FINANCIAL CONTROL AND BUDGETING
Executive Summary
In the given Essay, the various micro and macroeconomics concepts are discussed. How demand and supply are affected by the prices of a product or service is analyzed. The Essay discussed the concept of scarcity and opportunity cost with their importance. In essays, different market structures and their characteristics are analyzed briefly. How market structures affect the decision-making in the economy is also explained. The Essay explained the different market factors that affect the business environment, such as political environment, technology, economic and legal environment are explained with examples.
Assignment 1
LO1
Business Economics
In this Essay, various economic concepts such as resources scarcity, opportunity costs will be discussed. The Essay helps demonstrate how the economic environment affects firms' business decisions and behaviour. The Essay will explain the importance of opportunity costs and business economics in business decision-making how the operation of the market influence the market structure will be discussed in the Essay.
Business economics is also known as managerial economics, which implies how economic theories are linked with business practices. Business economics includes using various methodologies and economic tools to solve different business problems. Applying different economic theories and concepts for decision-making is known as business economics. Business economics can be applied to solving microeconomics and macroeconomics' internal and external issues. Economics involves the analysis of human behaviour in an economy. It takes decisions, whereas business economics studies economic theories in a particular business or its products (DellaValle, 2019). That solves the following issues of microeconomics:
Demand & Price forecasting: In this analysis, demand for a particular product and service is analyzed by identifying the potential consumers based on the information obtained from market research. Price forecasting analyses how much value customers are ready to pay for products or services in different market circumstances.
Capital Management: This is difficult for organizations to make decisions related to capital. It requires high-level skills to decide where to invest the amount that will benefit the organization's long-term growth and provide maximum output.
Pricing decisions and policies: Pricing is the value of a product or service offered. Pricing strategies are important because they play a significant role in whether the consumer will buy the product or services or not (DellaValle, 2019).
Importance of Economics for Its Managers
Business economics is very significant in decision-making for the managers in an organization. It assists in identifying and evaluating the various economic factors, whether internal or external, that impact the business organization and its functions.
It helps forecast the demand or price of a particular product or service, and managers can accordingly plan their production and sale strategies to increase their sales.
It helps to understand the various relations between the economic components, such as the income of individuals, market structures that assist managers in decision making for the benefit of the organization (Lahti, Wincent, and Parida, 2018).
Business economics assists managers in the formulation of various strategies which help in predicting the future, such as pricing policies, deciding on Re-ordering levels, etc.
Concepts of scarcity & Choices
The basic understanding of scarcity is that resources are limited, but the wishes or wants of people are unlimited. So scarcity is the situation of not being able to satisfy all the wishes of people within the available resources. For example, one can have so many workers, land, or money at a given time, but how they can be used is unlimited. So there is always colliding for the use of resources because of their shortness. A piece of land can be used in several different ways, such as building a large house, a shopping complex can be made on it, and a football stadium (Lahti, Wincent, and Parida, 2018). People have to choose in what manners resources should be used. London's housing market is complex due to varying geographical and housing type submarkets. The housing market is facing failure due to the changes in the recent economic market of London.
Importance of opportunity cost in business decision making
Opportunity cost is the value of benefit forgiven by choosing one option. The concept of opportunity cost is very important in the decision-making of capital investment projects. It will not be possible to find the true cost if the opportunity cost is ignored. The concept of opportunity cost helps business managers choose one option out of different alternatives available in the market. The concepts of scarcity & choices and opportunity costs are significant in economics (Aleisa and Heijungs, 2022). Although opportunity cost is not recorded anywhere in the books of accounts still, the business needs to make decisions. A person can make more accurate decisions that will help the company utilize its resources optimally.
For example, a person working currently in a multinational company on a salary of £50000 per month leaves his job to start a business. The opportunity cost to start a business is the salary forgiven by him. So it helps in decision making whether to start a new business or continue the current job. It helps determine priorities among various options, and only the most profitable option is selected. The opportunity cost helps decide the relative price of & benefit from each option. After combining the aggregate value of each option, one can decide the best alternative (Aleisa and Heijungs, 2022).
Production Possibility Frontier
These are the models used to distribute the resources between the manufacturing of two products. The production possibility curve is generally used to define the concept of opportunity cost, scarcity, economic growth, efficiency, inefficiency and other constraints. For example, Mr John splits his time making furniture in a mall and making chairs. Here the Production possibility curve will show the maximum of chairs or furniture that can be made. In the command economy system, the economy is controlled by the government. In contrast, in the mixed economy, the economy is run partially by the government or partially by the private sector or free market (Aleisa and Heijungs, 2022). Opportunity cost in a command economy is how the resources should be used by the government either it can be made in arms or in making the roads & infrastructures. In a mixed economy, the opportunity cost should be considered for either using resources for making chairs or making tables in a school.
How changes in the economic environment affect business decisions and the behaviour of firms
A country's economy includes all the activities such as production, distribution, selling, and ultimate use by the consumers. The economic environment has a big impact on businesses. The economic environment includes many factors that can be understood with the PESTLE analysis (Akman, 2020).
Political factors: Different political parties have different political approaches that affect the taxation policy, trade restrictions, implementation of new rules and regulations, and political stability. Government Policy may be favourable for one industry and, at the same time, unfavourable for another industry. Suppose the government imposed a ban on Cigarettes that will adversely affect the firms that are involved in the Tabaco industry
Economic environment: The economic environment includes the interest rate, minimum wages rate, inflation, foreign exchange rate, the living standard of people, and unemployment. These factors combined affect the various business firms and decision-making. For example, an increase in the interest rate on a home loan may affect the demand for homes in the country, and people will avoid buying a new house.
Social environment: social factors such as health consciousness, age distribution, availability of young population. For example, due to the festive season, vehicle sale increased in the market (Akman, 2020).
Technology factors: These are the innovation and research & development in the technology field. Technology is changing so rapidly in the market. Due to recent developments such as machine learning, artificial intelligence companies have to change their way of doing business otherwise, they can lose their existing market and customer base.
Legal factor: The legal factor includes changes in the legislation, taxation policy, import and export restrictions. This factor affects the functioning of business in the economy.
Economic factors: These are the general economic factors that affect the overall economy. Such as the impact of global warming on business firms to switch the renewable energy source and other sustainable resources (Akman, 2020).
The economic environment affects business decisions and behaviour in the following ways:
Change in Tax Rate: The tax rate affects the business differently. Such as an increase in the import rate or imposition of import tax on the new product will decrease the volume of imports. Due to this, domestic industries will motivate to produce that product to satisfy the demand of domestic consumers (Kremer, Rao and Schilbach, 2019).
Interest rate: Usually, the country's central bank controls the interest rate in the country. An increase or decrease in the interest rate differently affects the demand and supply in the economy. For example, when the central government reduces the interest rate, it will result in increased demand in the country because it will be easy to get loans, and thus increase the purchasing power of people in the country (Kremer, Rao and Schilbach, 2019).
Income level: The income level and living standard of the public in a country will affect the production of luxury goods. If people earn a good income and their income capacity is good, then demand for luxury goods will increase.
Recommendations: From the above discussion, it can be concluded that market factors such as political and social factors influence the decision-making of business firms and individuals. When the interest rate increases, people avoid spending money on their necessities. Business firms also avoid their investment proposals in the short term. When the tax rate changes, a decrease in the demand for that product can easily be seen in the market.
LO2
Operation of a market and influence of market structure on a firm's production and strategic decisions
Concepts of demand: This is the consumer's wish to purchase goods or services at a specific price. The demand can be market demand for that product or service or demand in the total economy. The law of demand says that when prices increase, demand declines and vice versa.
Concept of supply: Supply refers to the availability of goods or services at a particular time. The law of supply says that when the price increase, the supply also increases, and when the price declines, supply also decreases.
Equilibrium price and quantity: This is the point where the demand and supply curves intersect each other. The point wherein the economic demand for a product becomes equal to the supply of that product or service is known as the equilibrium point.
Source: (Management mania, 2021)
Different Types of Market Structure
Market structure in an economy is very important in decision-making in the business (Hovenkamp and Shapiro, 2018). The characteristics of the market structures affect the demand, supply, and stability of a firm in the economy. The market structures can be classified as follows:
Perfect competition: There is no monopoly of a firm or company in this market structure. All the firms are selling similar products or services. In perfect competition, no firm can decide the market price. They are just price takers (Hovenkamp and Shapiro, 2018).
Monopolistic Competition: This is the market structure where various entities produce and offer identical products that are not interchangeable. This market structure is between perfect competition and monopoly.
Monopoly: In this type of market structure, there is only a single producer and seller of the product or services. Because there is no competition, they can determine their price, which is usually high (Dhingra and Morrow, 2019).
Oligopoly: In this type of market structure, the few firms are operating the market are producing or selling their products or services without influencing the other firms in the market.
How market structure influences business decisions and strategies
Market structures play a significant role in the economy because different market structure creates different opportunities and threats for the business firm. The market structures affect the competition and pricing policies of firms. For example, a firm holding a monopoly can hold its position only by maintaining the quality and standard of its product or services. Quality will be the main core area in decision-making (Victor et al., 2018). In a perfect competition market structure, firms will try to increase their market share by reducing the prices. So market structures affect the decision-making of business managers and firms in the long term.
Importance and limitations of the market operation
Market operations are significant in investigating consumer preferences and the price elasticity of a product or service.
The market trends can be analyzed with the consumer behaviour to prepare a policy for the product or services. It assists managers in drafting long-term strategies for their business and sustaining their market share.
In the market, innovation is encouraged to get competitive advantages. Competition helps in improving the effectiveness and efficiency of the ness operations.
However, due to the overproduction, prices may decline, and firms may lose their contribution margin due to this decline (Victor et al. 2018).
Due to the overproduction in the market unemployment rate may increase, which may harm the wage rate and growth of the economy.
The Essay explains business economics and its significance for business managers in business decision-making with suitable examples. The concept of opportunity cost with scarcity & choices is understood with examples in the Essay and its importance in business decision making. The Essay discussed how the market and market structure operation affects the firm's production and strategic decisions. The Essay explains how changes in the economy affect the decision-making and behaviour of firms.
References
Akman, M.K. (2020) Defense Management and PESTLE analysis. Ante Portas–Security Studies, 1(14), pp.93-102.
Aleisa, E. and Heijungs, R. (2022) Leveraging Life Cycle Assessment to Better Promote the Circular Economy: A First Step Using the Concept of Opportunity Cost. Sustainability, 14(6), p.3451.
DellaValle, N. (2019) People's decisions matter: understanding and addressing energy poverty with behavioral economics. Energy and Buildings, 204, p.109515.
Dhingra, S. and Morrow, J. (2019) Monopolistic competition and optimum product diversity under firm heterogeneity. Journal of Political Economy, 127(1), pp.196-232.
Hovenkamp, H. and Shapiro, C. (2018) Horizontal mergers, market structure, and burdens of proof. The Yale Law Journal, pp.1996-2025.
Kremer, M., Rao, G. and Schilbach, F. (2019) Behavioral development economics. In Handbook of Behavioral Economics: Applications and Foundations 1 (Vol. 2, pp. 345-458). North-Holland
Lahti, T., Wincent, J. and Parida, V. (2018) A definition and theoretical review of the circular economy, value creation, and sustainable business models: where are we now and where should research move in the future?. Sustainability, 10(8), p.2799.
Victor, V., Joy Thoppan, J., Jeyakumar Nathan, R. and Farkas Maria, F. (2018) Factors influencing consumer behavior and prospective purchase decisions in a dynamic pricing environment—An exploratory factor analysis approach. Social Sciences, 7(9), p.153.
