At Least They Aren’t Asking for Government Assistance (Yet?)
In an article in yesterday’s St. Louis Post-Dispatch, Bill McClellan asked his readers to “Support St. Louis’ Culinary Landmarks.” I am very supportive of people voting with their feet, and choosing to support local restaurants in favor of national chains is a great example of this. Later in the article, McClellan illustrated — probably unintentionally — why many local restaurants fail: They fail to respond to changes in the market.
I told him I’ve heard that the recession is hurting a lot of restaurants, especially the high-end places. (Al’s is high-end. My steak was $38. Jack’s veal was $35. With salads, sides and drinks, our bill was $155.)
The meal for two cost $155? No wonder there were only two other people in the restaurant!
According to the law of demand, consumers will buy more of a good when its price decreases and less of a good when its price increases. Fewer people demand a steak that’s $38 than one with a lower price.
Although a person may experience positive marginal utility when they frequent restaurants that have history and character, that value may not be enough to meet or exceed the cost of a $155 dinner for two. Furthermore, people who eat at high-end restaurants face a high opportunity cost; instead, they could pay for multiple meals at a lower-end restaurant, buy groceries and make meals for the rest of the week, or spend the money in a different way.
The demand curve for high-end restaurants in Saint Louis has shifted to the left in recent history, and this can be attributed to many reasons. Reduced patronage from businessmen is a reason that McClellan identifies in his article, and he explains that this is because Saint Louis has fewer corporate headquarters and fewer conventions than before. Additional explanations for the leftward shift in demand for high-end restaurants include: the declining population of Saint Louis, reduced levels of disposable income, and the rise of close substitutes that are less expensive (i.e., chain restaurants).
Supply and Demand for High-End Restaurant Meals in Saint Louis
As shown in the preceding graph, the leftward shift in demand places a downward pressure on the equilibrium quantity and the equilibrium price. This means that the number of high-end restaurants will be lower (i.e., some will go out of business), and it also means that the price charged by the restaurants that remain will be lower.
If a restaurant owner wants to stay in business, then he or she should be responsive to shifts in demand such as this. The restaurant owner can either exit the market, or work toward a better chance at survival by adapting — perhaps by lowering his or her prices.