Case Studies and bedtime stories

The EMBABE Diaries

Bedtime story no. 1 – Where rose-flavoured macarons meet supply and demand

on February 21, 2013

Once upon a time, in a faraway land called Embaland, there lived a little girl called Bea. Bea didn’t like sweets. She loved them. Love. Hearts, flowers, chubby cherubs, the works. Thankfully, she found a kindred spirit in Embaland’s Study Group 13 – a boy called Pete, who also loved sweets. United by their shared values (love of cake), Pete and Bea decided, one warm, sunny London afternoon (I told you this was a bedtime story, so don’t contradict me – it WAS sunny), to kidnap the other members of Group 13 and escape to a faraway planet to establish the Cult of Cake. They did feel slightly uneasy about having stolen the concept wholesale from the Cult of Pie that had recently been set up in Embaland, but decided that the only responsibility of a business was to generate a profit, so they went ahead and did it anyway (their ethics advisor said that this was perfectly OK, as long as they could make up an elaborate story about how they had come up with the concept themselves). They made it safely to their faraway planet only to realise that they had disregarded a rather important element – there were no cake shops there to supply the cult. Happily, Pete was an entrepreneurial spirit, so he set up the first cake factory on the planet. By now, his ethical standards had dropped so low that he decided to steal the recipe book of La Duree (if you haven’t tried their sweets, you haven’t lived – trust me on that one) and produce clones of their heavenly rose-flavoured macarons, incidentally Bea’s favourite thing ever. After a very heated debate on the relative merits of apple crumble versus berry crumble, which quickly turned nasty, Bea and Pete decided to part ways, with Pete keeping his macarons factory and Bea the Cult of Cake. Determined to become rich as quickly as possible, Pete sold macarons-making trainings to a few thousand pastry chefs on the faraway planet, while Bea rebranded the cult as “Le Cult du macaron” and recruited the remainder of the population’s planet to it.

Pete trained the cooks so that they could all produce identical, wonderful, light macarons (he may have had no ethics but his NEO* was impeccable and so he was able to lead his team to heights of macaron perfection that would make Mr La Duree kill himself in shame). However, each cook’s costs of producing the macarons was different – some had brand-new ovens and brilliant employees, while some made do with old ovens that ate up a lot of fuel and employees who stole macarons from the cookie jar. If the price was low, only the most efficient cooks could afford to produce; if the price was high, more cooks could fire up their ovens profitably and more macarons were produced. So the higher the price, the higher the production of macarons.

Figure 1 – Macaron production (in ‘000 units) as a function of price

supply

We could call the difference between the total price of the macarons that a particular cook sold and the cost of those macarons “profit” but that would be way too clear so we’ll call it “supplier excess” to confuse the masses.

Back in La Maison Du Cult, as Bea sat on her golden throne, she dreamt of macarons. She hadn’t had dessert in months and, being a corporation, she was by now completely amoral, so she could literally kill for the incredible, mind-exploding experience of that first bite into the rose-flavoured masterpieces. However, she quickly remembered that she was an EMBA and should therefore be able to generate an exact monetary equivalent of any experience, such as, say, waiting in a line, or wanting cake so badly that she could kill for it. She instantly equated “I could kill someone to get this macaron” to “I could pay 15 pounds”. If Pete’s cooks were willing to sell that first macaron for no more than 15 pounds, she would gladly buy it. Otherwise, she would rather do something else with the 15 pounds, such as pay 0.000000001% of her EMBA fees. The first macaron she ate was all she had expected; she was practically in tears. The second was also scrumptious, but she was not quite as starved so she would have paid no more than 14.60 pounds for it. By the fifteenth, she was getting a little bit nauseous. She could still find some use for more macarons, for example in hazing rituals for the Cult, but the experience of watching terrified new Culties trying to eat 60 macarons per second was nowhere near as satisfying as eating those first few pieces herself, so each additional macaron was worth less and less to her. As all her Culties has been brainwashed to become mini-Beas, they all felt and acted exactly the same. But, of course, each macaron sold at the same price. So the higher the price, the less macarons people were likely to buy.

Figure 2 – Macaron demand (in ‘000 units) as a function of price

demand

Pete and his cooks started to experiment with pricing and production levels. At first, things were pretty confused, because they didn’t know how much each macaron was worth to their buyers and so they were always either stuck with unsold macarons or assaulted by crazy Culties wanting more, but Pete soon managed to steal the Excel file where Bea had carefully set out the decreasing satisfaction levels that each additional macaron brings to the Cult (expressed, of course, in monetary value). He was incredibly excited: “OMG!!! I get to play with Excel!!!” Breathless, he plotted the data against his cost of supply chart, trying to find out the magic price at which the number of macarons that his cooks would be willing to supply and the number of macarons that Bea’s Culties would be willing to buy would be the same. And, a few suspense-filled seconds later….bingo!!!

Figure 3 – L’Equilibre du Macaron

equilibrium

At eight pounds per macaron, the cooks needed to produce at least 34,000 pieces to break even; otherwise, the total production cost would have been higher than the total price. At that same price level, the Culties would buy no more than 34,000 macarons; any additional macaron would be worth less than 8 pounds to them so nobody would ever buy it.

At this point, the cooks could produce 34,000 macarons and sell them to the Culties for 8 pounds each so that we would have a perfect market. But since we still need to go through nine more sessions of Managerial Economics, Pete and/or Bea will soon start exploiting the market in ways that we can only begin to get confused about after Session 4.

Nighty-night!

*NEO – a personality assessment test (very interesting!) that we used in our Leadership Skills class http://en.wikipedia.org/wiki/Revised_NEO_Personality_Inventory

Want your own macarons? Pete refuses to sell to non-Culties but M. La Duree is open for business.

Full disclosure: I have no business or other relationship with La Duree but man, I love those rose-flavoured macarons!

Data to generate graphs c/o Prof. David P Myatt, LBS

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One response to “Bedtime story no. 1 – Where rose-flavoured macarons meet supply and demand

  1. Marina says:

    Alex – the bedtime story is hilarious!

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