Microeconomics
BUS1604/ECN60104
Individual Assignment
Nestle
Introduction
Nestle
was firstly established in1866 by Farine Lactee Henri Nestle, who is a trained
pharmacist. It is a Swiss multinational food and beverage company and belongs
to the food processing industry (Nestle, 2013). Nestlé’s headquarter is located
in Vevey, Switzerland and is one of the largest food company. Their products
consist of dairy products, confectionery, coffee and tea, bottled water, ice
cream, baby food, breakfast cereal, snacks, milkshakes, seasonings, performance
and healthcare nutrition, pharmaceutical products, cosmetics and pet food. The
company has approximately 450 factories operating in 86 countries and employs
328,000 individuals (Wikipedia, 2013). Nestle have been providing quality
products for almost 100 years.
The law of demand states that the lower
the price of a good or service, the bigger the quantity. Nestle responds to its
market demands by supervising consumer’s attitude and essentials through market
research. They take two forms of research, which are the qualitative research
and the quantitative research. The qualitative research requires setting up
small focus groups of customers who are willing to share their ideas and
opinions about their requirements and perspective of other products. At certain
level, nestle would interview a group of professional athletes to share about
their daily routine, dietary habits and training. They could also require a
specific consumers focus group to talk about the quality on a specific product.
Next, the quantitative research. The
quantitative research only requires a fairly small group of individual. For
example, Nestlé’s market researchers would interview an amount of people
through telephone. The law of demand results from two reasons, which are the
income effect and substitution effect. When the price of a good or services
rises relative to income, individuals could not afford the things that they
have previously bought, therefore the quantity demanded will decrease
drastically. For example, if nestle increase the price of their products
relative to income, demand decrease which lead to lower sales and profit. There
are also factors that would affect Nestlé’s supply. For example, the prices of
agricultural products have increased because it has been affected by the
weather. Good weather could increase the
supply of agricultural products whereas bad weather can decrease the supply of agricultural
products. Although there are factors that could affect the cost of production,
nestle can still maintain their gross margin because they have 24% of the
market share. For example, the storm has affected the supply of wheat, which
means there is a shortage. Therefore, the price of wheat will increase which
will lead to the increase of breakfast cereal produced by Nestle.
As the world is continuously changing,
Nestle would change and try their best to adapt to new challenges and
environments. They must engage in business principles in all the countries,
such as taking note of local legislations, religious practices and culture in
every country. Their aim is to produce and market their own products in a way
where they can create values and can be sustained between long-term
shareholders, customers, business partners and workers.
At the expense of victorious long-term
business, Nestle does not prefer short-term profit. Nestle believes that,
without their customers, the company itself would not exist. They know that
their consumers have a profound and rightful interest in beliefs and actions of
the company behind brands who they trust.
Consumer Surplus
Consumer
surplus is defined as the difference between the maximum price that a consumer
is willing and able to pay for a certain product and the actual market price of
the product. Consumer surplus is the excess of the benefit received from a
product over the amount paid for it and occurs when consumers are willing to
pay more for a product than the current market price. (McConnell, Brue &
Flynn pg. 126). For example, a consumer goes to a convenience store to buy a box
of nestle breakfast cereal and he is willing to pay RM10 for a box. The actual
price is $4 therefore there is a consumer surplus of $6. At the price of $10 per
box, the consumer is willing to buy 5 boxes a week and it’s worth $50 to him,
so his marginal benefit from the purchase is $50. Therefore, the consumer receives
a consumer surplus of $50. Consumers tend to receive more benefit from their
use then the amount they pay because all products and services have decreasing
marginal benefit.
Price Ceiling
Nestle is in the perfect competition
market structure. Theirs products are similar to other firms such as Hershey’s.
as they are in a perfectly competitive structure, nestle does not have control
over the price of their product. Therefore, Nestlé’s company is a price taker.
Price Elasticity of Demand
for Nestle products.
Price
elasticity of demand is a unit-free measure of the responsiveness or
sensitiveness of the quantity of a good or service demanded to change in its
price when all other influences on buying plans remain the same.
Elastic demand is defined as a large
percentage change in quantity demanded for given percentage change in price.
Inelastic demand is defined as a small percentage change in quantity demanded
for given percentage change in price. Unit elastic demand is defined as given
in percentage change in price, there will be an equal percentage change in
quantity demanded.
Calculating
Price Elasticity of Demand
Price
elasticity of demand is calculated by using the following formula: -
Price
Elasticity of Demand =
The graph above shows that the price of
breakfast cereal has risen from P0 to P1. If the coefficient of price
elasticity of demand is between 0 and 1, therefore the demand is in elastic.
For example, a 20% rise in price of breakfast cereal might cause the demand for
breakfast cereal to decrease by 10%.
Price
Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price
Price Elasticity
of Demand = 10% / 20%
Price
Elasticity of Demand = 0.5
If price elasticity of demand is lesser
than 1, therefore the demand responds more to a change of price. Therefore, the
demand for breakfast cereal is elastic.
There are a few determinants of elasticity
for breakfast cereal. The availability of substitutes. The more substitutes a
particular product has, the more elastic the demand. For example, breakfast
cereal can be substituted with oatmeal. Next, level of income. People with
higher incomes tend to have an inelastic demand. For example, people with high
income don’t have a problem the rise of price for breakfast cereal. Then, price
of the product itself. The more expensive a particular product, the more
elastic it is.
The price elasticity of demand is affected
by the time period allowed following a price change. The longer the consumers
have to respond to a price change, the more elastic the price. If the rise of
price in rice is long-term, consumers should change their consumption decisions
or find substitutes. For example, if price of Nestlé’s product increases,
consumers should buy from other companies such as Hershey’s.
Reference List:
1.
Nestle:
About Us
2.
Wikipedia:
Nestle
3.
Nestle:
Nestle in Malaysia
4. Sloman J., Wride A. & Garratt D.
Source
work: Economics, Eighth Edition.
5. McConnell, Brue and Flynn.
Source
work: Economics, 18th edition.
6. Taylor B. (2006)
