Neoclassical and Behavioural Economics Analysis of Nestle Chocolates in a Monopolistically Competitive Market

Running head: ECONOMICS FOR MANAGEMENT
Economics for Management
Name of the student
Name of the University
Author Note

1ECONOMICS FOR MANAGEMENT
Table of Contents
Introduction:...............................................................................................................................2
Neoclassical analysis of Nestle:.................................................................................................3
Demand and Supply:..............................................................................................................3
Elasticity:................................................................................................................................4
Behavioural economics of Nestle:.............................................................................................5
Conclusion:................................................................................................................................5
Cost pattern of Nestle:............................................................................................................8
Market structure of Nestle:.....................................................................................................9
Profit maximisation of Nestle:.............................................................................................10
Market Power:......................................................................................................................12
Behavioural Economics:..........................................................................................................13
Conclusion:..............................................................................................................................14
References:...............................................................................................................................15

2ECONOMICS FOR MANAGEMENT
Introduction:
Neoclassical economics represents an approach that deals with demand for and supply
of a product in market considering rationality of an individual and firm. The chief focus of
the firm is to maximise utility while for an individual the chief focus is utility maximisation.
To analyse these economic concepts, neoclassical economists intend to use mathematical
equations (Foss and Klein 2015). On the contrary, behavioural economics deals with
psychological aspects of a firm and producer regarding their decision-making processes (Pete
2014). In addition to this, the behavioural economics focuses to maximise expected utility of
a consumer. With the help of these two economic approaches, a firm takes its business
decisions regarding production of output and charging appropriate price. This paper conducts
this analysis on Nestle chocolates through considering its market decision-making process.
Nestle is a Switzerland based multinational company that produces drinks and foods.
Since 2014, it has remained the largest food producing company across the world in terms of
revenue. The company chiefly produces medical food, baby food, breakfast cereals and other
energy drinks like coffee and tea. Some well-known brands of this company are Nescafe,
Nespresso, Maggie and Kit Kat. In addition to this, Nestle is one of the largest shareholders
of L’Oreal, which is the largest cosmetic company of the world. The company has large
market share across the world though it competes with other large-scale chocolate producing
products. The entire market of Nestle depends heavily on cocoa market. The report will focus
on demand and supply of chocolate, demand elasticity, market structure and profit
maximisation condition of this firm. In addition to this, the report will discuss about
appropriate behavioural economics related to company’s activity.

3ECONOMICS FOR MANAGEMENT
Neoclassical analysis of Nestle:
Demand and Supply:
Demand and supply are the main tools that help a company to take proper decisions
regarding amount of output that it needs to produce and setting price appropriately. Based on
demand law, the firm cannot charge higher prices for its product, as it can adversely affect
demand in market. On the contrary, the company can supply more amounts of outputs when
prices of company’s products increase in market (Canto, Joines and Laffer 2014). The
demand and supply curves help the company to obtain market equilibrium amount of output
and equilibrium price. According to the given case study, Nestle industry decides to reduce
the size of chocolates bars or increase the prices of it for maintaining a balance between
supply and demand for cocoa in market. An imbalance between demand and supply of cocoa
can influence price of Nestle chocolates in market accordingly (Zoutman, Gavrilova and
Hopland 2018). For instance, excess demand of cocoa can lead its price to increase further in
market. Furthermore, this will force the price of chocolates to increase in market. The price of
chocolates will increase, as input cost of the product increases in market. The opposite
situation can also occur if price of cocoa reduces in market due to excess supply. According
to case study, cocoa prices increase rapidly in 2017 due to lack of production. The price of
this ingredient increases by 2 percent and this in turn increases cost of chocolate production
more than 10 percent. This further reduces supply of this product in marker through reducing
the size of chocolate bar. At the same time, demand for the product remains same as before.
The following diagram can represent this situation accurately.