IKEA is one of the
biggest global home furnishing companies with more than 200 stores in over 30
countries in 2008. IKEA is established in Sweden in 1943 by Ingvar
Kamprad, he used his initials, Ingvar Kamprad, Elmtaryd
(the farm where he grew up), Agunnaryd (his hometown in South
Sweden) for the acronym.
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| Ingvar Kamprad |
At first, Ingvar sold
everything from pens and wallets to watches and nylon stockings. Until 1951, he
began to focus only on furniture and discontinued all other products from the
IKEA product range that was received positively by its customer in 1947. In addition,
the first IKEA furniture catalogue was published, because he sees the
opportunity to sell furniture on a larger scale using a catalogue. Ikea's logo
is in blue and yellow as Sweden's national colors.
Ikea is known for its
modern architectural designs for appliances and furniture and its interior
design work is often correlative with an eco-friendly simplicity. Besides that,
IKEA's vision is to create a better everyday life for the many people. IKEA
provides ready-to-assemble furniture, such as chairs, tables, beds and
wardrobes. Ready-to-assemble furniture is popular for consumers who wish to
save money by assembling the product on their own and save cost in delivery.
Other than ready-to-assemble furniture, IKEA also provides appliances for bathroom
and kitchen and home accessories, such as lighting, mattresses, kitchen
utensils and others. Thus, IKEA is offering a wide range of well-designed,
functional home furnishing products at prices so low that many people as
possible will be affordable to them.
Market Structure:
Monopolistic Competition
IKEA is considered as
monopolistic competition, because there are tons of furniture stores that it
has to compete with. Monopolistic competition is a type of imperfect
competition as there are quite a large number of firms, but it isn't as large as perfect competition. Although there are many firms in the industry, there is only one firm in a particular location. For example, there maybe many
furniture shops in Petaling Jaya, but only IKEA located in the street. In
monopolistic competition, each firm has pressure between its rival, but it
still have some degree of market power for the price of its products. Although
all furniture shops sell furniture, there is product differentiation between
IKEA and it's rival. Product differentiation allows firm to raise the price of
the product without losing all its customer as the product is different in
quality, brand, type and etc. from it's rival. IKEA diffrentiates their
products by selling eco-friendly and self-assemble furnishing products at low
price for more people to afford. In monopolistic competition, there are few barriers for new firms to entry and exit. In addition, IKEA uses catalogue for its main advertising
media.
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| The cover of IKEA catalogue in 2013 |
Demand
The demand curve of IKEA
is downward sloping. This is because there occurs product
differentiation in monopolistic competition market. Consumers cannot find perfect substitutes from other place,
such as the type or quality of the products that only in IKEA. Each firm can
raise the price of the product without worrying customers will switch to the
rival's product. When the price of the product rise, the demand of it will decrease, as people are not so willing to buy for the goods when the price rises.
Change in demand occurs
when the price of the products remains same, but the change in other
determinants influence the quantity demanded of the products. There are 5 main
determinants that causes change in demand, preferences, income, price of
related goods, expected future price and population.
Preference: As
IKEA provides ready-to-assemble furniture, if consumer more prefer at assembled
furniture, the demand of the products in IKEA will decrease.
Income: When
consumer's income increase, the demand for the product will also increase,
because consumers are more willing and more able to purchase the product of IKEA. However when consumer's income decreases,
they have to cut off their expenses, so the demand will also decrease.
Price of Related Goods: If
the price of substitute goods decrease, consumers are more willing to buy the
one that is cheaper, so the demand for IKEA's product will decrease.
Expected Future Price: If
consumers expect that the future price of products will increase, then
consumers will buy more now.
Population: The
population of the area increases, means there are more people buying its goods,
so the demand for its goods increase.
The determinants
mentioned above will influence the demand curve shift leftward or rightward.
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| Change in Demand |
Elasticity
Price elasticity gives
the percentage change in quantity demanded in response to a one percent change
in price. If the goods of IKEA increase in one percent, the price elasticity of
demand is greater than one. It means the changes in price have a relatively
large effect on the quantity demanded. Thus, the demand for IKEA goods is
elastic.
Income elasticity of
demand measures the responsiveness of demand to a change in the income of the
people demanding the good. If the income increases, the demand for the goods
also increase; but if the income decreases, the demand for the goods will
decrease. The demand for luxury goods expands rapidly as people's income rise,
whereas the demand for basic goods rises only a little. (John Sloman, 2012)
Thus, income elasticity of demand for IKEA's goods is positive as its products
is normal goods.
The short run is a time
period during which at least one factor of production is fixed. Then, output
can be increased only by using more variable factors. However, all factors of
production are variable in long run. Giving long time enough, IKEA can build
additional stores. (John Sloman, 2012)
In short run, average
total cost influence by law of diminishing return and its curve is in u-shaped.
This is because the cost that have to share in every output become lesser when
the output increases. But when the output increase until a certain level, the
rise in marginal cost will rise up the average cost. In long run, IKEA can find
out the lowest cost of production according to the short run average cost.
When IKEA makes profits
in the short run, there will be break even in the long run. This is because
when there is a profit in IKEA, new firm will add in to this industry. As there
is more and more firms enter, the demand will decrease and total average cost
will increase. Therefore, until the long run IKEA will only make zero economic profit.
Economies of scale is
where a given percentage increase in inputs will lead to a larger percentage
increase in output. If a firm is getting increasing returns to scale from its
factor of production, then as it produces more it will be using smaller and
smaller amounts of factors. (John Sloman, 2012) In response to the explosion of
human population and material expectations in the 20th and 21st century, IKEA
achieve economies of scale. In 2008, IKEA is the world's largest furniture
retailer, therefore it can take advantage of financial economies. Larger
companies are able to borrow greater quantities of money, so that they can
invest in factors of production and increase efficiency.
IKEA is one of the
world's largest furniture retailer. Its goods are considered as normal goods as
it has elastic price elasticity and its income elasticity is positive. IKEA is
be classified as a monopolistic competition market. In monopolistic
competition, the products is differentiate with others, as IKEA is known for
its eco-friendly products and ready-to-assemble furniture that cannot be found at other furniture shops. So, the demand curve
for IKEA is downward sloping because of product differentiation. However, there is some determinants that affect
the demand curve will shift to left or to right. IKEA can provides their goods in such a low price, because the cost of production for its goods is low. The average cost curves in short run will decide the long run average cost curve, so IKEA can find out the lowest cost of production. Besides that, IKEA maybe earning profit in short
run, but in long run, the profit will become zero normal profit. This is because earning profit will attract new firms to enter, when more and more firms enter, the profit will be spread towards the zero normal profit. In addition, IKEA implement economies of scale in long run.
Reference List:
Aus-giulio.wikispaces.com. 2013. aus-giulio
- Economies of Scale- IKEA. [online] Available at:
http://aus-giulio.wikispaces.com/Economies+of+Scale-+IKEA [Accessed: 23 Oct
2013].
Wikipedia. 2013. IKEA. [online]
Available at: http://en.wikipedia.org/wiki/Ikea [Accessed: 23 Oct 2013].
IKEA /AA/EN. 2013. IKEA Concept and
history - IKEA. [online] Available at:
http://www.ikea.com/ms/en_AA/about_ikea/the_ikea_way/index.html [Accessed: 23 Oct 2013].
Ikeafans.com. 2013. IKEA History.
[online] Available at:
http://www.ikeafans.com/ikea/ikea-history/ikea-history.html [Accessed: 23 Oct
2013].
Sloman, J. 2012. Economics. 8th
ed. Pearson.
