Krispy Kreme Microeconomic Analysis: Dozen Glazed Donuts

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Krispy Kreme Microeconomic Analysis: Dozen Glazed Donuts
Elizabeth Reel
GM 545
Ben Gruszczyk

Introduction

Krispy Kreme's glazed donuts are a tasty treat especially hot out of the oven. Thousands of people enjoy this delectable delight every day. Knowing this I will attempt to analyze the microeconomics of a dozen glazed donuts at a weekly basis. I will be covering terminal course objectives A through D. The TCOs are as follows: TCO A- Illustrate how the price mechanism, in response to changes in other demand or supply factors leads to a new market equilibrium price and level of output. TCO B- Given appropriate marketing data, including price elasticity coefficients, demonstrate how to use this information in product pricing in order to maximize profits. TCO C- Given knowledge of key cost and marginal revenue relationships, use marginal analysis to demonstrate shutdown, break-even and optimal output points, as well as the optimal amount of resource to use. TCO D- Given relevant price and cost data, discuss optimal output levels for a competitive firm versus a firm operating in am imperfectly competitive environment. Demand

The demand curve is the curve showing the amount of dozens of glazed donuts that consumers are willing and able to buy at different prices. For example, at the current price of $6.50 consumers are willing and able to purchase 150,000 dozen per week, as opposed to 90,000 dozen at $7.50 each. The graph below shows five possible prices and quantities demanded.

Supply
The supply curve is the curve showing the different quantities of dozens of glazed donuts that Krispy Kreme is willing and able to produce at different prices. For example, at the price of $4.50 per dozen, Krispy Kreme is willing and able to produce only 75,000 dozen per week as opposed to 260,000 dozen at $7.50 each. The following graph shows five possible prices and quantities supplied.

Equilibrium Price and Quantity
Knowing this information, we can figure out the equilibrium price. This is the point on the graph where the demand curve and the supply curve meet, or quantity demanded equals quantity supplied. The following chart shows the possible equilibrium price of the donuts at approximately $6.35 each with a 155,000 demanded per week.

Changes in Market conditions
I found the following question on the internet and thought that I would attempt to answer it using the information from the above graphs. Use the supply and demand model to explain what happens to the equilibrium price and the equilibrium quantity for Krispy Kreme in the following cases: a.There is a large expansion in the number of firms producing Krispy Kreme. Since there are more donuts being produced, the quantity supplied would increase, but the quantity demandedwill stay the same. The equilibrium price will fall and quantity will rise due to the change in supply. b.It is widely publicized in the press that Krispy Kreme isn't as healthful as previously thought. The quantity demanded will decrease, but the quantity supplied will stay the same. The equilibrium price will fall as will the equilibrium quantity. c.There is a sudden increase in the price of Krispy Kreme flour, which is used to produce Krispy Kreme. The increase in the price of flour will increase the cost of producing the donuts and reduce the quantity supplied. The quantity demanded will remain the same as this change in resource prices is a supply factor. The equilibrium price will rise, but the equilibrium quantity will fall. d.In general, we know that a change in D and a change in S lead to changes in P & Q. But is this always true? i.e., would it be possible for both D&S to shift without there being a change in price or a change in quantity? No. See the following table: Change in Supply

Change in Demand
Effect of Equilibrium Price
Effect on Equilibrium Quantity
Increase
Decrease
Decrease
Indeterminate
Decrease
Increase
Increase
Indeterminate...
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