Nike Inc.

The company that I have chosen is Nike Inc. Nike, one of the leading brands in the Footwear & Apparel industry, who was originally known as Blue Ribbon Sports in January 1964 and was founded by Bill Bowerman and Phil Knight. Bowerman was a respected coach at the University of Oregon while Knight was a runner from Portland. They opened their first retail store in Santa Monica, California and the company was renamed Nike Inc. in 1971.

As of today, Nike Inc. headquarters is located at suburban Portland, Oregon of the United States on a 213 acre piece of land.  Nike sponsors numerous sports teams and athletes all over the world. Their trademark, which is “Just Do It”, is very highly recognized. Nike has a wide product range such as sports equipment, sportswear, athletic footwear, athletic apparels and golf wear. One of the economic problems that Nike has sustained was in 1996 during the opening of the San Francisco store. Nike was facing problems with their workers for their low wages in developing countries. Back then; this situation was called the sweatshop condition. Nike dealt with the situation by setting up a monitoring service and they restricted under aged individuals from working at their factories. Nike has also joined the Global Alliance for Workers and Communities which is a group that handles workplace issues and provides guidance.

Nike Inc. has been operating around the world accordingly with their mission that is to bring inspiration and innovation to every athlete in the world. Nike is confident that they will be able to meet the customer’s needs, desire and demand, which will lead to the willingness of these customers to pay for the Nike products. Nike is as successful as it is today due to their creative marketing strategies where they sponsor famous athletes such as Ronaldinho, Michael Jordan, Wayne Rooney and Tiger Woods to endorse their range of products.

As like all other businesses, Nike’s first economic problem is scarcity. According to Sloman, Wride and Garratt (2012), scarcity is additional wants over what can be produced to fulfill that want, especially when there is only a limited amount of resources available. In order to maximize these resources, companies would allocate their resources by dividing it accordingly. Once done, a choice has to be made, so the opportunity cost, which is the best alternative that is forgone, is taken into account. To emphasize this concept, Nike Inc. only has a limited amount of resources that can only produce 200 shoes and 350 shirts respectively. If Nike wants to produce more shoes, then they would have to sacrifice a certain amount of shirts in order to produce more shoes.

After much research, it can be said that Nike has been operating under the Law of Demand. According to Frank (2000), the Law of Demand is the empirical study that when the price of a product decreases, the demand for that product will increase, and vice versa. However, this would only be true if all the other factors have to remain equal. For example, when there is a sale, all Nike products will be discounted, during this time, the sales generated would increase as customers are willing to purchase more. Basically, there are 2 reasons for the law to exist and they are the income effect and the substitution effect. In the income effect, customers can afford more at a lower price, without giving up other goods. In the substitution effect, the customer is able to substitute the cheap good for similar ones that are more expensive.

Demand could be affected by a variety of determinant factors. The first determinant is the preference or taste of an individual which increases the demand of the product if they want that particular product. In particular, when a new fashion trend is in place, and Nike releases footwear that is in line with the trend, there will be an increase in sales for the new footwear design. The second determinant is the number and price of substitute goods which is when the price of the substitute goods is high, the demand for this product will be high as well. In the case of Nike, when the price of Adidas footwear increases, the sale of Nike products will increase as well. The third is income, where as an individual’s income rises, their demand for the goods will also rise.

In addition, Nike operates according to the Law of Supply as well. As stated in Jackson & McIver (2005), the Law of Supply is the relationship between the quantity that is supplied and the price of a product or a service during a certain period of time with the assumption that all other factors remain equal. This law shows us that when the price if a product high, then the producer will be keen on producing and supplying their products, and vice versa. For example, when a new collection of Nike limited edition shoes are released and sold at a normal price of RM360, because it is limited edition, most customers would rush and purchase it. After observing that the response of the customers is appealing, the company decides to release another batch. This situation illustrates the law perfectly as Nike is willing to sell more of the shoes at the high price.

The first determinant for supply is the cost of production where the profits made are less due to the increase in cost of production. For example, if the wages of employees in the Nike factories rise, Nike will cut back on production to reduce their cost. The second would be natural disasters where the weather would affect the output and the supply of the raw materials. The third would be the expectation of future prices, where if the price in the future is expected to be high then producers will reduce the amount that they currently sell. For example, if Nike Air Jordan’s range of footwear is said to rise in the future, Nike Inc. would hold back most of their current supply and only start selling it when the price goes up.

When demand and supply is combined into 1 graph, there will be an equilibrium point in which both contradicting interests are balanced. At this point, the customer’s demands and the producer’s supply are equal. However, any demand and supply above this point will be a surplus of product. Any demand and supply below the equilibrium point, will exist as a shortage of the product.

Moreover, the responsiveness of customers towards Nike is also corresponding with the price elasticity of demand, whereby it is the degree of response of quantity demanded to the difference in price. There are a few ways to determine the price elasticity of demand. First of all would be the closeness of substitute products, which is most important because when there are more substitutes to choose from, people will switch to these products easily. For instance, Nike has many other competitor brands in the market such as Adidas, Rebook and New Balance, so when the price of Nike apparels and footwear goes up, the customers would easily switch to these other brands as an alternative. This makes the demand for Nike to be relatively elastic. The second determinant would be the percentage of income that is spent on the product. This is because, when an individual is spending a higher percentage of their income on a product, they will have to reduce using it when the price increases. As an illustration, a regular customer of Nike purchases 3 pairs of Nike shoes that prices range from RM 280-350 at the release of a new season. If Nike were to increase the price of the shoes, then the customer would probably only be able to purchase 2 pairs of shoes instead of 3.

Likewise, Nike Inc.  follows the theory of the price elasticity of supply, which is the individual’s response of the quantity supplied to a change in price. The first determinant of price elasticity of supply is the amount that costs rise as output rises, whereby the lesser additional costs to produce extra output, more firms will be encouraged to produce thus the supply is said to be elastic. Another determinant for price elasticity of supply is the time period. This is when supply is inelastic due to the unlikeliness of increasing the supply immediately in a short time.

Reference List:

Frank, R.H. (2000) Microeconomics and Behaviour. 4^th ed. United States: The McGraw-Hill companies.

Jackson, J. and McIver, R. (2005) Microeconomics. 7^th ed. Macquarie Park, Australia: McGraw-Hill Australia Pty Ltd.

Sloman, J., Wride, A. and Garratt, D. (2012) Economics. 8^th ed. Harlow, England: Pearson Education Limited.

Bibliography:

Ktaz, M.L and Rosen, H.S. (1998) Microeconomics. 3^rd ed. United States: The McGraw-Hill companies.

McConnell, C.R., Brue, S.L., Flynn, S.M. and Grant, R. (2012) Economics. New York: McGraw-Hill/Irwin.

Nike Inc. (2013) Nike Inc - The official corporate website for Nike and its affiliate brands. Available from : http://nikeinc.com/  [Accessed 2nd October 2013]