Fundamentals Of Microeconomics

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Pick any ONE business/company of your choice. The company you choose can be a small local restaurant or a large multinational company. Based on your selection, answer the following questions:

In your paper,

Describe the basics of the business you chose- including the size of the business, types of goods/services the business sells, and possible barriers to entry/exit.
Distinguish among four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly in this order.
Discuss what kind of market structure your company falls under. Why?
Analyze whether the demand of the goods/services sold by the business are elastic or inelastic. Why?
Discuss if there are any externalities involved. If so, explain how the externalities can be fixed.
Discuss any roles that larger companies can play in promoting inclusion, equality and reducing poverty.

Sample Solution

Starbucks, the ubiquitous coffee chain with its siren logo beckoning from almost every corner, makes for a fascinating case study of market structures and social responsibility.

The Basics:

  • Size: With over 34,000 stores worldwide and employing over 380,000 people, Starbucks is a global giant in the coffee industry.
  • Goods/Services: Primarily selling coffee beverages, pastries, and snacks, Starbucks also offers merchandise like mugs and tumblers, as well as digital services like mobile ordering and delivery.
  • Barriers to Entry/Exit: While the coffee business itself has relatively low barriers to entry, establishing a brand like Starbucks with its widespread recognition, global supply chain, and loyal customer base is significantly more challenging. High initial investment, complex logistics, and fierce competition create significant barriers to entry. Similarly, exiting such a vast network of stores comes with logistical and financial hurdles.

Market Structure:

Distinguishing among the four main market structures:

  • Perfect Competition: Many small firms selling identical products with perfect information and easy entry/exit. This doesn’t apply to Starbucks as it is a large chain with differentiated products, brand recognition, and significant barriers to entry.
  • Monopolistic Competition: Many firms selling differentiated products with some market power due to branding and unique offerings. This structure fits Starbucks best. Its vast product variety, customized options, and premium image differentiate it from smaller coffee shops. While not a monopoly, it exerts some market power through customer loyalty and brand recognition.
  • Oligopoly: Few large firms control a significant market share with interdependent decisions. This doesn’t apply to Starbucks as the coffee industry, while concentrated, has numerous players beyond just Starbucks.
  • Monopoly: Single firm with no close substitutes and control over price and quantity. This does not apply to Starbucks as it faces competition from other coffee chains, cafes, and even home brewing.

Demand Elasticity:

The demand for Starbucks’ products is relatively inelastic. Coffee is considered a daily necessity for many customers, and the premium pricing at Starbucks may not significantly deter them from their daily fix. Additionally, brand loyalty and the “experience” associated with Starbucks can further insulate it from price fluctuations. However, certain products like seasonal offerings or high-end beverages might have more elastic demand due to their price sensitivity.

Externalities:

Starbucks’ operations generate both positive and negative externalities:

  • Positive externalities: Job creation, community spaces, support for local farmers through ethical sourcing initiatives.
  • Negative externalities: Waste generation from disposable cups, environmental impact of coffee production, potential displacement of smaller coffee shops.

Internalizing Externalities:

Starbucks can strive to minimize negative externalities and amplify positive ones through these measures:

  • Promote reusable cups and incentivize their use.
  • Invest in sustainable coffee sourcing practices.
  • Support local communities through partnerships and initiatives.
  • Offer fair wages and benefits to employees.

Larger Companies Promoting Inclusion and Equality:

Larger companies like Starbucks can play a significant role in promoting inclusion, equality, and reducing poverty:

  • Diversifying their workforce and leadership teams.
  • Offering equal opportunities and pay for all employees.
  • Supporting minority-owned businesses and suppliers.
  • Investing in community development programs.
  • Advocating for fair trade practices and sustainable development.

Starbucks has made efforts in these areas, from launching diversity and inclusion initiatives to supporting farmers through its C.A.F.E. Practices program. However, there’s always room for improvement, and continued scrutiny and public dialogue are crucial in holding large corporations accountable for their social impact.

Conclusion:

By understanding its market structure, demand characteristics, and the externalities it generates, Starbucks can navigate a complex marketplace while fulfilling its social responsibility to promote a more inclusive and sustainable future. As a global giant, its actions and commitments have the potential to significantly impact lives and livelihoods, making its choices on inclusion and equality all the more crucial.

 

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