LPC FELM4026 Financial and Economic Literacy for Managers SPRING 2019 FIRST SIT Coursework Brief Handout: [Week 1] Deadline for Submission: [2pm, Wed 24 April, 2019] Submit this coursework through the...

#1.
Consumer sovereignty plays an important role in classical economics. The concept of “consumer sovereignty” conventionally assumes that consumers enjoy the freedom to choose the goods and services within their buying power or effective demand as long as they are not unduly restricted by the regulations imposed by the state, religious institutions or so on. The concept of consumer sovereignty is critical in capitalism. (Deborah Rose Brock, 2012)
According to the theory of consumer sovereignty, it is the consumers in the competitive economy who decides what is to be produced in the economy and the scarce resources are to be allocated. They have both the freedom and the ability to choose from different suppliers or the firms in the market. The consumer is free to buy the goods in whatever quantity they want. Producers, on the other hand, produce the goods and services that meet the taste and preference of the consumer In the theoretical perspective, consumer sovereignty ensures the effective functioning of the free market. This theory advocates that consumers only encourage the producers what goods to be produced in the market. Consumers in the competitive economy are free to decide what goods to be produced. In neoclassical economy, both consumers and produces a motivated by self-interest – while the producers decide the best mode of production to maximize profit, consumers on the other hand decide what goods to be purchased to satisfy himself. Consumer sovereignty is achieved where both the producers as well as the consumers according to their self-interest. In order to maximize profit, the producers have to sell his products and to do so they have to produce the goods that the consumers want to purchase. Thus, the concept of profit maximization is very much consistent with consumer sovereignty and it makes sense. (Trigg)
Transaction marketing is a marketing practice in business economics that is guided by consumer sovereignty. It focuses on maximization of profit by attracting more and more consumers to buy the form’s product. Consumers sovereignty reflects the idea where the consumers exercise their economic vote wisely with making the rational decisions. Most of the business laws are designed today to ensure that they protect consumer’s interest and they are well informed about their choices.
Consumer sovereignty is very much prevailed in free market economy. It is considered as societal arrangements that causes the economy to act in terms of consumer demand. Due to consumer sovereignty, the economy moves neither in response to government directives nor the interest of any individual business. In the pursuit of profit maximization, when the business produces the goods and services according to consumer choice, it will reduce wasteful production. It would rather help the producers to proper allocation of scarce resources thereby maximize profit. With the pursuit of profit, business people listen to the consumers, disseminate the information gathered from them and produce the goods and services that satisfy the needs of the consumers. (Tadajewski)
Consumer sovereignty plays a critical role in determining the allocation of scarce resources and selection of the goods and services that are to be produced in the economy. The urgency for certain good implies the consumers are willing to pay more that in turn results larger profit for the producers. No business will ever successful without considering the likes and dislikes of the consumer. The restoration of consumer sovereignty is only made possible not only by protecting the competition but also promoting competition among the different actors in the market. The promotion of competition among the producers results an efficient exchange of information about consumers choice and preferences as well as production of quality goods at the reasonable prices. (Künzler, 2017)
#2.
Market structure is an important concept in the business studies as it affects the market outcome. The motivations, opportunities and the economic decisions of the market participants significantly differ across the various market structures thereby impacted the market outcome. The extent and the nature of competition in the market affects the strategic decision making. There are some important variables that determine the market structure of the industry. These variables include the numbers of sellers and buyers, ease of entry and exit to the market, product substitutability mutual interdependence among the firms and others. Based on these variables, economic literature has broadly categorised four types of market structure: perfect competition, monopolistic competition, monopoly and oligopoly. (Fischer, 1997)
Tesco is operating under oligopoly market structure. Grocery market in UK is characterized by oligopoly with Tesco as the dominant player. According to the current statistics, Tesco has the highest market share that reaches to 30%. Other three big firms in UK’s grocery market is ASDA, Sainsbury’s and Morrison’s. In order to protect the market share, super marketers like Tesco have used both price and non-price competitive strategies. Tesco heavily relied on aggressive advertising and enjoyed huge profit margin Traditionally, these four are the major players in UK’s grocery market but the grocery market has undergone major changes since 2012. Due to emergence of few discount stores, such as Lidi and Aldi, the market share for Tesco and other major firms have come down. The huge expansion drive of Lidi and Aldi have come as a huge threat for all the major supermarket stores. (Richard Lipsey, 2007)
British Airways is operating under oligopoly market structure. This is because airline industry is characterized by oligopoly where few large firms dominating the industry. Moreover, due to high set up cost as well as high operating cost, the entry barrier tends to be substantially high in airline industry. It is essential to note that barriers to exit is also considerable high for airline industry as it involves the sunk cost. When the airline firm leaves the industry, it cannot recover the cost once it leaves the market because the resources used in airline industry is subject to specialization and cannot be used in other sector. High barriers to entry deter the entry of potential firms in the industry resulting a supernormal profit for the airline firm like British Airways both in the short run and in the long run.
The short run equilibrium of an oligopoly firm like Tesco or British airways can be explained through the kinked demand curve model. If the BA wants to increase the price above P*, other competitors like KLM -Air France will not follow because of the fear of losing market share. Thus demand curve before the kink is found to be considerable elastic to an increase in air ticket price. On eth other hand, if BA decreases the price then KLM-Air France will also follow because of not to lose the market share. Thus the demand curve below the kink is found to be elastic with the rise in air ticket price. The oligopoly firm will produce Q* at the price P* in equilibrium. The oligopoly firm will not change the output even if the price increases from MC1 to MC2.
Cost and revenue
MC2
Demand is relatively elastics
P**
MC1
P1
A
Demand is relatively inelastic...