South-Western College Publishing - Economics  
Three and Four Star Restaurant Prices Shoot Heavenward
Subject Comparative statics
Topic Equilibrium
Key Words Prices, costs, quality, rents, loans, incomes, wealth, stock market
News Story

The prices of entrees in New York restaurants rarely used to be above $30 - except perhaps for lobster and prime sirloin. Now many menus list nothing under $30. This is happening even in restaurants with less than four-star food, service and ambience. Who could have imagined paying $32 for cod at Picholine or $38.25 for rack of lamb at Limoncello? At the Essex House, the new French chef --who has six Michelin stars--is expected to charge $200 per person, excluding wine.

A restaurant consultant says that some of the high prices are justified, while others are not. Food costs have risen, particularly where chefs search out the most rarefied ingredients, or increase the quality of meat or fish they use. Some restaurants have chosen to upgrade which means hiring more experienced managers and specialist chefs. Rents are also increasing fast. Opening a high-end restaurant requires spending $3 million on design and construction; then the loans have to be paid off.

Yet restaurants are full because many New Yorkers are seeing their incomes and cyberwealth rise. They seem to have amnesia and forget what dining prices were like at lower income levels. This may not last, however. The decline in the stock market has reduced the number of stockbrokers who are dining in expensive restaurants. Consequently, for example, the owner of Two Two Two is lowering his prices substantially.

(Updated July 1, 2000)

1. Draw a price-quantity diagram of the market for New York City restaurant entrees, showing the supply and demand curves and the equilibrium price and quantity. Chefs are using more expensive ingredients and restaurant owners are paying more rent (or spending more on building their own restaurants).
  a) Which determinant of demand or supply have these developments affected?
  b) On your diagram, draw the implications for the curves and the equilibrium.
2. At the same time, New Yorkers have experienced rising incomes and wealth.
  a) Has this affected the demand for or the supply of entrees?
  b) On another diagram show the effect of higher incomes. What has happened to the equilibrium price and quantity of entrees?
3. The news story indicates that the price of entrees has skyrocketed yet restaurants are full.
  a) Draw another diagram of the market for entrees, and show the changes in both Questions 1 and 2, making sure that your diagram shows what has happened in practice to prices and the number of entrees bought and sold.
  b) Recently, stockbroker incomes have fallen. Show the effect of this on the equilibrium price and quantity of entrees. Study your diagram and strategize what restaurant owners could do to ensure their establishments are full.
Source Rick Marin, "Remember When $29 Shocked…," The New York Times, May 17, 2000.

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