08S7B trailblazers

Goods/Flaws of the Lemonade Stand Game

Everyone should have already known that I love picking up flaws in issues like this.

Let me first say that I have made a virtual profit of $188.27 from the game, not a revenue =D

I believe that the game is not just about weather as a demand determinant. The main issue here is about obtaining and maintaining a strong consumer base. In the game, it is divided into the following 2 catagories:

1) Satisfaction
It refers to how much the consumers liked your product, in this case, lemonade. In the first few rounds, the percentage (%) satisfaction won't be high as we, as students, don't have the perfect knowledge of the good in question. We do not know what proportion of ingredients - lemonade, sugar and ice - will make a tasty jar of lemonade. We also do not know the initial market equilibrium price of lemonade. As such, our goods may appear in excess (if we set a price above the market price), since consumers are unwilling to pay for the product, resulting in a wastage of resourses. It may also appear to be in a shortage (if we set a price below the market price), since consumers will achieve greater consumer surplus/benefit and thus there will be a greater quantity of lemonade demanded. Apparently, my lemonades are usuall sold out for no good reason... However, we do know that consumers eye for icy cold drinks or food items when the weather is very hot.

In the process, through consumers comments such as "yucks!" and "hmmm", we can deduce whether or not they liked the lemonade made. From here, we can then adjust the proportions of ingredients used in per jar of lemonade to achieve greater consumer satisfaction. With this, the consumer satisfaction indicater will increase overtime and probably till maximum, like what I achieved in day 3 =D However, towards the end of the one month period (ie. day 24), I observed that consumer satisfaction rate has started to decrease till around 95% for me. In my opinion, this cannot be further improved back to 100% as when the time proceeds, some consumers may have lost interest in the lemonade produced. As such, the effect of consumers' taste and preferences set in. However, there is always some days when consumers' satisfaction is not maximum since one can never satisfy every single consumer.

2) Popularity
It refers to how popular your product is among the consumers, and thus ensuring a particular consumer base. It is just about knowing what the consumers liked and also what is the price that they are willing to pay for the lemonade at the given time period.

With this, I was able to determine the price to be set for lemonade on different days. These are the pricing policies I adopted:

a) When temperature is high, I increased the price of lemonade. This is because during hot weathers, demand for cold drinks will be more inelastic. Thus, an increase in price will lead to a less than proportionate decrease in quantity demanded for lemonade. As such, there will be a net increase in revenue. The opposite is done when temperature is low as the demand of cold drinks will be more elastic.

b) When I have achieved a strong consumer base, or high popularity, I began to increase the price of lemonade slowly. This is because the my product will have become more inelastic to price changes. Thus, an increase in price will lead to a less than proportionate decrease in quantity demanded for lemonade. In this case, however, the decrease in demand may be negligible since the number of consumers per day appears to be very low (<120). Thus, there will still be a net increase in revenue with price increase.

Apart from these, what I did was to adjust the number of ice used per cup during the different climatic conditions. I made use of this formula: number of ice = (temperature / 10). The result is rounded up to to nearest whole number if the weather is sunny or rounded down if it is cloudy, raining.

Having said those, I would like to discuss some flaws of the game:
1) During rainy days, temperature should not be very high. In some days, I received this situation of raining and 98oF
2) There is no competition (as what JiaWei said). However, in real world, there appears to have more than 1 lemonade stand and there are also substitudes such as soft drinks available. This will be cross-elasticity into the picture, which in this game, is not shown. Thus with more substitutes available, the lemonade becomes more price elastic as a change in price of other relevant drinks will cause a more than proportionate change in the demand for lemonade.

Back to the good points, the game still holds economic relevance.

It shows that the food and beverage industry, in this case, just drinks, is considerably a free market, since the set-up cost is low. Although there may be domination from F&N, Coka Cola etc, there still exist many small firms that brew and sell home-made drinks such as barley and herbal tea. The products are thus not homogeneous in nature as different producers will include different proportion of ingredients to achieve product differentiation and thus, attractiveness to consumers. The low set-up cost results in free entrance and exit of small firms, in this case, my small lemonade stand =D Producers and consumers also have the perfect knowledge of goods in question, which may be achieved after some trials. However, consumers' taste and preferences still holds the major determination factor to the demand of the good.

This game also shows partly internal economic of scale that could be experienced such as bulk purchases whereby if you were to purchase more, you will be able to save more, thus reducing cost price. Assuming that total revenue generated is the same, then there will also be a gain in profit.

What I would suggest is that, if there exist an IT-savy person in college, he/she may consider developing a related game such that it involves many players playing simultaneously in the same given scenario to illustrate the effects of cross elasticity of demand of good. There may also be different products invloved such as coffee or tea to illustrate this concept of cross elasticity. The game may also involve merger of firms to show how bigger firms may be more advantageous in the market, in terms of greater asset and specilisation.

posted by elyminator @ 12:31 PM