Editor’s Note: This is a smart paper. The student successfully managed to apply most concepts learned in Microeconomics using a very simple example. I would have organized all the figures presented in some form of table. Sources could be listed more formally.
Microeconomics
Dr. Stanziola
Fall 2000
Pricing Strategy
November 27, 2000
Pricing Strategy
After numerous research on the internet for an “easy entry” business, I have decided to open a popcorn stand at the Flea masters Flea market called “Poppin’ Up.” I will have a table on Friday, Saturday, and Sunday to sell my popcorn. I found all my equipment and supplies on the internet at Cornucopia’s website and at Buttercup Popcorn’s website. I will be popping my own popcorn with an 8-ounce popcorn popper and selling it in 10” bags for $.75 a bag. There will not be any labor cost because I will be running a sole proprietorship. According to Protec.com, the average cost of a bag of popcorn is $.10 and people will usually pay up to $1.00 for it. With this information, I determined $1.00 to be my product’s reservation price. Since I am selling my popcorn for $.75, there is a consumer surplus of $ .25. I believe that my product will be inelastic because my table will be at a place in the flea market where there are not any other snack tables. Therefore, because there isn’t a wide availability of substitutes around close, people may pay more for my popcorn. Based on the number of people passing through the flea market every weekend and the fact that my popcorn popper can pop five bags per 3 minute cycle, I estimate that I could sell 25 bags an hour, 8 hours a day, 3 days a week, and four times a month. This calculates to 25 x 8 x 3 x 4= 2400 bags per month. Also, because I will be popping it fresh all day, the smell of popcorn will fill the air and bring me more business!!
Based on my research, I have come up with a list of all fixed, sunk, and variable costs for a monthly period. I also determined how much I would need based on my estimate of selling 2400 bags a month.
Rent for table at flea market $240.00
240 pounds of popcorn $60
(8 oz per cycle x 40 cycles daily x 3 days a week x 4 times monthly)
60 pounds of oil $64.80
(2 oz each cycle x 40 x 3 x 4)
2400 10” bags $36.00
(25 per hour x 8 x 3 x 4)
30 ounces of salt $15.66
(1/16 x 40 x 3 x 4)
8 ounce Buttercup Popcorn Popper $480.00
Neon Popcorn Advertising Sign $150
Popcorn Scooper $4.25
8 oz corn measurer $2.95
1/8 oil measure $2.95
Monthly, my average total cost is $176.75. $176.75 divided by 2400 comes to about $.07 a bag. Therefore, my marginal cost is $.07 per additional bag and is constant. My marginal revenue is also constant at $.75 per additional bag. Because most of my costs are sunk and fixed costs, I do not believe it will take me long to attain profit maximization. Also, according to The Popcorn Board, on average, each bag of popcorn selling for about $. 80 yields an 87.5% return on investment. My Total Revenue monthly will be $1800. (2400 bags x $.75). Most of my expenses are all sunk costs. My monthly profit per unit, I estimate to be $ .68.
I believe that because I have a horizontal MC curve and my location in the flea market, I will be a monopoly. This means, with the smell of popcorn in the air, and my price already $. 25 below the reservation price, I can raise prices as I wish. However, because I am selling regular movie style popcorn, if a firm on the other side of the flea market differentiates their popcorn, by say flavoring it, I may have to rethink my pricing and product differentiate as well. Also, the other firms may collude with each other and fix prices, which could hurt me drastically. If this were too happen, I may have to differentiate my product or come up with marketing ideas. As far as advertising, I have my neon popcorn sign and the smell of fresh popcorn in the air! According to The Popcorn Board, selling a product such as popcorn “that has wide and lasting appeal generates high-volume sales.” With this in mind, I plan to run a very successful business.
Sources:
foodusa.com
buttercuppopcorn.com
popcorn.org
Protec.com