Business Environment: An Analysis of Economic Downturns and Profitability in Amazon Group through Prime Services

Module Number: BMP4003

Module Name: Business Environment

Year/Trimester: 2023-24/ Semester 2/ January 2024 Cohort

Module Tutor/s: Hussan Jakaria / Edidiong Emmanuel Sidney/ Anesa Isufi/ Sunny Akpabot/ Umair Shafi Choksy/ Emmanuel Oghosanine/ Mohammad Rashid Khan/ Mahnaaz Siddiqui/ Shyam Sharma

Assessment Number	1
Assessment Type (and weighting)	Individual Written Report - 100%
Assessment Name	Economic Concepts and Models
Assessment Submission Date	29 September 2024 at 23:59

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Executive Summary

The report has analysed the correspondence of economic downturns to profitability in Amazon Group through Prime services initiated by Jeff Bezos, covering the economy of the United Kingdom. In this regard, there is an evaluation of economic data, models and theories to understand the current economic turmoil that has been taking place across worldwide economies. Other than this, there is also an emphasis on how Amazon Prime may be able to help keep the business afloat amid the economic crisis while mitigating turbulence through imposed government policies. The report has outlined how Jeff Bezos may be able to acquire cash.

Introduction

Decision-making has been denoted as an emergent approach to evolving as the most essential component in the core of government as well as business issues that can lead to managerial economics (Samuelson et al. 2021). Herein, managerial economics has been responsible for analysing crucial management rudiments through familiar tools and perceptions. This report will outline economic notions, models and data in terms of understanding legal constraints and regulatory frameworks imposed on business operations. Amid economic turmoil, Jeff Bezos, the owner of Amazon Group, has been subject to recent downturns and has been looking for cash down payments through one of his firms. Herein, the report will take into account external operations and analyse the landscape for Amazon Prime in terms of harnessing profit in the long run. Amazon Prime is headquartered in the United States and was established in the year 2005 in the e-commerce subscription service industry (Crunchbase, 2024).

Theory and Primary Economic Issues

Demand and Supply

The law of supply and demand idealises the ceteris paribus assumption conforming to the idea that every factor around an economy that may be capable of influencing consumer demand remains constant. For instance, with any upsurge in the fiscal value of subscriptions on Amazon Prime, there may be a deterioration in the economic demand for new platforms, discounts and offers. However, in case the monetary worth of subscriptions declines such as the provision of discounts on one-year subscriptions, there may be a corresponding surge in the demand for services from Amazon Prime. Based on the accumulation of affordable price rates from Amazon Prime, subscription rates may increase at a rapid pace for the organisation. This establishes an inversely proportionate affiliation between the fiscal values of commodities and the quantity demanded of those pecuniary goods. However, an unprecedented hike in the demand for commodities is likely to ensure an upstream movement reaching operations in the supply chain, resulting in the amplification of economic impacts (Handfield et al., 2020). This is likely to result in a potential decline in the demand for Amazon Prime subscriptions in case there is an unprecedented increase in price rates which may not be affordable.

Figure 1: Law of Demand

(Source: Created by the learner)

From another perspective, the law of supply tends to fortify the idea that each determinant across an economy which is capable of influencing the quantity supplied, other than the price of commodities, remains constant. Herein, it represents how consumers are capable of and willing to pay high price rates for luxury commodities, based on their confidence in an economy. For instance, an upsurge in the fiscal value of Prime subscriptions such as movies or web series, can lead consumers to pay higher prices for one year, leading to a surge in the quantity supplied. However, with declines in the price of subscriptions or the promotion of unusual or untimely offers, the confidence of consumers in Amazon Prime can lower, resulting in a deterioration of the quantity supplied. This emphasises the establishment of a directly proportionate affiliation between the monetary worth of goods or services and the quantity supplied of those commodities. From a different perspective, consumers who prefer lower price rates in the form of 3-month subscriptions can lead to reduced quantity supplied based on their perception of an economy. Herein, the current supply of goods and services within an economy can lead to a potential change in prices.

Figure 2: Law of Supply

(Source: Created by the learner)

Elasticity

Price elasticity can be denoted as any vicissitudes in the demand and supply of commodities based on havoc, slight or no modification in the fiscal value of goods and services. This can be influenced by the brand awareness rate and consumer loyalty rates of organisations based on how consumers are likely to pursue changes. For instance, the brand awareness rate of Amazon Prime has been increasing at a rapid pace in the United Kingdom, influencing an increase in the demand for its subscriptions, even at higher price rates. However, consumers who prefer Netflix as their platform for entertainment or any other online channel for affordable shopping may easily shift from Amazon Prime, implying a lack of brand loyalty. This can lead to a havoc revolution in the quantity demanded for subscriptions even at higher price rates, implying inelastic demand while elastic demand is the exact opposite. In 2023, around 71% of Amazon shoppers had been Prime members, reflecting the strong appeal of its services to platform users (Statista, 2024c). Herein, although the prices of Prime membership increased in 2022, especially in European nations where inflation rates hit the most, the wide range of offered services and shipping options remained unchanged.

Figure 3: Elastic Demand

(Source: Created by the learner)

Figure 4: Inelastic demand

(Source: Created by the learner)

In addition to this inelastic demand and supply based on no or little change in the quantity demanded and supplied of shipment from Amazon Prime, there may be alteration in the market with the presence of competitive services. With any intensification in the fiscal worth of Prime subscriptions, there can be a disproportionately large change in the demand for Amazon Prime based on its competition with other platforms. This can be denoted as elastic demand, which in turn can lead to a decline in supply, emphasising elastic supply. On the other hand, loyal consumers of Amazon Prime are not likely to shift to other brands with an increase in price rates. However, they can reduce their demand for subscription services and limit their consumption, waiting for prices to go down. For instance, in addition to tailored deals and free deliveries, Prime users can benefit from authentic and exclusive discounts on Amazon Prime Days (Statista, 2024c). This implies that there may be the presence of unit elastic demand and supply based on the annual shopping events being able to generate increasing worldwide sales while dominating the promising market of retail memberships with other competitors generating a fraction of Amazon’s revenue.

Figure 5: Elastic Supply

(Source: Created by the learner)

Figure 5: Inelastic Supply

(Source: Created by the learner)

Macro-Economic Factors Impacting Amazon Prime

Inflation Rates

The rates of inflation in the UK piqued to 11.1% in the fiscal year 2022, prior to declining to 2.2% in the monetary year 2024 (Statista, 2024a). Herein, it can be aligned that Jeff Bezos is likely to be able to convert his financial wealth into cash amid economic turmoil since price rates and recessions are going down at an aggressive pace with inflation rates stabilising within the economy. The price rates of subscriptions from Amazon Prime excavated inefficiency in consumer decision-making and the implementation of government policies. This emphasises the idea that higher fiscal values within an economy may potentially lead to enhancing costs of production, supply chain bottlenecks and unhealthy standards of living. With poverty rates striking the lower-income groups, rapid changes in government policies initiated and impacted economic operations. This, however, created a problem for high-income earners such as Bezos, based on taxes and tariffs.

Figure 5: Inflation Rates

(Source: Statista, 2024a)

Interest Rates

Interest rates that have been identified in the UK revolve around 5%, a decline from the peak of 5.25% aimed at keeping inflation rates stable within the economy (Bank of England, 2024). This implies that interest rates imposed by the government can lead to more savings for Amazon Prime and Bezos can thereby be able to cash down his financial values. Consumers may also invest and deposit more money in banks while receiving a modest return rate on investment. This rate of return can benefit Bezos and Amazon Group through the profit earned by Prime subscriptions. However, the return on investments can be much higher as well as riskier for Prime members which can help increase the demand for new offers or discounts. However, higher costs can lead Amazon Prime to engage in more expenses based on rates of borrowing while lowering the share price of the firm.

Exchange Rates

The currency or exchange rates generated between the United Kingdom and the United States instil “$1 as an equivalent to 0.780884 GBP” (Forbes, 2024). This implies that the operations of Amazon in importing goods from the US to the UK can be challenging based on exchange rates. However, in the case of exports from the UK to the US, Amazon may benefit and gain more profit with a larger count of exports, denoted by the current exchange rate. This is because the exchange rate for the US is higher than that of the UK. Herein, UK operations for Amazon Prime can benefit Jeff Bezos through exports and US operations in the form of imports can help him cash down his earnings amid economic turmoil. Exchange rates can help determine the tax rates and tariffs imposed by the government on imports and exports, leading to changes in business operations.

Figure 8: Exchange Rate Between the US and the UK

(Source: Forbes, 2024)

Technological Changes

The internet penetration rates that have been fluctuating changes in the UK represented 66 million users in the year 2023, accounting for 97.8% in the next fiscal year (Statista, 2024b). This implies that Amazon Prime, a tech-savvy organisation based on its extensive e-commerce operations, has been benefitting from such technological advancements over the years. With more individuals relying on technological growth, digitalisation, and online shopping, Amazon Prime has been extending its offers and discounts to consumers in terms of increasing demand. Herein, Prime members have also been remunerated for subscriptions over the years leading them to benefits such as free delivery, high-star-rated products, affordable price deals, discounts and other such offers that are not accessible to non-prime members. This technologically advanced firm has been reaching out to a myriad of consumers through its online sales and products, offered with detailed outlines and acknowledged with personal or customised highlights.

Figure 6: Internet Penetration Rate

(Source: Statista, 2024b)

Government Policies

The Monetary Policy outlined in the UK is an action plan undertaken by the government or the Central Bank, aiding stable and lower rates of inflation, aimed at keeping them at 2% within the economy (Bank of England, 2024). This implies that the primary tool imposed by the government includes bank rates that can be imposed by commercial banks aimed at enhancing economic growth rates and ensuring a strong, balanced and sustainable economy. Other than this aiming at reducing borrowing rates from the economy, the government also emphasised Quantitative Easing as another crucial tool in the form of implementing new and innovative policies. QE settles higher rates of inflation through the purchasing of bonds while bringing down long-term rates of interest imposed on savings as well as loans. This entails the idea that reduced borrowings and stable bank interest rates can help Jeff Bezos cash down his earnings.

Influence of Growth Rate in the UK on Amazon Prime

Substantial progress aims at maintaining public health and wealth based on profiting the poor, empowering comprehensive prosperity and cultivating economic standards of living (Todaro and Smith, 2020). However, over the years, worldwide economic growth rates have been declining, especially after the advent of the pandemic, Brexit and the Russia-Ukraine war. Herein, globalisation has been playing a crucial role in the representation of challenges across hyper-connected economies with an emphasis on an intensely competitive landscape. With challenges in economic policies, globalisation and income distribution soaring across the globe, Amazon Prime has been subject to such worldwide issues through its international operations.

Disposable Income

Consumer engagement rates, the availability of labour and employment opportunities have been declining at a rapid pace in the UK, resulting from the growth of income inequality rates within the economy. This has also been impacting worldwide operations in the form of disposable income, price rates and economic growth. For instance, the World Bank chronicled a precedented 768.5 million individuals represented under the poverty line of $1.90 per day of working, attuned based on their purchasing power in the year 2017 (Todaro and Smith, 2020). In the US, consumers live in a fortified amount with over 1.8 of them interlaced with acute scarcities. Herein, Amazon Prime may be subject to discrepancies in the cumulative duties regarding consumer detachment imposed by disruptive wage rates within the economy. Deteriorating rates of fiscal growth, polarization, and diminishing social cohesion can lead to major challenges experienced by Amazon Prime against disposable income.

Economic Policy

The Monetary Policy that has been formed in the UK aimed at reducing the rates of borrowing and keeping rates of inflation low and stable within the economy, has been capable of imposing bank interest rates. Bank rates generated by commercial firms have also been leading to the creation of balance while empowering sustainable and concrete economic growth rates. Other than that, another tool of the Monetary Policy set out by the UK government takes into account Quantitative Easy which is likely to help reduce long-term and high rates of interest while reducing costs of borrowings imposed on loans and savings. In addition, fiscal policies and taxation policies have also been implemented by the government in terms of exerting effective control on tariff rates, exports and imports. This can stand out as a major benefit for Amazon and Bezos since financial transactions may increase at a rapid pace.

Globalisation

Globalisation has turned out to be a major concern over the years with the establishment of hyper-connected economies within a dynamic and intensely competitive landscape. It has been represented as an affiliation between a wide range of economies from all across the world based on cultural dimensions, exchange rates, trade agreements, ideas, technological advancements, innovation, risks and costs. However, in addition to adversities such as hyper-competition, globalisation has been benefitting large organisations such as Amazon Prime. For instance, although Amazon lost its Prime members in the US, its retention rates appeared to be high amid shoppers entitled to Prime benefits for a longer span of time (Statista, 2024c). Other than that, the actual reach of Prime users has been estimated to be wider than subscriptions for Amazon, which is a crucial outcome of globalisation. However, since consumer loyalty does not indicate exclusivity, innovation can take a backseat in Amazon.

Government Interference in Amazon Prime

Public Investment

There has been an expanding demand for international cooperation with the current economic system recognising aid as outdated and futile while sanctioning worldwide public investment (Glennie, 2020). This implies that government expenditures have been continuing to expand at a rapid pace, especially after the outbreak of the pandemic, the war between Ukraine and Russia, and Brexit. In the UK, public spending increased, leading to a reduction in the rates of borrowing within the economy. In addition, there has been a plausibility that subscription rates from Amazon Prime may have increased with income rates coming back in position for consumers. Even premium prices have been remunerated by loyal consumers of Amazon Prime and an extensive Prime membership rate led the firm to generate extra profit and demand. Herein, the quantity supplied by Amazon Prime also increased due to expanding demand for offers and discounts entailing growth for the firm.

Trade Policy

There has been an establishment of profound issues through the mobilisation of domestic fiscal resources imposed on trade policies (Glennie, 2020). It relates to the development of climate change policies, trade regulations, enhanced taxation, and guiding private firms through arms trade, land rights, and sustainable growth. Taxation rates and tariffs increased in the UK demanding more subscription members in Prime with an emphasis on extensive export services from the UK to the US. Amazon Prime has been entitled to tariffs on imports and exports leading to the reimbursement of profit over the years. However, amid economic challenges, cashing down profit margins has been an issue for Jeff Bezos, making it prominent that trade policies need to be reassured within the firm. As a result, fiscal policies have also been introduced in Amazon Prime to be able to encourage the growth of subscription rates through effective trade agreement policies.

Tax Breaks

Financing that has been aimed at development demands foreign direct investments, and remittances through taxes, domestic resources and private as well as private sector investments (Glennie, 2020). As an online e-commerce platform, Amazon Prime has been subject to tax payments over the years to a wide range of global nations. Although the tax rate for Jeff Bezos, the owner of Amazon Group has been high based on his income, the possibility of earning excessive profit has always been a crucial part of Amazon Prime. This is because the firm has an exclusive brand name with exceeding rates of brand loyalty, making it a preferred yet premium platform for consumers. With online participation increasing over the years, tax breaks can help Jeff Bezos reach out to a myriad of target audiences in the long run. However, tax breaks may also require heavy financial investments, leading to losses with time.

Subsidies

Subsidies are recognised as a sufficient amount of finance granted by governing entities and public or state units aimed at supporting industries as well as businesses in terms of keeping fiscal values as low as possible. This is beneficiary amid dynamic and constant changes in the competitive business landscape nowadays. For instance, Amazon Prime has been engaged in higher competitiveness through reward systems and retail memberships (Statista, 2024c). However, imposing subsidies for a longer span of time can lead to problems associated with business and economic operations at Amazon Prime. Government subsidies can lead to market distortions by imposing unfair advantages to certain businesses or industries over their competitors. Although Amazon Prime has not been subject to such unfair advantages nor has the organisation received the same, it may be challenging in the long run with an increasing demand for its competitors, leading to inefficiencies and shortages of supply.

Conclusion

In conclusion, it can be derived that Jeff Bezos, the owner of Amazon Group, may be able to achieve his target of acquiring cash amid the current economic turmoil that has been taking place all across the world. From the analysis of economic operations in the United Kingdom and the United States, it has been concluded that Amazon Prime may be able to enhance the profitability criteria for Bezos, and, in turn, increase the revenue generation and sales volume of Amazon Group. However, there have been legal constraints such as fiscal policies and regulatory compliances such as tariffs, which have been imposing challenges in Prime subscription rates. Herein, with higher price rates, Prime subscriptions have been increasing through brand loyalty, exchange rates and globalisation among hyper-connected economies. As a result, Bezos can revert to economic turbulence and enhance sustainable economic growth and profit and Amazon through its exclusive Prime services.

Reference List

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Statista. (2024b) Internet penetration in the United Kingdom (UK) 2002-2024. [online] Available from: https://www.statista.com/statistics/1124328/internet-penetration-uk/ [Accessed 20 September 2024].

Statista. (2024c) Amazon Prime - statistics & facts. [online] Available from: https://www.statista.com/topics/4076/amazon-prime/#topicOverview [Accessed 20 September 2024].

Todaro, M.P. and Smith, S.C. (2020) Economic development. Pearson UK.