Economics of the firm - IKEA Term Paper Example | Topics and Well Written Essays - 3000 words

Economics of the firm - IKEA - Term Paper Example It ensures to bring product within the buying capacity of as many people as possible. IKEA takes challenges to provide the best quality at low price. Hence, success of IKEA is based on the secret recipe of simple yet effective business model. This report is aimed at providing the detailed review of the economics of IKEA, giving insight about firm’s internal conduct as well as impact it receives from domestic and international events. NATURE OF PRODUCT OR SERVICE IKEA furniture nature can be classified as normal goods; between the broad categorization of normal and inferior goods. Technology has played an incredible role in determining the demand for furniture. At IKEA, technological development has ensured continuous innovation that facilitated furniture in a flat package that is also easy to assemble by self at home. Moreover, technological advancement enables firm to sell online, allowing people to devise their own set up using IKEA applications and reduce cost with maximum benefit with IKEA’s life improvement projects. IKEA ranks first on top 20 furniture retailers (Daten, 2011) due to low price among its main differentiating factors. (Daten, 2011) Furniture has high price elasticity that threatens sale in case of rising prices. On the other hand, prices of furniture are rising due to declining natural resources and rising price of furniture components such as steel, plastic, aluminum etc as presented in graph below (Daten, 2011). (Daten, 2011) Survey report has shown that more than 75 percent consumer keep an eye on price when buying price (Daten, 2011). Therefore, IKEA is benefitted for its low price where other competitors get hard hit due to price. Housing demand compliments furniture demand. Availability of widest range of home furnishing product at affordable price makes IKEA preferred choice. During economic downturn, IKEA has managed to carve profit with its low cost offering fetching sales for being growingly adopted as substitute for high cost offerings in home furnishing . IKEA sales grew by 6.9% and stores increased by 2.7% in the year 2011 (Ikea., 2011). Finished flats as main drivers of furniture demand still have sizeable market as projected for 2012, survey report shows: (Daten, 2011) MARKET TREND Being home item furniture is used by almost all family members; hence, there are large numbers of factors that affect its purchase. These aspects include personal, product, industry, availability and many other domain all putting equal pressure in driving consumer behavior. Survey results driving the furniture purchase from two perspectives as shown in the following figures (Microsoft, 2011): (Microsoft, 2011) Shopping behavior for furniture purchase is affected by following factors (Microsoft, 2011): (Microsoft, 2011) Keeping all these factors, the survey found IKEA is the most preferred furniture retailer as shown: (Microsoft, 2011) Survey results regarding reasons resulting in furniture buying is mentioned bel ow: (Microsoft, 2011) Among many factors leading furniture buying, income and price are very important. At IKEA constant innovation reduces prices which in result drive sales. At an average IKEA reduces its sales price by 2-3 percent per year (Ikea, 2011). An indifference curve for furniture consumption with change in prices from IKEA has been developed showing the increase in