Managerial Economics Analysis of IKEA's Furniture Demand and Market Equilibrium

This report provides an analysis of the demand and market equilibrium of IKEA's furniture using managerial economics. It includes a description of the business, identification of demand and market equilibrium, and an indication of whether demand is more elastic or inelastic. The report also suggests pricing policies that IKEA can use to sustain in a highly competitive market.

Managerial Economics 1

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Description of business................................................................................................................1
Identification of demand and market equilibrium.......................................................................3
Indicating that demand is more elastic or more inelastic............................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
A branch of economics that deals in execution of microeconomic analysis for decision
making techniques associated to management along with businesses units is managerial
economics (Rajasulochana and Ganesh, 2019). It also assists management of company to predict
aspects of economic comprising cost, production, demand, price and so on. For understanding
about managerial economics, chosen business is IKEA which is popular conglomerate involved
in designing and selling ready to assemble offerings. It was established in 1943 to offer well
designed furnishing products at low prices that are affordable by many people.
The report describes business and its major products. Further, it identifies demand along
with market equilibrium. At last, it includes description about ways in which main organisational
product is affected and factor which indicate whether the demand is more inelastic or elastic.
MAIN BODY
Description of business
Overview of company
IKEA is a business that is specialised to design and sell various ready to assemble kitchen
appliances, furniture, house accessories and other commodities along with services. In 1943, the
organisation was established by Ingvar Kamprad (IKEA, 2021). It serves at global level and some
of its area served includes South Asia, North America, Europe, East Asia, Oceania, North Africa
and hence forth. The entity has passion for home furnishing and inspiring vision that is to create
a better everyday life for various people. It has around 456 stores worldwide. It offers iconic
products that has global popularity together with brightened up houses across the globe. The
company stands for great functionality, exceptional design as well as high quality services.
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Figure 1: Gross profit of IKEA worldwide from 2009 to 2020. 2021
(Source: Gross profit of IKEA worldwide from 2009 to 2020. 2021)
From the above graph, it is determined that in the year 2020, international gross profit of
IKEA amounted to 11.7 Billion Euros, down from 12.4 Billion recorded in earlier year. Products
offered by the entity are flat pack and ready to be assembled by clients and consumers (Gross
profit of IKEA worldwide from 2009 to 2020, 2021). Low prices are cornerstone of
organisational business idea and it executes practices in efficient as well as cost effective
manner. As of 2021, IKEA is one of the most valuable retailer brand in the world. The venture
sells range of products such as decoration, furniture, beds & mattresses, lighting, pots & plants,
textiles and many more.
Chosen product
Furniture is one of product of IKEA that attracts wider population for furnishing entire
home from top to bottom for comparatively modest amount. There are lot of furniture choices for
room decor in a house including beds, wardrobes, outdoor furniture, chairs, trolleys, cabinets &
cupboards, nursery furniture, room dividers and so on. Furniture offered by the company is
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relatively easy to assemble and its efficient packaging makes it easy to transport. It pays more
attention to sustainability and enhances focus upon increasing the use of sustainable material.
Reason for choosing the product
The major reason behind selecting the furniture offered by IKEA is to analyse the ways
in which the company sells the same in an affordable manner. Another reason to select the
product of company is to determine demand along with market equilibrium.
Identification of demand and market equilibrium
Demand is defined as the number of consumers that are willing to buy particular products
and services at a certain price (Tafreshi and Lahiji, 2015). It depends on wants and needs of a
consumer along with their willingness to pay. It drives economic growth. All businesses prefer to
enhance the concerned demand in order to improve the profits.
Figure 2: Graph of demand. 2021
(Source: Graph of demand. 2021)
From the graph, it is determined that demand curve is downward sloping which states
that when prices of commodity increases, then its quantity demanded comes down and vice-
versa. It is an underlying force which drives growth and expansion of an economy. In case with
IKEA, without demand, the company would ever bother to design and manufacture products.
Equilibrium is described to a state wherein the market supply and demand balance each
other which further results in stable prices. When market is at equilibrium, prices will not change
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unless any external factor changes demand or supply which causes disruption of equilibrium
(Tan, Xiao and Zhou, 2019). There are various kinds of factors that must be emphasised by
organisations while analysing that whether the demand of offerings will increase or decrease in
future. With this, it is determined that the elements have possibilities to leave positive or
negative effects on sales. Some of factors that influence demand of furniture offered by IKEA
are identified below:
Price of substitute: Substitute is defined as any product or service that can take place of an
already existing product or service. Substitute products are closely related and turns consumers
to alternative products when prices of either of the same increases. In aspect to IKEA’s furniture,
substitute product that exist is material substitute that includes wood based artificial products that
are known as engineered wood and materials other than metals, glass, etc. All these impacts sales
of existing furniture products that are offered by IKEA. At the time, when prices of wood
material to design and manufacture furniture increases then the demand for engineered materials
increases because of low prices. It is determined that when price of substitute material for
furniture of IKEA decreases then demand for other materials of products decreases.
Price of complements: Complementary products are those products that are used in
combination with other ones (Esmaeili, Anvari-Moghaddam and Jadid, 2019). These have little
value without complements. In other words, commodities which are accessories for other goods
alter in demand contingent on prices of major product. For furniture of IKEA, complimentary
product includes castors, furniture hooks, organising boxes and optional feet. Prices of these
complements are increasing because of huge increment in demand for furniture of the company
in market. It is analysed that when prices of main product rises than demand for complement
goes down. Increase in prices of compliment products will not affect demand for furniture as all
of these are not necessary to be purchased with the furniture. Also, demand for furniture of the
venture is increasing because of good quality of complementary products.
Consumer Income: Purchasing power of buyer is dependent on their wealth and income.
It is a factor on which companies provides huge emphasis while planning the sales of products to
the end consumers. Product consumption increases when the income of consumer gets enhanced.
The increment in the income results in the higher demand of goods and services. Slight shift in
consumer income leaves negative effects on sales volume of a commodity. At present, consumer
income is increasing because of an increase in the employment as well as growing nominal
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earning. It directly impacts demand and supply of the furniture of IKEA. If it decreases in sudden
manner, then consumers will not purchase them because of higher prices. Increased consumer
income leads to enhancement of demand of furniture in market due to direct relationship among
the factors. It is analysed that increasing consumer income causes continuously enhancement in
the demand of the furniture offered by the IKEA.
Consumer taste and preferences: People buy things according to their lifestyle and the
way they feel for a particular brand (Lee and Johnson, 2015). In a market, demand for products
changes as per taste and preferences of consumers. In this, advertising of a brand plays crucial
role in changing taste and preferences of buyer. While designing and manufacturing furniture, it
is essential for IKEA to consider taste and preferences of customers because it will assist in
satisfying the preferences and taste that can result in elevated profits for the company. It is
crucial for people to use furniture in their houses in ways which reflects attitudes and
preferences. In times of Covid-19, buying furniture is at top list of customers.
Consumer expectations about price: Another factor that influences demand and market
equilibrium is expectations of consumers about future prices of commodities. Because of some
reason, when consumers have expectations that there will be rise in near future prices of
products, then they would demand more quantities in present with the hope of not paying higher
prices. In aspect to furniture of IKEA, all customers have different expectations regarding its
prices and it is essential for managers to analyse them addition to set prices accordingly. All
customers and clients of IKEA are expecting decrease in prices of furniture so that they are able
to purchase them easily. It affects demand of commodities as there are times when higher prices
are set by organisation for the product. However, of customers expect that prices of goods will
fall in future then they postpone some part of consumptions of commodities present which leads
to decrease on present demand for offerings of entity.
Demographics: It is said to number of buyers of a product in the market. Market demand
associated to a product is obtained through adding individual demand of existing and prospective
consumers of commodity at distinct possible prices (Guo, Zhao and Wang, 2020). For furniture
of IKEA, it is analysed that wider number of buyers results in greater market demand for the
product.
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Figure 3: Retailers where consumers in the United States shopped most often for furniture as of
2019. 2021
(Source: Retailers where consumers in the United States shopped most often for
furniture as of 2019. 2021)
From the statistics, it is analysed that retailers in which consumers of United States most
shop as of 2019 is furniture. As of March 2019, around 9. 8 respondents say that they shopped
for furniture at IKEA the most (Retailers where consumers in the United States shopped most
often for furniture as of 2019. 2021). In 2020, only Europe accounted around 73 percent of sales
of IKEA’s furniture while Asia accounted around 11 percent of furniture sales. The entity sold
around 60 million of furniture products in last quarter of 2020 that reflects that huge number of
buyers of furniture of IKEA worldwide. With this, it is analysed that the number of purchaser for
organisational offering are increasing. Because of this, demand addition to sales are enhanced
that leads to higher revenue generation for business.
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Indicating that demand is more elastic or more inelastic
Price elasticity of demand could be termed to a measurement for consumption change of a
commodity in relation with changes in price (Inoua and Smith, 2020). Economists uses the
concept for understanding the ways supply and demand related to a product changes at the time
when there are changes in prices. Because of this, furniture product line might be impacted as
when strategists of IKEA modify prices of variants of furniture and increase prices then it
reduces demand of it. It is because customers expect reduction of prices. This indicates that there
is huge elastic demand for furniture of IKEA as changes in prices causes situation of decreased
sales volume. There is various substitute available for rivals to use other materials for
manufacturing furniture and when it grabs attention of consumers then impacts on sales of it.
Substitution effects: It is decrease in sales volume for a commodity which is attributed to
buyers switching towards cheaper alternatives at the time of rise in prices. There is situation
when a product loses market share, but substitution effect is reflection of frugality. For example,
if brand such as IKEA raises prices of furniture, then some consumers will choose or switch to
cheaper alternative. As per customer view, furniture is a necessity which indicates that demand is
inelastic as there are few substitutes available in market for necessity products. In general,
greater necessity of commodity creates more inelastic demand as available substitutes are
limited.
Income effects: It is defined to changes in consumption of product on the basis of income
(Suenaga and Madden, 2018). In other words, consumers spend more when they experience
increase in income, however, spend less when their income drops. In association of furniture of
IKEA, huge purchase represents that smaller portion of consumer income as consumers have
preference to buy furniture because of its affordability. It states that the ways when change in
price of product change quantity which consumers demand of it as per the ways price change
impacts real income. The factor indicates that there is demand is more in in elastic as small
proportion of income of consumer is spend on furniture of IKEA. At the time of changes in
prices of the good, consumers continue their purchase at same quantity.
For sustaining in highly competitive market, it is essential for managers of IKEA to set
and implement appropriate pricing policy in order to deal with entities that offer substitutes to
consumers and clients. Pricing policy is said to the way in which strategist of entity set prices for
commodities and services on the basis of demand, costs, value, competition, etc. it entails
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broader than reaction towards pertaining conditions of market. Some of pricing policies that can
be used by IKEA are as follows:
Price skimming policy: It is establishing high prices during launch of a product and
gradually lowering prices because of entrance of more competitors in market (Cao, Wei and Mei,
2017). For furniture, strategist of IKEA could opt price skimming policy so to gain opportunity
for capitalising on early adopters as well as further undercutting future competences by joining
well established developed market.
Market penetration policy: In this, a manufacturer sets lower prices in initial offerings
so to attract larger customers for products and rapidly reaching to wider fractions. If IKEA
managers uses market penetration policy for furniture, then it can enable the venture to get the
good quickly accepted together with adopted by customers.
Competitive pricing policy: It is choosing strategic price points for attaining best
advantage of commodity based market relative to rivalry. In case, when IKEA wants to reach at
higher level of equilibrium, managers can use competitive pricing policy. Additionally, it will
allow the firm to regulate competition through preventing any loss of customers as well as
market share of rivals.
On the basis of analysis, it can be said that IKEA managers should employ competitive
pricing strategy for furniture. With this, the company is able to respond each movements of
competitors and prevent losing of customer base and market shares to competitors. Competitive
pricing strategy is also effective for giving customer better quality, ensuring better availability of
product, providing superior services to customers, building strong brand reputation and
embedding latest technology (Krivosheev, 2020).
CONCLUSION
As per presented information, it is concluded that management of economics guides in
forecasting economic relationships among various business factors including elasticity of
demand, profit analysis, income, cost analysis and hence forth. By keeping other factors
constant, increase in product prices results in decrease on quantity demanded for the product and
vice-versa. Market equilibrium is a state wherein market demand addition to supply balance each
other. Factors which indicate demand is more inelastic or elastic are substitution effect and
income effect.
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REFERENCES
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Online:
Graph of demand. 2021. [Online]. Available through:
https://m.economictimes.com/definition/law-of-demand?from=desktop
Gross profit of IKEA worldwide from 2009 to 2020. 2021. [Online]. Available through:
https://www.statista.com/statistics/241801/gross-profit-of-ikea-worldwide/
IKEA. 2021. [Online]. Available through: https://about.ikea.com/
Retailers where consumers in the United States shopped most often for furniture as of 2019.
2021. [Online]. Available through: https://www.statista.com/statistics/1011338/retailers-
where-consumers-shop-most-often-for-furniture/
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(Rajasulochana and Ganesh, 2019) (Tafreshi and Lahiji, 2015) (Tan, Xiao and Zhou, 2019)
(Esmaeili, Anvari-Moghaddam and Jadid, 2019) (Lee and Johnson, 2015) (Guo, Zhao and Wang,
2020) (Inoua and Smith, 2020) (Suenaga and Madden, 2018) (Cao, Wei and Mei, 2017)
(Krivosheev, 2020)
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