist, my evaluation regarding the problem is that first and foremost, if
ever a business has higher demand rates compared to its supply, it must find the
appropriate means to provide the needed supply; this is to avoid shortages. Sellers may
benefit from shortages because it gives them the power to increase their prices however, in
the long run, it is better to aim for market equilibrium. Afterwards, if ever the business
notices that competitors are gradually decreasing their prices, then so should they. This is
to maintain their competitive advantage. If a business does not follow the trend of their
competitor’s prices then they will be left out and will be inefficient. Every business owner
must make decisions if their marginal benefit exceeds their marginal cost and not because
they just “feel” like making the decision. For example, the two gas stations (Shell and
Petron) which are located beside each other in South Road Properties (SRP). If Shell sets
their price of diesel to Php 43.64 per liter and offers an additional Php 1.00 discount for
every liter being purchased the Petron will exactly do the same. This is to ensure that the
market will not be monopolized by one gas station in the SRP area. Petron may also opt to
sell their diesel at a cheaper price with a better discount rate but Shell will still follow their
pricing strategy for the same reason stated in the latter.

P Demand curve has a movement

R going upwards which indicates
I the decrease in demand when a
firm’s price is higher compared
C
to its competitor’s price.
E

QUANITITY DEMANDED

Demand and supply curve when

the demand is greater than the
supply of labor being offered by
Mr. Dalanon’s company; shortage
occurs. competitor’s price.

Demand curve of both Shell and Petron if they choose to sell their diesel at the equilibrium price of Php 43.64

PHP 63.64

PHP 43.64

PHP 23.64
500 1,000 1,500