One of the major economic areas in north central Wisconsin is Wausau. The city is home of the most popular technical college. The love of coffee and ice cream brings the owner to open a Dunkin Donuts/Baskin Robbins near the college. Commercial space is available to build a facility, and the spot is right. The competition is a few fast food chains and two bakeries. The city has no Starbucks, but does have a Dairy Queen that is at the other side of town. The market structure is a monopolistic competition. The area has a few large assorted sellers, products are differentiated, and there is easy entry and exit. The products are differentiated by the brand name; product attributes, and has the perfect environment. The owner will look at the elasticity of demand, profit maximizing, break-even point, total revenue test, marginal cost and revenue, barriers to entry, pricing and nonpricing strategies, and product differentiation. The owner needs to take into consideration the business cycle of the current economy, how to plan during this time, the effect of credit markets, international economic conditions and the effect they can have, and other conditions that may apply. Elasticity of Demand
In determining the elasticity of demand, the law of demand, substitutability, and determinants of demand need to be taken into account. The law of demand is consistent with everyday common sense and the utility of purchasing additional items with. Substitutability is the greater the number of other options available, the greater the price elasticity of demand. Coffee is readily available, but the taste and the options the store has for coffee products will stand out among others. The determinants of demand will play a role in the elasticity of demand. Consumers have preferences, and they can change. The buyers in the market are not only college students, so the other segments must be targeted. A college student’s discretionary income may not be large so prices must be compatible and meet their expectations. Increasing Revenue
The best way to measure the elasticity of demand is the total revenue test. If demand is elastic that means a decrease in price will increase total revenue. The trick is to increase revenue without increasing costs. Costs are both fixed and variable. The loan, interest payment, franchise payment, depreciation, repairs, and salaries are fixed costs which will seldom change. The variable costs of raw materials, delivery costs, and wages are items that cannot be under total control. The employees will need to be trained to work effectively and efficiently. The menu is set but there is some leeway concerned as far as under-producing items. At the owner’s discretion, they can be released from the menu to free up inventory for the more popular items. Employees must ensure that business is conducted so customers have a pleasant experience so they will return. Wages can be somewhat controlled by employing college students for just above minimum wage. Hiring the students will bring in more students to purchase the products. To increase revenue product differentiation will be the utmost importance. Purchasing these products will be made impossible to live without. Break-Even
Breakeven point is a financial analysis tool the owner will use. The breakeven point occurs when total revenue and total costs are equal. To calculate the point where total costs equal total revenue the owner will need to know the fixed and variable cost and the price of the product. Total costs equals total revenue is also when normal profit equals zero. Normal profit takes into account the opportunity cost. The owner knowing the normal profit will know the minimum level of profit need to remain competitive. Resources used will be efficiently used and known that could not be used elsewhere. For any business it is important to measure how the resources are used comparative to other options. The...
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