Task 1

 

1. Explain the economic problem of scarcity and demand resource allocation in managing an economy with examples drawn from the UK and using your chosen organisation. 
2. Discuss the role of supply and demand in an economy and explain how equilibrium in the market is achieved. 
3. Evaluate the importance of differing market systems in general and evaluate the role of opportunity costs in determining how an organisation of your choice makes economic decisions.
4.Using an organisation of your choice, explain what is meant by elasticity of demand and assess the importance of elasticity in market interactions. 
5. To achieve M1, you will have made an effective approach in explaining the economic problem of scarcity and demand resource allocation using the UK economy as an example.
6. To achieve M2, you will have applied relevant theories and techniques in your evaluation of the differing market systems and how they affect your organisation.
 

 

Introduction

The study focuses on the nature and characteristics of the UK economy. It also highlights on how the economic system of this nation affects on the business organization of this nation. The UK economy is highly developed economy and is the fifth biggest in the globe as accounted by GDP (Gross Domestic Product). This nation has been ranked ninth biggest in terms of PPP( purchasing power parity). The service industry mainly dominates this nation and contributes to 80% of its GDP. This country has the mixed economy that relies on capitalist system (Taussig 2013).  This system is characterized by absence of UK government intervention and free markets.

• The economic systems plays significant role in performing resource allocation. Scarcity has been one of the vital issue in which the people wants are unlimited and hence it creates huge difficulties in fulfilling the peoples need owing to limitation of resources (Laursen 2015). Due to unlimited needs of economic society, the perishable resources become scarce because they are not recyclable. Therefore, it is necessary for every economic society to utilize their resources in efficient way. The resources are basically limited in two ways that includes-

1. Limited in terms of physical quantity such as land that has finite amount
2. Limited in utilization such as labor as well as machinery

 The demand for the specific good affects its price. Production cost as well as labor cost affects the price of scarce commodities. In UK retail market, the market forces mainly consider resources allocation. This means that the condition of market helps in determining resource allocation to higher level (Cuñat  and Melitz 2012). For example, Tesco Plc invests their money in distributing the scarce resources that includes labor, capital etc.  Producers and consumers have various takes in setting the product price. A particular price establishes demand and supply balance, which is also referred to as equilibrium price. The sellers set the product price after dealing with their customers and focusing on their rivalries strategy (Rassenfosse and Potterie 2012). If the buyers does not accept the price and stops purchasing it, then this forces the retailers to decrease the price. 

1.2 Both supply as well as demand are two vital economic activities and have influence on each other. These affect the prices of buyer’s products and services within the economy. Demand refers to the measurement of consumer expenditure as well as consumer desire on specific product or service at particular price. Prices might decline if supply continues to increase. Supply and demand helps in determining the prices of product. Consumers purchasing products exhaust supply that results in rise in demand for goods. The theories of market economy claims that the relationship balances the equilibrium price, demand as well as supply reaches approximation of perfect resource allocation. However, at this equilibrium point, prices are set to consumer’s interest and hence producers produce fewer products. Market economies apply this as mechanism in order to determine product development as well as production. In case of weak economy, both the demand as well as supply becomes weak. Hence this adversely affects both the production and consumption.

1.3 Market System refers to the network of retailers, purchasers and other players that works together for trading specific product. Various kinds of market systems that includes perfect competition, monopoly, monopolistic competition etc is vital for business as it helps the firms in making product pricing as well as production decision (De Luca and Atuahene-Gima 2012). The most vital step that the company takes in achieving success in business is educating the people regarding brands, product advantages and enhancing the stakeholder’s relationship. This method of market assessment is mainly done before the organizations fiscal year that refers to the extension of budget formation and planning procedure. Opportunity cost refers to the cost of the foregone alternatives. It also facilitates the company in maximizing profit that could be achieved from capital and technology. As economic decision making is based on the accounting information, it is vital that information is useful to the organizations economic decision making. Tesco produces their product and offer services in such a way, so that it fulfills the requirement of buyers and stakeholders. This organization considers carrying cost including storage cost, opportunity cost and storage cost in order to make economic decision.

Opportunity cost is vital for business as it helps this organization in deciding in which business activities they should invest the money in order to attain higher profitability. In addition, Tesco also assess opportunity based on benefits as well as cost associated in order to make informed economic decision.

1.4 Price elasticity of demand refers to the relationship between changes in quantity of commodity demanded with respect to its price change. Price and total revenue is inversely related to each other. This means if price of the product rises and total revenue declines, then it is known as elastic demand. On the contrary, if both the product price and revenue increases, then the demand is known as inelastic (Rassenfosse. and Potterie 2012). In case of luxurious products, the demand is inelastic and hence small rise in price does not affect the buyers. On the other hand, demand is said to be elastic in case of substitute product. This means that if the price of one good increase then the consumers switches to other product. Price elasticity plays a significant role in Tesco. Tesco producers gather knowledge about price elasticity of product in order to decide upon the pricing policies that rely on the information about behavior of consumer and demand. However, if the product of Tesco has higher demand, then its price rises owing to excess demand. Still, if the revenue falls then this is known as sheer elasticity.

2.1)  Tesco’s “game changing” pricing policy increases their sales by 0.6% in last year. Price value satisfaction refers to the method of assessing price on company’s operation. The managers of the company limit maximization of profits while the stakeholders are not involved in business activities. The pricing as well as corporate objectives have huge implications in business. The corporate objectives of Tesco includes-

• To gather knowledge about the customers preferences and meet their requirements
• To be more competitive on fundamentals
• To provide proper business environment
• To upgrade already existing stores of Tesco
• To focus on the product quality and the promotional activities of product
• To adapt new technologies for manufacturing products
• To focus on the elasticity’s of products for setting their price
• To achieve more profit  in order to return to shareholders

Tesco’s focuses on the competitors pricing and the market demand for the product before setting their product price. As Tesco operates in perfect competition, it focuses on product demand besides its price for producing that commodity. They even concentrate on the competitor’s business strategy and target market in order to gain competitive advantage. Thus, this helps them in attaining higher profit and expanding their business globally.

2.2)The setting of product price varies among different market structures. The product price in perfectly competitive market structure is determined through forces in the market that reflects demand and supply of goods.  Monopolistic competition refers to the market structure where the commodities that are sold vary from the consumer’s idea about product. This means that the same commodities are sold under different brand names. One of the vital factors that differentiate this market structure from prefect competition is product differentiation. In oligopoly market structure, large number of firms competes among themselves and hence competition level is high (Baumol and Blinder 2012). In this competitive business environment, as one firm lowers the price of product for attracting the customers, it influences the action of other entities. As Tesco operates under oligopolistic competition, the market share involves total firms in the present market and hence their market share value influences the market. This company operates under highly competitive business environment by lowering the price of their goods and service.  They even analyses the target market and their competitors for sustaining in the competitive business environment. However, if the UK government imposes requirement of standard quality, then Tesco Plc has to follow it irrespective of their company’s policy and change their product price accordingly. 

2.3) Market power means the firm’s ability to increase the price above that level that exists under competition. It mainly leads to decrease in output and economic welfare loss. But with this market power, any business organization makes huge profit. They are basically the price maker because they balance the share in the market (Cuñats and Melitz, 2014). The entities usually have zero market power in perfectly competitive market. Tesco plc strategy is to change their activities when the exchange rate varies in the nation. One of the UK’s regulations includes imposition of competition policy positively affects the larger business organization but adversely affects the new entrants in the market.  Due to this competition policy, the larger organization plans their business strategy based on the rivalries business action and their target markets. This policy argues that customers are influenced by the local markets being highly concentrated, which portrays less competition. Owing to this competition policy, Tesco potentially earns huge profit margins. However, they revise their commodity price in such a way that it attracts large number of customers in the market that in turn helps them in maximizing profit.  On the other hand, the new firms that enter that market faces huge difficulties in competing with them. In fact, the new entrants try to lower their product price in order to attract more buyers. Moreover, the UK’s regulatory policy introduces higher degree of unplanned balancing and trading policy in order to enhance competition between the business organizations. Thus, this reflects that the UK’s regulation policy impacts on the market power of Tesco.

The economy of the UK has undergone substantial changes in the twenty first century as the dynamics in the economy changed according to different aspects. The country, as a whole has experienced significant shifts with reference to the importance and weightage of the different sectors present in the economy of the country. In the last few decades, the economic structure of the country has shifted from being highly industrial to moving towards a service sector based economy (Galí 2015). In the contemporary period, the economy of the UK  has experienced a significant decline in the output and also seem to have less growth in terms of employment as reflected in the recent statistics of the service sector in this nation.As can be seen from the above table, the manufacturing sector has significantly shrunk with respect to the percentage share of GDP of the country. The sector, which contributed hugely (41%) in 1964, now contributes as low as 15% to the GDP of the country in the current periods. On the contrary, the service sector has steadily increased with time and now contributed nearly 73% in the GDP of the country.

However, not many changes have been observed in the agricultural or primary sector of the economy with time (Schumacher 2013). Though the relative percentage of contribution of this sector in the GDP of the country has decreased to a little extent, the absolute valuation of the sector has increased due to the inelasticity of demand of the commodities which this sector offers.

Thus, from the above discussion and empirical evidences, it can be concluded that the current economic structure of the economy, though experiencing a pro-service sector shift, has not created a hostile environment for Tesco Plc’s growth. Hence, there are favorable conditions prevailing for the company in an overall scenario.

The macroeconomic conditions of any economy have considerable implications (both positive as well as negative) on the overall well-being of the economy as well as on the business operations in the economy of the concerned country. The macroeconomic policy framework of the economy of the UK has undergone substantial changes over the twenty first century, which had significantly modified the commercial and other aspects of the country over time.

The economy was highly regulated in the first few decades of the twenty first century, which however changed with time and with the implementation of the liberalization policies in the country. The country in the recent period, with the macroeconomic objectives of full employment, controlled level of inflation, steady levels of balance of payments and a fair distribution of productivity and income among the different social and economic strata in the country (Wild, Wild. and Han 2014). Given the recent macroeconomic policies in the country, the growth rate of the country has been stable at 2.8% and the unemployment in the county also has fallen significantly. The country uses monetary tools like rate of interest and bank rates to keep the level of inflation low at a targeted level of 2%. With the liberal policies, both monetary and fiscal (the country adopting expansionary fiscal policies), the trade sector of the country is also becoming robust and the country targets expanding its share of operations in the international markets.

With the increase in the overall employment as well as the external sector of the country, the business operations and revenue generation of the concerned company, Tesco Plc, is expected to increase. The company being a major player in the country’s grocery retail market, with the increase in employment is expected to see increasing demand of the commodities which the company offers. The liberalizing monetary as well as trade policies of the country is also expected to increase the revenue of the same. However, the commodities being mostly primary in nature the demand is expected to increase up to a certain extent as the demand for such commodities in less elastic in nature. 

Tesco’s operation has been directly affected by both the monetary as well as fiscal policy. The federal government in UK uses fiscal policy in account of taxation policy as well as government spending. This policy is used to create jobs and hence increases the spending level on consumer’s part.  This rise in expenditure level benefits Tesco in account of high demand for products as well as services. Besides this, it also impacts the ability of this company in taking risk as government tax policy to invest in business expansion also positively encourages Tesco. Moreover, monetary policy in form of credit flow encourages consumers in purchasing product from this company, which in turn improves their financial performance.

The performance of the economy of the UK over the years can be seen with the help of the performance of the country in the key economic indicators during this period:

As can be seen from the above figure, the growth of the GDP of the country, apart from a couple of downward fluctuations, have been showing upward trend in the twenty first century. The GDP of this nation averaged to 0.60% from 1955 to 2017.  Recent statistics reflects that in the year 2015, the UK GDP growth rate was 0.8% while in 2017 it was 0.7%.  Hence, for the last two years, there has been slight fluctuation in UK GDP growth rate.

The employment dynamics of the country has been continually positive. Though there has been a sectoral shift in the economy from manufacturing to service sector, the skill levels of the workers have also increased which can be seen in the rising trend of employment in the country over the past decades (Draghi 2014). 

The unemployment rate, which continually increased till 2010, kept on falling after that and till now it has been continually decreasing which asserts the fact that there has been a continuous increase in the number of employments created in the economy of the country (Henry, Karanassou and Snower 2012). The unemployment rate in UK averaged to 7.08% from the year1971 until 2017. In the year 2015, the unemployment rate was 5.7% while in the year 2017 it was 4.3%. This shows that for the last two years, the unemployment rate of this nation declined.n of the country. However, it has been mostly within 0% to 4%, with occasional fluctuations. The inflation rate in this country has been more or less stable over the last few years. Recent statistics reflects that in the year 2015 it was 0.7 %while in the year 2017 it was 1.5%.

The overall performance of the economy of the country in the above discussed economic indicators have been more or less positive and the impact of t economic performances on the company has been positive (Kremer, Bick and Nautz 2014). This can be seen from the major share of the retail market, which the company enjoys in the country (Barnett, A., Mumtaz, H. and Theodoridis 2014). These indicators do not always positively impact Tesco. This is because little fluctuation in at least one of these indicators influences their operation.

The company, as can be seen from the above figure, enjoys the biggest market share and there is a striking difference between the market share of Tesco and Asda, which comes second in the market share (Mankiw, 2014). The company has also seen considerable increase in its sales in the recent years with the expansion of the trade relations and better performance of the macroeconomic factors in the country.

Task 4

4.1 Comparative advantage refers to the economic law relating to the capability of any economic actor that helps in producing the products and services at low opportunity cost with respect to other actors. The opportunity cost actually measures the tradeoff (Schumacher 2011). This economic theory lays out the fact that every actors mutually benefits from the voluntary trade and cooperation. The example of the comparative advantage from emerging countries against UK has been illustrated below:

	Textiles	Copies
UK	1	5
India	2	3
Total	4	7

 The above table illustrates that for the UK, in order to manufacture one unit of textiles, it will have an opportunity cost of total five copies. On the other hand, in India, production of one-unit textiles will have an opportunity cost of total 1.5 copies. However, it has been seen from the above fact that India will have a comparative advantage in manufacturing textiles as it will have low opportunity cost.

Opportunity cost of manufacturing copies

The production of one copy in the UK will have an opportunity cost of 0.25. On the other hand, production of one copy will have an opportunity cost of 0.66 (Laursen 2015). In this case, UK will have the comparative advantage in manufacturing copies as it will have lesser opportunity cost in comparison with India (Woodford 2012).

Total output after specialization

If each nation now specializes to produce one commodity then the total output will double assuming CRS (Constant Returns to Scale).

	Textiles	Copies
UK	0	6
India	3	0
Total	3	6

This table reflects that the total output of these two commodities will increase which explains the gains that is obtained from comparative advantage. Other issues might occur in the real world. This means that if India makes specialization in textiles, then economies of scale might occur that will lead to larger output. However, the two nations will be able to trade now. Therefore, UK will export copies and India will export textiles. This will include trade cost, which can be reduced by containerization. Thus, this example illustrates that free trade helps in enhancing economic welfare of the nation.

Free trade is defined as the kind of trade policy, which allows the traders in acting as well as transacting without any government interference. According to the comparative advantage principle, the policy helps in permitting the trading partners gains mutually from trade of commodities and services. Free trade has some advantages and disadvantages, which includes-Benefits from free trade

• Increase in production
• Efficiency in production and proper allocation
• Increase in growth rate of the economy
• Gains from foreign exchange

Disadvantages from free trade

• Structural unemployment
• Reduces economic stability
• Environmental issues
• Unfair competition

4.2 Global economic shocks adversely affect the UK economy. It decreased near about 6% points from annual GDP growth rate.  It had also come via trade channel as export demand weakened and import prices rose. It had also led to tighter credit supply and volatile prices of assets in the nation. Emerging nations increases competition among the company in developed economies. The UK allied with Triad has threats as well as opportunities from the BRICs countries. These mainly include- industries in UK facing huge challenges, competition with export nations for their products and increasing GDP growth rate. Moreover, increase in competition has expanded the markets where UK competes in selling product. In addition, both the technology sector and services mainly in segments of software development experiences boom due to rise in demand. But this competition among the rivalries of Tesco expands the business. As this company operates under oligopolistic competitive market structure, if one firm increases their price of good, other remains constant. However, the firm who increases the price of good loses their market share as the customer avoids in buying those goods. Hence, this helps Tesco in setting stable price for homogenous goods.

Conclusion

From the above study, it can be concluded that as UK has capitalist economic system, most of the economic decision taken by the government based on the present condition of market. The government expenditure accounts for 35% of the total GDP of this nation. As the UK’s economic system relies around capitalism. It allows the free organizations as well as market forces to allocate the resources in appropriate way.  Therefore, when the company’s profits are being reinvested, the labor as well as capital becomes highly productive. Hence, the organization always remains competitive as well as efficient in facing the risk of the business. In addition, this system mainly needs innovation as well as flexibility for keeping pace with variation in demand and supply of products. It also increases competition among the companies and facilitates in creating dynamic efficiency.

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