ECO 201
The final project for this course is the creation of a research paper. Every day, millions of economic choices are made by people—from what brand of soap to buy
to how many employees to hire for a factory. Microeconomics provides us with the tools, models, and concepts to better understand individual choices in the
marketplace and how resource allocation is determined at the micro level. The decisions made by individuals and households impact the market and influence
decisions made by firms. Firms use these tools as a way to determine pricing, output, and profit maximization. As a student of economics, you can use the
microeconomic principles to gain an understanding of how firms and individuals make decisions and also to make your own conclusions about actions we can
take to improve those decisions.
Now, imagine that you are a consultant to the firm of your choice. The firm has hired you to advise it on how it can ensure its future success as a company in its
current market. To do this, you will write a 7–9-page research paper analyzing market and business data to explain how the core microeconomic principles
impact the sustainability of the firm and what actions it can take to ensure success.
The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final
submissions. These milestones will be submitted in Modules Two, Four, and Five. The final submission will occur in Module Seven.
In this assignment, you will demonstrate your mastery of the following course outcomes:
ECO-201-01: Apply microeconomic models to real-world situations for informing effective business decisions
ECO-201-02: Analyze business and market data using microeconomic tools for their impact on business sustainability
ECO-201-03: Evaluate the structure of various markets for informing effective decision-making strategies
ECO-201-04: Assess the behavior and decisions of individuals and firms for their relation to the microeconomic framework
Prompt
You will work with your instructor to choose a firm for which you can find reliable data and information, both at the firm level and the industry level. The firm you
select must be a publicly traded company, must operate in the U.S. market, and must currently be in business. You will need instructor approval before continuing
on with your research paper in order to ensure you have met the necessary requirements. Publicly traded companies file reports with a great deal of data that
you will find useful for your analysis. Once you have selected a firm for your case study, you will gather information and data relevant to the firm and its industry
and use the core microeconomic principles you have learned in class to analyze the information and make a recommendation for your firm. You will compose a
7–9-page research paper in which you will analyze the market and business data to explain how the core microeconomic principles impact the sustainability of
the firm, and your recommendation will suggest the actions the firm can take to ensure success.
Specifically the following critical elements must be addressed:
I. Introduction
Work with your instructor to choose a firm that matches the following criteria: a publicly traded company operating in the U.S. market that is currently in
business.
a) Outline the purpose of this paper and how it will inform your conclusion.
b) Summarize the history of the firm, and provide an overview for what the firm does and what goods/services it sells.
II. Explore the supply and demand conditions for your firm’s product.
a) Evaluate trends in demand over time, and explain their impact on the industry and the firm. You should consider including annual sales figures
for the product your firm sells.
b) Analyze information and data related to the demand and supply for your firm’s product(s) to support your recommendation for the firm’s
actions. Remember to include a graphical representation of the data and information used in your analysis.
III. Examine the price elasticity of demand for the product(s) your firm sells.
a) Analyze the available data and information, such as pricing and the availability of substitutes, and justify how you determine the price elasticity
of demand for your firm’s product.
b) Explain the factors that affect consumer responsiveness to price changes for this product, using the concept of price elasticity of demand as your
guide.
c) Assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growth.
IV. Examine the costs of production for your firm.
a) Analyze the various costs a firm faces, their trends over time, and how they have impacted your firm’s profitability.
b) Apply the concepts of variable and fixed costs to your firm for informing its output decisions. For instance, analyze how different kinds of costs
(labor, research and development, raw materials) affect the firm’s level of output.
V. Explore the overall market for your firm.
a) Discuss the market share of the firm and its top competitors by providing details on current percentages for each firm and describing the trend
over time. You might consider presenting the data graphically.
b) Analyze the barriers to entry in this market to illustrate the potential for new competition and its impact on your firm’s future in the market.
c) Describe the market structure for this firm, and analyze how this affects the firm’s ability to influence the market.
VI. Recommendation
a) Develop a recommendation for how the firm can manage its future production by synthesizing the data presented.
b) Suggest how the firm’s position within the market and among its competitors will allow it to take your recommended action.
c) Describe how the firm can sustain its success going forward by evaluating the findings from demand trends and price elasticity
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Sample Answers
Student Name
Name of the Institution
Date
Introduction
Economics is very essential for decision making and policy statements in firms. Microeconomics is a branch of economics which mainly deals with the theory of the firm and production. Macroeconomics is an economic theory that examines how firms utilize the available resources or factors of production to maximize the level of output. It examines the supply and demand factors that affect a firm (Verceli, 2019). Therefore, most firms utilize microeconomic principles so as to develop economic decision which is beneficial and helps in minimizing cost as well as maximizing revenues. The aim of this paper is to apply microeconomic principles in the development of economic decisions in firms and in this case the analysis is about Starbucks
Starbucks Corporation was established in 1971 as a roaster and retailer of both grounded and bean coffee. The firm was established in Seattle’s Pike Place Market. The company offers a wide range of products ranging from coffee, handcrafted beverages, coffee and tea brewing equipment, mugs as well as fresh food such as pastries, and hot sandwiches (Wells, 2017). The firm has established numerous stores across the world America, Europe, Asia, and Africa. Also, the firm is listed on the NASDAQ stock.
Supply and Demand of Starbucks Coffee
Supply is the total output of goods and services available to consumers while demand is the willingness of buyers to buy a certain good or service. Demand and supply are essential microeconomic principles that are used to determine the price and output of a product in the market (Deepak & Jeyakumar, 2019). The most notable principle is the law of demand and supply which stipulates that an increase in the demand for goods and services will lead to an increase in the prices of those goods and services and vice versa. Therefore, if Starbucks Corporation wants to increase the price of its coffee then it has to examine the level of demand in the market. Starbucks is one of the largest coffee suppliers across the world and its success has been attributed to the application of the principles of supply and demand.
In this case, when the supply of coffee exceeds the demand for coffee in the market, the equilibrium price of coffee will fall which leads to an increase in demand for coffee. Therefore, Starbucks has enjoyed the freedom to incorporate demand and supply factors in its supply for coffee. The demand and supply curve below show how Starbucks uses microeconomics of demand and supply in the market for its coffee (Guler, 2018).
Price per cup
Of Coffee D2
D1 S1
P1 P2 S2
S1 P3 D2
S2 D1
Cups of coffee per hour
The graph above shows the demand and supply for a cup of coffee in an urban American market. In most cases supply is affected by demand. The graph above in Curve D1D2 shows that when the price of goods is high (P1) the supply reduces due to decreased demand for those goods as shown by curve S1S2. Furthermore, when there is an increase in the supply of cups of coffee per hour the demand will increase until the price reduces to P3. At price P3 the level of demand increases as a result of price reduction. Eventually when the demand increases further Starbucks responds by increasing the prices of a cup of coffee so as to meet the demand. Therefore, this is explained when the supply curve shifts from S1S1 to curve S2S2. Consequently, this shows how Starbucks has been able to meet its level of supply and demand in the market by applying this macroeconomic principle. As a result of this, the annual sales of Starbucks have increased within the last three years. The sales revenue of Starbucks was $22.39B in 2017, $24.72B in 2018 and $26.51B in 2019. These represent an annual increase rate of 5.02%, 10.42%, and 7.24% respectively for 2017, 2018and 2019. The graph below shows how Starbucks Corporation has been performing in terms of sales revenue. The graph shows that revenues have been increasing since 2009.
Source: https://www.macrotrends.net/stocks/stock-comparison?s=revenue&axis=single&comp=SBUX
Price Elasticity of Demand of Starbucks
Price elasticity of demand is the responsiveness of demand to the changes in the prices of goods and services. The demand for coffee is inelastic since an increase in the prices of the coffee does not affect the demand (Greenlaw & Shapiro, 2017). Therefore, this means that Starbucks can transfer the costs incurred in the production of coffee to its customers. Starbucks has a strong brand of quality which attracts more customers and this has created brand loyalty of consumers to its products. The company can raise its prices but its consumers are attracted by the strong brand quality established by the firm. The prices of Starbucks prepared coffee is slightly higher than the coffee prepared at home or office. Sometimes the firm views this as less elastic however this does not have an impact on the sales of Starbucks. Starbucks view their coffee as a lifestyle product hence this continues to attract more customers despite the price increases.
Consequently, to boost sales the firm does not use the pricing strategy but rather the band strategy. Starbucks products are more appealing which has brought more appeal to consumers. Due to this strong brand Starbucks has been able to increase its prices from $3 to $11 due to the rising demand. Moreover, this has led to increased demand and more people are willing to spend more to take Starbucks products.
Costs of Production of Starbucks
The costs of production for Starbucks involves the costs of coffee, milk, sugar, workforce, plastic products, and marketing. Coffee prices are very high across the globe and this is one of the factors that drive the pricing strategy of Starbucks. Therefore to ensure optimization in production, Starbucks is able to employ fixed and variable costs of production. Fixed costs are costs that do not change a certain period of time while variable costs are costs that are traceable in each production unit of a particular product (Jiambalvo, 2019). The fixed costs at Starbucks are rent, advertising as well as insurance whereas variable costs include workforce, coffee beans, plastics, and milk.
At Starbucks, fixed costs are driven by increasing revenues from the sale of its products. When the level of performance is high in terms of sales Starbucks is able to increase the number of its stores as well as the costs of marketing. An increase in marketing costs has also led to the improvement in the brand quality of which one of the major significant changes was the change of logo. The company was able to reach brand resonance hence attracting more consumers. Perhaps the firm, therefore, has top constantly monitor its fixed costs so as not to affect profitability.
On the other hand, variable costs are dependent on the level of demand for coffee in the market. If the demand for coffee is high it means Starbucks has to incur more costs in obtaining the coffee beans and other products useful in ensuring a quality supply of coffee to consumers (Nguyen, 2016). In this case, the firm needs to ensure there are enough inputs so as to meet the level of demand for cups of coffee every hour.
Furthermore, due to this, the firm has been able to monitor its costs of production by optimizing both fixed and variable costs. There has been a significant decline in the operational costs of the firm. The firm has been able to conduct research and development which has led to the adoption of proper inventory management systems such as lean systems which have helped to ensure the costs of production are available at all times to meet the rising demand from consumers. Also, this has led to increased profitability and reduction in wastage in the firm.
Overall Market
In the market for coffee, Starbucks Corporation faces stiff competition from Dunkins Brands Inc. The firm also faces competition from MacDonald’s and other food and beverage suppliers (Fatanah, & Musadek, 2017). The company enjoys the largest market coverage for its products. Large market share has been attributed to its strong brand and increasing prices of its products in the market. The firm attracts high-end consumers especially those working in corporate offices and high-income earners. As a result of this huge market share, the firm has been able to increase its revenues which have led to the intention to enter new markets across the globe. The figure below shows how the firm has been able to increase the number of stores for several years in the United States. Also, this shows how the firm enjoys a high market share compared to its competitors.
The Number of Starbucks Stores in the United States from 2005 to 2019
Source: https://www.statista.com/statistics/218360/number-of-starbucks-stores-in-the-us/
Furthermore, the firm has a high market capitalization on the NASDAQ market. The company is capitalized at $103.99B which shows that the firm enjoys a huge market share for investors. The shares of Starbucks Corporation trade at $87.36 and the firm is able to achieve a high of $88 in away. The shares of the firm have increased significantly and this has been attributed to the growth of its revenues. The graph below shows how Starbucks shares have increased significantly for the last five years.
Source: https://www.bing.com/search?q=graph+of+share+price+growth+for+starbucks&cvid=52e4d840da3e4e2aab5b9bf7253f3e87&FORM=ANNTA1&PC=U531
On the other hand, the analysis of porters five models the firm is likely to face the threat of substitutes in the market. There are increased numbers of food and beverage industries across the globe. MacDonald’s have developed their products and offer their products at lower prices as compared to Starbucks. Also, these competitors offer different food products apart from the coffee which is the main product sold by Starbucks. Therefore, this shows that Starbucks needs to ensure it provides its consumers with a wide range of products to avoid the threat of substitutes in the market. However, the firm can utilize its huge market share to provide more products in the market to satisfy its consumer needs.
Recommendations
Despite the huge market share the market dynamics are changing and Starbucks needs to be on track to meet future changes in demand and supply for coffee. Also, the firm needs to make suitable pricing decisions that would enable them to meet consumer needs. Therefore this section aims to bring out the recommendations though which Starbucks Corporation should in its decision making.
Starbucks Corporation needs to adopt the Porters 5 forces in making its economic decisions. Porter’s five forces emphasize competition in the industry, the potential of new entrants, the power of substitutes, the power of suppliers and the power of demand (Velásquez, & Meunier, 2017). Therefore this shows that the market for coffee can be influenced by these factors and Starbucks needs to adopt strategies to mitigate the same. Also, this will be a suitable and ideal way to determine the competitive structure of the firm.
Moreover, the firm needs to conduct a PESTEL analysis for its products. The firm needs to understand the external environment of its products by examining the political, economic, social, technological, ecological and legal factors in the market. Most of the coffee beans are imported from other countries and this means the firms likely to faces some political implications. A PESTEL analysis will aid the firm in developing a suitable marketing strategy that will help in balancing the demand and supply of its products.
In conclusion, microeconomic principles are essential for the development of the firm, they are useful in analyzing the costs and revenues of the firm. In this analysis, Starbucks has applied different policies in the production and supply of coffee and other products across the globe. Due to this, the firm has been able to acquire a huge market size as well as increase its revenues.
References
Deepak, R. K. A., & Jeyakumar, S. (2019). Marketing management. Educreation Publishing.
Fatanah, B., & Musadek, M. (2017). Competitive intelligence for business: A study on Facebook as a marketing strategy (Doctoral dissertation, University of Malaya).
Greenlaw, S. A., & Shapiro, D. (2017). Elasticity in Areas Other Than Price. Principles of Economics 2e.
Guler, A. U. (2018). Inferring the Economics of Store Density from Closures: The Starbucks Case. Marketing Science, 37(4), 611-630.
https://www.bing.com/search?q=graph+of+share+price+growth+for+starbucks&cvid=52e4d840da3e4e2aab5b9bf7253f3e87&FORM=ANNTA1&PC=U531
https://www.macrotrends.net/stocks/stock-omparison?s=revenue&axis=single&comp=SBUX
https://www.statista.com/statistics/218360/number-of-starbucks-stores-in-the-us/
Jiambalvo, J. (2019). Managerial accounting. John Wiley & Sons.
Nguyen, H. (2016). Supplier Selection Process in Café Industry: Case: X Coffee vs. Starbucks.
Velásquez, A., & Meunier, L. (2017). COMPARATIVE MARKETING ANALYSIS OF THE UK AND GERMANY FOR GLOBAL SUSTAIN.
Vercelli, A. (2019). The Emergence of Modern Financial Economics. In Finance and Democracy (pp. 61-91). Palgrave Macmillan, Cham.
Wells, B. (2017). Generating New Value with Consumers: A Multiple-case Study of Co-creation in The LEGO Group and Starbucks Corporation. Projet, 2017, 2549.
