Question

Answer the questions that follow using the information below.

When you decide to go and have a dinner with your friends in a world class hotel such as the Langham hotel or Coronado Beach, perhaps you would be horrified by the high price you would have to pay for a bottle of soft drink such as Coca Cola or Pepsi Cola or wine or even bottled water. Perhaps you begin to ponder why the same commodity that you can get at a supermarket at one tenth the hotel price is going for such an astronomical price at the hotel.Of course, such facilities will have a warning such "you are not allowed to bring in your own food or drinks" posted at appropriate places in the facility for the attention of customers.In another scenario, you enter a designer shop to buy clothes with a designer label for a friend on their birthday or on Valentine day and you reckon the clothes are so much expensive compared to similar own brand clothes from a clothing or chain store, even though they may cost a similar amount to produce.

Questions

Using your knowledge
in basic economics, especially
of the concept of demand and supply, attributes of a competitive market and price elasticity of demand, briefly discuss the following

A. Why may a hotel charge such very high prices for wine, soft drinks or even bottled water and yet quite reasonable prices for food and still get away with such high prices?

B. Why are designer shops able to price their clothes so very expensive and yet still get clients even though similar clothes that are available in a supermarket chain shops cost pretty much less?

Already rated 100%

Answer 1

A. Hotels can get away with high prices charged for the wine, soft drinks or even bottled water. This is mainly because they provide their service along with the products. The hotel does not go out of business even if they charge such high prices because the customers enjoy the other factors that are included in that price such as the ambience, the technology, amenities, services, etc. The price elasticity of demand is highly inelastic, that is the demand will not change irrespective of the prices charged. As a result of which the hotels can charge more than the marked price and still make profits. During peak seasons, there will many tourists in a particular destination and hence the demand for hotels will peak and the competition too. This will compel the hotels to charge prices higher than usual. Even at this high prices, customers won't hesitate to pay their maximum willingness to pay because they get to enjoy other factors as well. So, the quality, service and the location compensates for the high prices paid.

B. Designer stores charge high prices for its clothes because of its quality and unique designs. Most often than not prices are charged high because the designer carefully makes each clothing unique which has high cost of production. Here, the designer is charging more not only for the materials used but also the time and energy used in making that particular item. Luxury clothing lines have high demand inelasticity and as a result, their demand never actually fluctuates much. Customers know what they want and are clear about their preferences and will buy the product that gives him/her the maximum satisfaction no matter how much it costs. As a result, the designer stores can charge more than the supermarket chain shops, where clothes are produced in a bulk and hence decrease its marginal cost of production. The designer stores keep up with their competition by maintaing their fashion labels, they have nice packagings, advertisemensts in magazines, etc.