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Production Decisions

Production Decisions

Q Listen to the following podcast Supply - Getting the Best Out of What You Sell Think Like An Economist and consider how the coffee shop owner's choices change at different prices. (Click for Supply Podcast Transcript.) Did this give you additional insight into how business owners make supply decisions? Did you notice the description of how a higher price would give the coffee shop owner more incentive to increase the quantity supplied? Notice the repeated mention of marginal (cost and benefit) when making decisions. Refer to the chart describing types of market structures here Market Structure. What market structure do you think most closely resembles the structure that this coffee shop is operating in? How would its choices/decisions be different if it were operating in a different market structure?

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The coffee shop as explained appears to be following the monopolistic competitive form of market structure. In this kind of market structure, different firms are found to be producing and offering different products/services which appear to be most closely but not perfect substitutes at all with each other. If the coffee shop followed any other form of market structure then it would have ended making different decisions. Now, according to the podcast, both the demand and supply decisions are determined on the basis of the product.