IKEA

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.

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.

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.

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.