How Economic Systems Attempt To Allocate Resources Effectively Economics Essay
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Published: Mon, 5 Dec 2016
The price mechanism plays a vital role in determining what to produce and for whom to produce. It indicates to suppliers the goods that consumers are willing to pay higher for and essentially, those are the goods that are produced and for those who are willing to be the equilibrium price.
How to produce is dependent on the most popular goods in the economy where all resources divert automatically as that good is more profitable to produce for suppliers.
Comprises of both the state and private entities.
The prices are determined by both the market forces of demand and supply as well as by the government therefore, ultimately, both consumers and the government influence what to produce.
How to produce will depend on the most profitable goods and services in the market however, governments may intervene to determine where to divert resources.
The impact of fiscal and monetary policy on business organizations & their activities
The economy of UK faced a period recession in 2008 which caused its Gross Domestic Product (GDP) to fall and the British economy shrank by 7.1%. The economy experienced high negative budget deficits, UK’s debt situation was critical and high inflation took over. The economy then came out of recession however, due to the heavy snowfall experienced in 2010, the economy slowed down once again in the beginning of 2011. The fiscal policy that was set to reduce the fiscal deficits was as follows (Oxlade, 2011):
Value Added Tax (VAT) increased
Income tax for richer middle classes rose
The following monetary policy also came into play (Monaghan, 2011):
Quantitative easing that is, increasing money supply
Lowering interest rates
The national and local businesses will be more or less similarly affected by the fiscal and monetary policies:
Impact of the fiscal policy on:
The People’s supermarket and Sainsbury’s
The increase in VAT and income tax would ultimately reduce the demand of consumers, especially of goods that are a want rather than a need. Thus, the supermarkets will consequentially order less of those goods from its suppliers. This may also cause them to lose out on profits.
On the other hand, Tesco will not be affected by the increase in taxes by the same extent. Although their earnings from the UK based supermarkets may reduce for the same reason as does The People’s supermarket and Sainsbury’s, it will still be able to cater to the demands of other countries’ consumers and so, will not reduce its orders from suppliers by much and will maintain its profit level.
They may also try to cover for its losses of UK from other countries.
Impact of the monetary policy on:
The People’s supermarket and Sainsbury’s
Reduction in interest rates will allow them to do more borrowing at lower costs thus; will increase their spending on its activities.
The increase in money supply main cause inflation, ultimately reducing its demand and therefore, the quantity of supply ordered from suppliers may fall and may lead to low profits.
The reduction in interest rates may not affect the global business as such because may be receiving loans from the other subsidiaries even when interest rates were higher, thus its spending on its activities may not increase as much relatively.
If inflation due to money supply causes demand to fall, Tesco’s order of supply to its suppliers will not change as much as well, as it has customers to supply to in other countries as well and so, unlike the local and national business, it may be able to maintain its profits also.
The impact of competition policy and other regulatory mechanisms on the activities of a selected organization
The impact of UK’s competition policy on Sainsbury’s, for example, would be to restrict it from monopoly formation; make managers more efficient and effective; give consumers improved quality at low costs; increase consumer choice, in short, augment the consumer and shareholders’ interests (Fernando, 2011). The competition policy in the UK economy is currently based on the Competition Act 1998, Enterprise Bill 2002, Office of Fair Trading (OFT) and the Competition Commission (CC) as well as other regulatory mechanisms including the Companies Act 2006, the regional policy, industrial policy, enterprise strategy, training and skills policy and so on (Sloman and Stucliffe, 2003).
Task 3: The behaviour of organisations in their market environment
How market structures determine the pricing and output decisions of businesses
The market structures and the pricing and output decisions are illustrated in the diagram below (Sloman and Stucliffe 2003):
Graph 2: Pricing and output decisions in various market structures
The way in which market forces shape organizational responses
Majority of the decision making of organizations depends on the market forces including:
Demand and Supply of the product: The key point that answers the questions of what, how and for whom to produce depends on the demand and supply in the market; leads to allocation of scare resources in a profitable manner (Lowson, 2002). For example, if Cadbury has to decide which type of chocolate to produce, it will look for the product where demand is high and divert majority resources in producing that particular chocolate.
Elasticity of demand and supply: Pricing and output decisions are also affected by the responsiveness of the quantity of demand of the product to changes in price, known as the elasticity of demand and the responsiveness of the supply as well (Lowson, 2002). For example, an organisation providing bus travel services might tend to charge higher prices at the peak time of the demand for buses, as people will consume the service to get to their destinations, no matter what the price is. In case of supply, if the cost of oil increases which causes their total cost of one unit to rise, they may reduce their production.
Economies of scale: A phenomenon where increase in output lowers costs therefore, giving firms the incentive to produce more as it would consequently lead to higher profits (Sloman and Stucliffe, 2003).
Consumer expectations and actions: Promptness in foreseeing and reacting to consumer demands will always be a significant element of competitive advantage for firms and cannot be ignored when making major decisions (Chang, 2005). For example, the Apple Company might determine the expectations of its consumers and innovate a product accordingly.
The short run and long run phenomenon: The short run period is where at least one factor of production is fixed; whereas in the long run all can vary, thus affects the decision making or response of firms, for example what machinery to use. (Sloman and Stucliffe, 2003).
Employee skills/technology/processes: As globalisation has taken, it is imperative that every firm takes advantage of it to achieve competitive advantage in the market and attain its strategic goals. For example, businesses can do this by providing employees with the latest skills and knowledge that would allow them to perform their job effectively and efficiently as well as streamline all the processes/activities of the organisation by using improved technology and methods (Dessler, 2007).
How the business and cultural environments shape the behaviour of an organization
A business operates within an environment where both are inter-reliant and constantly interact with one another. The factors determining the business environment are shown below (Fernando, 2011):
Graph 3: Factors forming the business environment
For example, if a new economic policy is set, the firm must adjust the functioning of their organization accordingly; if new technology replaces the existing one, the firm must consider streamlining their processes in order to benefit the organization; if a legal policy comes into existence, the firm must analyze how to comply with the new policy; or using processes, activities or technology that are environmentally friendly as required by the government, in order to assist in the controlling of global warming and being socially responsible. Therefore, it is believed to be the duty of businesses to amend its behavior in line with the environment in order to run successfully (Fernando, 2011).
The cultural environment on the other hand refers to the influence on the behavior of the organization by the cultural factors of the environment it operates in, which are beyond the control of the organization. The way culture may impact a business is asserted below (Trehan and Trehan, 2010):
What type of product to produce, its price, packaging, promotion and place
Consumers preferences, beliefs, attitudes, values would affect the product development for example, McDonalds does not serve beef in India.
The attitude towards work or the internal culture of the organisation for example, the attitude of employees towards a diverse organisational environment.
The labour workforce division at the organisation, for example whether both men and women should be employed or should majority of men be working and other decisions related to recruitment.
The ethical guidelines to follow in every process of the business.
The element of communication and dialect so there is effective communication of the organisation within, as well as outside the organisation with customers, suppliers and so on.
Task 4: The significance of the global factors that shape national business activities
The significance of international trade to UK business organizations
The UK is positioned as the fourth most open economy in the world. The importance of international trade to businesses operating in UK including The People’s Supermarket, Sainsbury’s, Tesco, Lloyds Banking group and Hard Rock Cafe are as following (Secretary of State for Business, Innovation and Skills, 2011):
Technological improvements lowering communication and transportation costs; innovation of business products and services.
Helps these businesses to build larger networks in terms of customers, suppliers, shareholders, employees and other stakeholders.
Transfer of capital at low costs therefore consequently leading to growth opportunities, better and streamlined processes and activities
Transfer of intellectual assets; ideas; skills; tacit knowledge
Employment creation; improved training processes; better and improved skills, knowledge and behaviour of employees
Increase in investment enticement; growth of investment; greater shareholders
Increases competition, making it products better and more consistent with the competition; offer better value and choice of products
The impact of global factors on UK business organizations
The global factors impacting UK businesses and the way they will impact them is explained below (Secretary of State for Business, Innovation and Skills, 2011):
The economies of Brazil, Russia, India and China (BRIC) are being seen to grow rapidly. This could be seen as a threat to the businesses operating in UK as competition for them would get tough or it could be seen in positive light as being viewed by the UK government currently, where it intends on building strong ties with these countries.
Globalization and global growth will provide these businesses with better market opportunities to develop and expand and building on export markets as well.
US regulatory environment and litigation risks however, may cause businesses to be affected negatively.
Potential synergies may develop between UK businesses and businesses of other countries.
Can take advantage of the opportunities provided by the World trade Organisation (WTO).
The UK government is also functioning to persuade the EU to implement a more tactical, organized and continuous move towards lobbying on market entrance and business issues, particularly through the High Level Economic and Trade Dialogue established in 2008.
Much scope to develop by exporting to Commonwealth countries.
Capitalize on opportunities present in developing economies.
The impact of policies of the European Union on UK business organizations
The various policies undertaken by the European Union (EU) and their impact on UK businesses are as follows (Sloman and Stucliffe, 2003):
The Climate Change Act which has set target for the UK of reducing carbon emissions. To help meet this target, the EU introduced various policies. This would impact the business organisations in terms of their productivity or in terms of the kind of machines they use. Moreover, non compliance with these policies may also impact the businesses in a negative way such as building on an unfavourable image of the business.
Regional Policy of the EU which endows with grants to firms in destitute regions thus, helping such businesses to improve in terms of sales, profits, activities and so on.
Monopoly and restrictive practice policy putting restrictions on those businesses that are operating in more than one state for example Tesco.
Adjustment of tax rates causing considerable differences in VAT taxes among member states. Thus, for example, Sainsbury’s will have to charge different VAT rates in different states.
Social Policy requiring businesses to implement specific health and safety, employment, equal opportunity policies in their organisations and non compliance may cause the business to suffer.
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