Assignment 3: E-Portfolios

Click on the links below to view E-Portfolios

Best Buy

Molson Breweries

Suncor Energy Inc.

The Little Potato Company

Correctional Service of Canada

Unit 9: Exercise 9-2 Comparing Market Structures

Unit 8: Exercise 8-1 - Defining Oligopoly and Game Theory

Considering the information in the video and Chapter 11 (pages 387-394), write a few study notes to answer the following questions:

·         What are the main ideas behind game theory?

·         How did it develop?

·         Is there evidence of game theory in the current economy? Explain.

·         How does the payoff matrix work?

·         Describe the principles behind collusive and cartel actions.

Game Theory is a mathematical algorithm used by players to analyze strategic situations, interactions and behaviours. Based on a player’s analysis of a situation he hopes to enhance success of his/her choices based on the strategic choices made by his opponent(s). In other words, the outcome is dependent on your actions as well as the action of others. What does this mean in economics? Well, in a competitive environment firms are constantly analyzing each other to gain corporate intelligence and strategize what the market player’s next move will be. A firm or an individual is always concerned about their own self interest.

There are many people in history that have been involved in some form of development or study of the game theory. In the ECON-250 10 minute video on game theory at http://www.youtube.com/watch?v=54Dk3x4osik John Nash’s contributions are primarily cited. However, another major contributor in the study of this theory is John von Neumann, amongst others. A chronology of Game Theory, for those interested, can be found at http://www.econ.canterbury.ac.nz/personal_pages/paul_walker/gt/hist.htm#nobel2 .

If we look at the various types of markets I believe game theory does not play a significant role in perfect competition, monopolistic or monopoly environments. The reason being one group is price takers (perfect competition, monopolistic) and the other is price is set by market demand (monopoly). Game theory would have benefit in an oligopoly environment where decision making and market share are based more on strategic thinking such as automobile or petroleum gas competitors.

The payoff matrix is a grid showing the best, mediocre and worst outcomes to profit, price or what ever other value one is trying to determine when employing game theory. Below is an example of a payoff matrix showing profits based on a dollar value against a quantity sold. If both firms are in equilibrium the profits earned are the same (top left). When one or the other firm gets hungry for business we see a shift in balance of fairness for one or the other (top right and bottom left). If both firms get extremely competitive against each other, such as a price war, then both will suffer (bottom right).

Collusion: an agreement among suppliers to set the price of a product or the quantities each will produce.

Cartel: an association of sellers acting in unison.

The definitions of collusive and cartel are noted above from Sayre/Morris 6e, Microeconomics. Both of these types of agreements if actioned in a legal manner provide benefit to both the firm and consumer. Both of these methodologies have a tendency to breakdown when illegal activity such as price fixing becomes involved with illegal collusion where firms attempt to control supply. The detriment of cartels is enforcement of production levels or again price fixing.

Unit 7: Exercise 7-1 Defining Monopolistic Competition

Unit 6 Exercise 6-2 Competing as Starbucks

In order for a market to be perfectly competitive the buyer and seller characteristics is such that there is no direct influence on the market supply/demand and price. Four conditions are cited by Sayre/Morris, Principles of Microeconomics 6e, page 261, in order for a perfectly competitive environment to exist. These conditions are:

1. Many small buyers and sellers all of whom are price takers;
2. No preference shown;
3. Easy entry and exit by both buyers and sellers; and
4. The same market information available to all.

Reflecting on the world market for coffee and the monopolistic competition created by the coffee houses Starbucks is in fact part of the perfect competition market. However, one may challenge point number four with respect to market information depending on how one construes the meaning. Internal market information such as trade secrets regarding blends and roasting methodologies particular to a certain supplier may be of competitive advantage, however, in my opinion it is not the driving force that the industry is seeking. One of the true governing sources of information available to all players is made available by the International Coffee Organization (ICO) whose mission is to “tackle the challenges facing the world coffee sector through international cooperation.”[1]

The demise of Starbuck resulting in six hundred store closures over the 2008-2009 time frame are noted in “Starbucks Gossip: Starbucks chairman warns of the commoditization of the Starbucks experience”.  The memo from Starbucks chairman Howard Schultz to CEO Jim Donald in February 2007 refer to automated machines, lack of passion and sterile, cookie cutter atmospheres as directly impacting the bottom line. While this may all be very well and true it comes down to an aggressive expansion strategy plan that was implemented to improve efficiencies and increase profits while sacrificing Starbucks history and traditions on which it was founded in 1971. Not to mention the economic recession that also played a role in the downturn of their profits and return on investment, however, the recession is not the pitfall and it was the internal management expansion strategy that caused the original impact.

As part of their restructuring plan short-run items for Starbucks scrutiny may be capital equipment, leases, wages or benefit packages. In the long-run global coffee sourcing ought to be reviewed and perhaps a marginal shift from fair-trade coffee sourcing should be added to their mix in order to reduce coffee costs.


I perceived Starbucks pricing structure to be higher than their competitors. How Starbucks can conceivably charge customer’s higher prices for burnt coffee is beyond me. Nonetheless, their burnt smelling and tasting coffee has filled a niche in this caffeine addiction market that satisfies their die hard customers. Should they choose to reduce their pricing structure through cost saving measures Starbucks ought to operate at a marginal loss which in the short run may benefit the company as opposed to store closures. Eventually they will see a resumption of demand for their product by gained customer base and would be in a position to slowly increase pricing again to reach the breakeven or profit making point.

[1] Cited from International Coffee Organization web page  http://www.ico.org/mission.asp?section=About_Us

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Unit 5B: Exercise 5-5 Long Run Costs and Economies of Scale

The business I would create would be an ice cream shop that provides fresh onsite gourmet ice cream following strict standards to produce the best and most high quality product for our customers. The name of the ice cream parlor would be Udderly Ice Cream. The plan will be to establish future franchises however, the first location will be a location established in the lower mainland of British Columbia. Research will be conducted to determine the best high traffic area for the first location (i.e. Schools, parks or shopping malls) in order to capitalize on market share. The competitors we would be targeting to steal market share from would be Ben & Jerry’s, Baskin Robbins.

The business size will be a small take out style venue and will have a small amount of stools along the front window area with a narrow table top for some patrons to sit and enjoy (no more than 10-15). The balance of the store will be dedicated to ice cream production in the back and space for the customers in the front to view the products in the freezer area. The back production are need not be to large as all of the product will be manufactured from one standard base product and all of the flavor varieties (from traditional to wacky like jalapeno-bacon, anything with bacon is good).

The short run costs would be labour, rent/lease, utilities, ice-cream making equipment and raw products. The long run cost would be very similar in that the initial concept is to keep the same store size and quantity of labour at future franchise locations. However, the best long run opportunity may be the sourcing of raw products for production.

An example of a local Edmonton based business with a similar model would be the Marble Slab Creamery: Web Page http://marbleslab.ca/index.php/creamery

Marble Slab Creamery Strengths:   1). Unique frozen slab technique of preparation

                                                      2). Uses the freshest and highest quality ingredients

                                                      3). A unique experience as soon as you enter the store

                                                      4). Offers portable slab catering service

Marble Slab Creamery Weaknesses:   1). Product line is very similar to competition

Unit 5A: Exercise 5-3 Law of Diminishing Returns

The Diminishing Returns to Tobacco Legislation
·         Decide which points in the debate have merit.

o   The numerous and visible warnings tend to be discounted or ignored over time.

o   Burdensome taxes and regulations  will increase smuggling activity.

o   There seems to be a correlation between taxation increases and decreases in cigarette consumption.

·         Decide which points lessen the debate.

o   The fact that Quebec entrepreneurs do not abide by the Canadian warning legislation and provide neutral drawings on their packages.

·         In words, estimate the point of diminishing returns for the government.

o   Government warnings and regulations have been in place on Canadian cigarettes for at least ten years. The effect of these campaigns have reached their point of diminishing returns as those who have had the desire to quit already have; those who have not may have curbed consumption due to taxes.

·         What are some other solutions that would increase the government’s production (success) compared to their costs, thus lessening their diminishing returns?

o   Mild forms of prohibition – what these could be other than an out right ban, who knows as a majority of Federal, Provincial and Municipalities have already adopted prohibitive measures such as smoking indoors, some public places and as of late in vehicles with children on board.

o   Dismantling of the private, for-profit, tobacco industry, and its replacement with a sort of public utility that would sell cigarettes in plain wrappers at cost as proposed by the US Food & Drug Administration.

o   Increased taxation on manufacturers of tobacco products.

·         What implications are there in this article for the supply and demand of tobacco (Chapter 2 and 3)?

o   The conclusion I draw from this article is that cigarette smoking tends to be an inelastic product do to the fact that regardless of the price increasing do to taxation a majority of smokers continue with their habit due to the lack of substitutes (supply would marginally decrease however overall demand would not be significantly impacted).

·         Explain the debate in terms of sin taxes (Chapter 4).

o   Sin taxes are levied against products that tend to have public disapproval such as cigarettes and alcohol. The article outlines how the government implementation of taxation plays a direct role in the diminishing rate of return.

Article Link: http://www.pierrelemieux.org/artdiminish.html

Unit 4: Exercise 4-3 • Tourism Industry in Canada

Current State of Canada’s Tourism Industry

Tourism is of economic importance within all regions of Canada. Our borders contain an array land and marine ecozones desirable to the relaxed vacationer or the adventuresome explorer. Despite our magnificent offerings Industry Canada still reports that there are many challenges facing the tourism industry now and in the future. In their document “Building a National Tourism Strategy”, Industry Canada states that cchanging demographics, shifting travel patterns and volatile economic conditions are key obstacles facing stakeholders.

The challenges identified to overcome and strengthen the industry are:

1.     Comprehensive research to better understand the expectations of travelers;

2.     More cohesive marketing and promotional campaigns while reflecting provincial/territorial realities and diversity in Canada;

3.     Further development of Aboriginal tourism;

4.     Human resource strategies to attract and retain employees in the industry;

5.     Investments in tourism infrastructure;

6.     Efficient and integrated transportation systems; and

7.     Broadening and adopting sustainable tourism and best practices. ^[1]

Statistics with regard to current and future growth within the industry vary depending on the source and the metrics used. The industry Canada Strategy notes that Canada’s market share is diminishing due to health concern, terrorist threat and the increased strength of the Canadian dollar. The Industry Canada September 2009 Tourism Highlights report indicates that tourism spending in Canada is up and the arrivals of tourists from outside our borders are down. One can conclude from this that Canadians are opting more for staycations and that the demand domestically may be elastic while the global response is inelastic.

Further statistics and information is also available from the Canadian Tourism Comission. Here is a link to their latest statistics for the month of April 2011. http://en-corporate.canada.travel/sites/Corporate/images/pdf/Research/Stats-figures/International-visitor-arrivals/Tourism-monthly-snapshot/TourismSnapshot_2011_04_eng.pdf . Again based on their data it is difficult to determine if price is a driver of demand (inelastic) for foreign visitors.

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Unit 4: Exercise 4-2 Elasticity and Revenue

 Fast food prices set to rise: observers
 http://www.albertalocalnews.com/business/Fast_food_prices_set_to_rise_observers_119403699.html?period=W&mpStartDate=03-31-2011&

Article Summary:
1. Prices of coffee went up due to higher cost of ingredients.
2. This is an article from The Canadian Press describing an increase in the price of Tim Hortons coffee in Canada.
3. Higher cost for beans due to poor crops and diease. 

4. Demand for coffee tends to be inelastic since these types of routine purchases tend to be insensitive to the kinds of price increases.

Unit 3A Exercise 3-2 Market Equilibrium Graph

I definitely have a better understanding of using excel to plot curves after this exercise.

Unit 3A: Exercise 3-3 Graphing Changes to Demand

Wow, this one sure took some thought. I originally was looking to see how physical CD sales were comparing to digital sales from ITunes. However, ther ewas not sufficient data available to obtain figures for plotting. I therefore elected to plot individual itunes sales againt the supply that itunes would provide. However, this is actually a futile exercise due to the fact that the digital supply from itunes is infinite.

Exercise 2-2: Economic Games

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I played Diner City and chose the Sushi restaurant against the Burger franchise next door. I really had no clue of what I was doing in the beginning even though I was making revenue. Then I decided to add employees to increase output as I only had seating capacity for 7. This increased the throughput and people were coming in and out fast, however, I had to spend $150 to clean the restaurant after that many patrons. I tried to stay ahead of the burger place as he added upgrades. I added an outside menu board, singers and a paved walkway to the door which all added to increased revenue ahead of the competition. Unfortunately this game automatically ended after day 7 of being in business and produced the attached summary. I am going to try this again or one of the other games. 19-June-2011 Well I tried this game again..... and again ..... and again against the computer driven burger franchise. After failing against the competition time and time again I started to see the connection between scarcity, choice and opportunity cost. My goal was to expand the franchise to the property across the street which was for sale for $3,000. The demand from the consumers seemed relatively equal when compared to my Asian restaurant and the burger franchise, so it all came down to choices of which upgrades to add to the restaurant and at the correct time to increase revenues. I tried the keeping up with the Jones' philosophy of adding the same upgrades as the burger franchise and this would never get me ahead. then I would try different combinations of upgrades and played with the timing of when I implemented them. This provided some advantage over the competition but never seemed to produce sufficient revenue to reach my goal of expansion. After about 15+ tries I did purchase the expansion property on day 13 but it still did not give me any real advantage over the competition and I failed again. I think I will let my kids play and see if they are better entrepreneurs than me.

Exercise 1-2: Possibility Curve

Reference: Figure 1.1, 1.2, 1.3 and 1.4, Chapter 1, Principles of Microeconomics 6/e, Sayre, Morris

1.      What are these graphs representing?

·     The four figures represent various forms of the production possibilities curve which is a visual graphical representation showing various theoretical combinations of output that may be produced by adjusting the factors of production (land, labor, capital and entrepreneurship).

2.      What do they depict about scarcity, opportunity costs, and choice?

·     Scarcity: is a limited amount of something, be it time, money or a resource.

·     Choice: scarcity leads to choice regarding the most efficient path.

·     Cost Opportunity: is the value of the best alternative given up as a result of the choice made.

3.      What are some choices you have to make based on scarcity and choices in your life? Think about your income, time, assets, etc.

·     For me the greatest scarcity is time as I must allocate it in order to encompass online education, work, family and my kids spontaneous issues that arise. Therefore in order to accomplish all of this there are times when sleep is sacrificed for studies, which in turn may have a detriment on my other commitments if continued for a prolonged period.

4.      What was one significant opportunity cost you experienced by returning to school?

·     I am fortunate in that my part time studies did not require me to give something up as the company I am working for is paying the tuition. Other than my time to conduct the course as noted prior I have not had to sacrifice income or realign other budgeted items for education.