Demand and Market Equilibrium for Ikea's Sofa: A Management Economics Analysis

This report provides a comprehensive analysis of the demand and market equilibrium for Ikea's sofa. Factors such as price of substitutes, price of complements, consumer income, consumer tastes and preferences, consumer expectations to prices, and demographics have been discussed in detail to understand their impact on the demand for the product. The report also discusses the price elasticity of demand for the product and suggests a pricing policy based on the market equilibrium and the factors affecting the demand for the product.

Ikea

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Business Description...................................................................................................................3
Identification of demand and market equilibrium and how each factors influence demand of
product.........................................................................................................................................4
Factors indicating whether the demand is elastic or more inelastic............................................6
CONCLUSION................................................................................................................................9
REFERENCES................................................................................................................................1

INTRODUCTION
Management economics is the branch of economics which involves the application of
economical methods in the managerial decision-making process for the integration of the
economic factors. In this project the chosen organization for the study of the management
economics is Ikea. This project will provide a critical evaluation of economic data in the
international and organizational context. In this project different economical concepts will also
be used for the making managerial decisions. This project will help in analysing the impact of
government policy on markets and its effects.
MAIN BODY
Business Description
Ikea is Swedish-founded organization which is headquartered in Netherlands. It is a
multinational conglomerate organization which designs and sells ready to assemble furniture,
kitchen appliances and home accessories. This organization was founded by Ingvar kamprad
founded IKEA in 1943 at the age of 17 (Elf, Isham and Gatersleben, 2021). It was started by the
selling household goods like pens, wallets and picture frames. It also deals with other goods and
home services. The industry in which Ikea operates in is the retailing of home furnishings that is
known to be the worlds the largest seller of furniture in the early 21st century. Ikea has been able
to gain competitive advantage in its market with the help of the cost-effectiveness strategy. This
explains how the global furniture retailer is able to offer low prices for thanking a combination of
economies of scale and technological integration into the different business processes. The
increasing variety of the products is also the factor which is responsible for the growth of the
organization and is able to generate.
Ikea has different range of home furnishings products. The chosen product from this
organization to study is economic impact on the business is Ikea Sofa's. Sofa which are also
sometimes called couch or a Davenport is long upholstered seat with both arms and a back. This
is considered to be a common luxury product of Ikea made for human comfort. It has been
known for matching with the décor and lift the mood of the person which uses it. The reason for
selecting this product is that it is one of the most sold products of Ikea and it despite being a
luxury product has started to turn into a necessity due to the matching concept that it brings in
the new culture.

Identification of demand and market equilibrium and how each factors influence demand of
product
Market demand of a product is described as the demand for the sofa from those who
wants to purchase it. Market equilibrium is the point of the market prices in which the quantity
demanded is equal to the quantity supplied. This is also known as the point at which the quantity
demanded is equal to the quantity supplied and is also the equilibrium price or the market
clearing price that is the corresponding to the quantity.
Price of substitutes
Substitutes are considered to be goods which are able to consumer one in place of the
other. The prices of complementary or substitute goods also shifts the demand curve (Nasir and
et.al., 2020). The prices of the goods that complement a good decrease. This as a result impacts
the quantity demanded and impacts the increase and the demand of other increases. If the price
of the substitute goods decreases, it impacts the quantity demanded for the substitute. This is bad
for the demand for the good that is being substituted for decreasing. The substitute for this sofa
are generally products which helps customers to sit. The price of the product of chair has been
decreasing as new and more innovative technology is impacting its cost-effectiveness. Therefore,
due to the increase in the demand of the substitute would affect this sofa's demand as it will
decrease.
Price of complements
The price of complements is being also considered to be a factor which affects the
demand curve. This happens if the price of these complements decreases the quantity demanded
for those goods also increase (Wen, 2021). This ultimately affects the demand of sofa as the
complement goods are product which are co-dependent on each other. Some complements of
safe would be a sofa table. This is product which is required to be kept close to the sofa's as it is
considered to be cultural set of the product. Hence, the increase in the demand for one would
also increase the demand of another. The demand of the price of complements for sofa which is a
sofa table in the market is high as due to the high demand of sofa as well. The price of the
complements is also increasing due to the increase in their demand.
Consumer income
Consumer income is the factor which affects the demand of the products directly (Yadav
and et.al., 2021). For sofa this relation is inverse in nature. Thus, the price of the product and

amount that consumers are willing to pay for it. Increase in the consumer income in the market is
considered would mean increase in the demand for the sofa. Therefore, this will influence the
price to increase. Then again the increase in the price will ultimately result in the decrease in the
demand due to the law of demand. This is how the market equilibrium of this product is decided
by consumer income. The consumer income has increased in the last few years as the more and
more mil
Consumer Tastes and Preferences
As per the recent trends in the market the customers prefer furniture made up of wood,
glass, stone and metal over the plastic and manmade fibre as furniture material. There are certain
factors that affects the buying pattern or behaviour of customers. While purchasing furniture like
sofa consumer consider it as spending for an investment that lasts long. So considering the trend
if Ikea produces sofas that are made from wood and natural fabric the demand will experience an
upward shift for the product (Bronnenberg, Dubé and Sanders, 2020). Further the company
should make sofas that are durable to be worthy in the eyes of consumers for making their
investment or purchase decision. High quality of materials being used by the company will
ensure that the manufactured sofas are durable. Further sofas are purchased by the consumers as
a complimenting furniture to their houses or offices. The interior of the homes and offices
impacts the decision to buy sofa. Thus to increase the demand for sofa the company should make
the product customized according to the recent trends in the interior. Contemporary, arches,
coloured concrete are some of the trends in the interior recently. The production of furniture as
per the preferences and tastes of the buyers will increase the demand and producers will be
attracted to the industry to earn the profits making the supply curve shift to meet the demand
curve.
Consumer expectations of price
As per the trends, over the last five years the consumer spending on furniture and
furnishing in United Kingdom has been declining gradually. It means that the consumers are
preferring some other products for spending their salaries. Consumer expectations for the price
of particular product affects the demand for the product. For instance, if the consumers expect
that the price of sofa will increase in the near future there will be an upward shift in the current
demand for the sofa requiring the firm to produce more for meeting the increased demand
(Modica and et.al., 2020). Vice a versa if the buyers expect that the price of furniture will fall in

the near future then their demand for the furniture will fall at present as the customers will tend
to wait for the fall in the price to purchase the furniture limiting the production by the company.
On the other hand, some customers believe that the furniture is durable, good, and worth to be
purchased if the price of the furniture is high. There are different types of furniture for different
income groups of the economy offered by Ikea. The luxury product buyers for from high income
group and expects the product price to be high. The buyers for affordable ranges by the company
expects the price to be low so that they can afford the products by the company. To maintain the
certainty in the demand levels the company should make the products available as per the price
expected by the company.
Demographics
The increase in population impacts the demand for goods and services. Rise in population
means rise in demand for furniture thus the demand is affected positively. The number of
consumers in the furniture and furnishing sector has been declining over the last few years this
impacts the demand for the Ikea’s sofas adversely (Kaputa and et.al., 2018). The demand for the
product falls. This fall in the demand for the product will make the producers to produce less.
Thus the producers in the industry will keeping manufacturing products in the low quantities till
the supply curve meets the demand curve reaching the situation of equilibrium.
Factors indicating whether the demand is elastic or more inelastic
Price elasticity of demand is the ratio of the percentage change in the quantity demanded of
the product in comparison to the changes in the prices. It helps in understanding how the supply
and demand of product change which the price of the product is changed (Hernández-Izquierdo
and et.al., 2019). The substitution effect is the decrease in the sales of the product which is due to
the fear of consumer switching to a cheaper alternative when the products prices increases (What
is the Substitution Effect?, 2022).
Sofa as a product has an elastic demand which means that the price elasticity of the
demand this product is greater than 1. Therefore, any changes in the price for this product will
affect the demand product. Comparatively it can be said that sofa as a product when was
launched it was considered to be a luxury for those which bought it. Consumer income has
increased in the market and effects of the demographics is converting sofa into necessity.
However, it can be said that there are substitutes for this product which are lot cheaper in price
that can fulfil the purpose of the customers for example, chair, bench, hanging seat etc.

Comparatively these products are much cheaper in price. High increase in the price due to the
high demand of sofa is influencing the customers to consider other options which are of lower
prices (Brzezicka and Kobylińska, 2021). The price elasticity of the demand will get affected by
this phenomenon. This can be understood with the following diagram,
From the above graph it can be understood that the initial price ratio is P0. It is the prices
of the Sofa in relation to the price of substitutes and is also known as the relative price of
substitute in the terms of sofa. Initially the consumers purchase the products at point X. As the
price of the substitutes fall from P0 to P1. This results in the substitutes now being less expensive
in terms of sofa. This shows how the substitution effect changes the consumption of this products
while the utility of the products does not change. The substitution effect can bring movement
along the same curve if the consumption of the sofa increase due to the product changing its
characteristics from luxury to necessity. This happens due to the increase in the income level of
the consumers. This shows how these factors affect the price elasticity of demand for Sofa.
Income effect arises when the demand of a product decreases due to the decline in the
consumer’s real income rises. It happens is the goods are costlier that its substitutes such as sofa
and it finds the increase in the demand as the society economy has improved. This generally
happens with products like sofa which has converted itself from luxury to necessity. In this the
substitution effects works for opposite direction. It can be explained properly for sofa with the
help of the following curve.
Sofa
Substitutes
Initial Price Ratio P0
New Price Ratio P1
New Price Ratio P1Z
X
Y
B3
B1
B2
A2A1 A3
New Utility Level
Initial Utility Level

The above diagram shows how at the initial level of disposable income the consumers where
preferring to purchase substitute products in comparison to that of the sofa (Denson, 2020). This
was due to the increased prices of this product. However, due to the increase in the disposable
income completely shifted the demand curve due to the customers preferring to purchase sofa as
it was necessity rather than a luxury. Therefore, the substitute products were not able to fulfil the
utility of Ikea sofa. Hence it can be proven that the income increases and the consumer’s
expenditure towards the products like Sofa. This results in these product having a positive
income elasticity of demand.
The pricing policy for these products needs to be determined with the help of the market
equilibrium. Depending on the different factors that has been discussed such as the price of
substitutes, price of complements, consumer income, consumer tastes & preferences, consumer
expectations to prices and also the demographics which needs to be considered while pricing the
sofa in the market. The prices of the sofa should not be very high otherwise the customers would
prefer to purchase its substitutes (Nor and et.al., 2021). However, in certain areas Ikea can afford
to keep the prices high if the consumer income level is high. As a strategy this would be helpful
Sofa
Substitutes
Z
X
YB3
B1
B2
A2A1 A3
Increased level of
disposable income
Initial level of
disposable income

for the business to consider for being able to effectively position the products as per the
consumer’s expectations and meet them with purchasing demand. The reason for considering the
cost effective strategy for Ikea would be help as it will allow it to keep the difference between
the price of sofa and its substitutes in uniform difference.
CONCLUSION
Based on the report the meaning of management economics has been made clear. Ikea
has been the organization chosen are the project. The report has given the description of the
business by the Ikea. The company deals in a variety of kitchen and home accessories. Report
has highlighted the background of the company. Out of the varied range of products in which the
company deals sofas by Ikea has been selected for the project. The product has been selected
based on the sales revenue company generates through selling this luxury product. There are a
number of factors that affect the demand in the market for the products of Ikea. The report has
discussed all these factors namely, price of substitutes, complements, consumer income, taste
and preferences, expectations for the price of product and demographics and their impact over
the demand for Ikea’s sofa. Through the report the concept of prise elasticity over the demand of
the product in the market has been successfully explained. Lastly, the impact of substitute,
disposable income and pricing of the furniture over the degree change responsiveness has been
outlined in this report.

REFERENCES
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Online
What is the Substitution Effect?, 2022[Online]. Available through:
<https://corporatefinanceinstitute.com/resources/knowledge/economics/substitution-
effect/>
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