How Market Structures Determine the Pricing and Output Decisions of Businesses - Assignment Example

Business Environment Task How market structures determine the pricing and output decisions of businesses In the business world, firms are not at liberty to make their own prices in the aim of maximizing profits. Their pricing strategies are often affected by the market structure in which they operate. Managers should therefore be in a position to respond to the market structures in which their organizations operate. The market structure also influences the level of competition. It should be noted that pricing is one of the major competitive factors of an organization. For instance, an organization whose goods and services are low priced is likely to attract more customers and hence is likely to be more competitive. It should therefore be noted that the pricing power of an organization is highly dependent ion the level of competition which is in turn influenced by the market structure among other factors. In fact, firms to a large degree are not able to influence prices unless they are producing unique products. Determination of prices is a very crucial aspect in micro- economics. Managers of organizations are expected to understand the market and acquire knowledge regarding the market in order to make perfect decisions on pricing. There are different market structures that can exist in different markets and that affect pricing and output decisions. They include; perfect competition, monopoly, monopolistic competition, oligopoly, and duopoly (Wetherly & Otter, 2013). In a perfectly competitive market, there are no large firms that hold the power to set prices for homogeneous goods. There are a large number of firms as well which sell or deal with homogeneous goods (Dwivedi, 2009). All firms are of equal size and none of them possesses any degree of control. The total output of an organization represents a small proportion of the total demand and therefore they cannot affect price by varying their supply. In this kind of a market, firms are price receivers rather than price setters. In a monopoly market, there is only one single seller of a product and there are no available close substitutes. It is the kind of a market where there are significant barriers to entry. The organization controls the supply of the product and in doing so it can affect or influence the prices (Dwivedi, 2009). In a monopoly market, the firm has the ability to set prices which can maximize its profits. Monopolistic competition exists where the number of sellers and the number of buyers is high just as in the case of perfect competition. However, there is a difference in that each of the firms produces goods that are slightly different from those of other organizations. In such a market, firms have little control on prices (Dwivedi, 2009). The degree of price control depends on product differentiation. They can influence prices by their output decisions. Oligopoly is a market structure whereby there are a small number of firms that have the ability to control the majority share of the market. They are large competitors with each one of them having a large control of the market share (Dwivedi, 2009). Oligopoly firms have some degree of control on prices. However, they depend on other competitor firms in making their pricing and output decisions. They make prices which can help them maximize their profitability. The firms have some power in the market such that they cannot be price takers. Finally, duopoly is a form of oligopoly market structure that has only two firms. Duopoly can either be perfect where the two firms are producing homogenous products or can be imperfect where the products by each of them are differentiated. The firms in a duopoly have power in the market and therefore are not price takers. They can decide the prices. They output decisions on the other hand may have influence on the pricing. Way in which market forces shape organizational responses In an ideal market set up, organizations are compelled in a certain way by the market forces. Their responses are shaped by the forces that exist. Forces that exist in a market have the ability to influence the actions taken by an organization. These are forces such as the demand and supply, the elasticity of supply, the elasticity of demand, customers’ tastes and preferences, economies of scales, pricing decisions, cost and output decisions, labor market trends, employees skills, technology, innovation and research and development among others. The forces of demand and supply have the ability to influence the action that the organization takes. For instance, when the demand of a certain commodity is high, the prices will normally be high as customers will be striving to acquire the limited products. They do this by paying higher prices. Suppliers will in turn produce more/ supply more goods to the market so that they can take advantage of the increased prices. The supply will in turn increase and surpass the demand. In order to entice buyers to buy the surplus goods, sellers will be forced to reduce prices. Elasticity of demand and elasticity of supply are the other forces that shape the organizations responses (Guisán, 2005). The elasticity of demand refers to the changes in demand following a change in price of a commodity. It the elasticity of a commodity is low, them organizations are likely to increase prices since they are aware that there will no be much change in quantity demanded. In the case of elasticity of supply, suppliers are likely to bring more goods to the market with an increase in price in order to make additional profits. However, the nature of the goods will influence the increase in supply. Customers’ preferences also shape the organizations’ responses in that the organizations will bring to the market goods and services which customers prefer. This will be in line with their profit maximization strategy. In the event that organizations are likely to enjoy the economies of scale by producing in large quantities, they will produce more goods in order to get the benefit. Labor market trends and employees skills on the other hand will force organizations to make certain decisions regarding their working patterns and production quality (Bowhill, 2008). Technology, innovation and research and development will also influence decisions on production capacity and quality. How business and cultural environments shape the behavior of a selected organization Business organizations operate in an environment. Their behaviors are by a large proportion influenced by the environments in which they operate. The culture of the region in which the businesses operate also influences the behavior of the organizations by a great proportion. The business environment is made up of; political, economic, social, technological and legal environments. Businesses would do well and would prefer in a region where there is political stability. The political decisions should also be in favor of a business for it to be in a position to operate in a given country (Bowhill, 2009). The political stability in the UK is generally reliable and favorable for business organizations. The political decisions in the UK are also favorable to most business organizations. The economy of a country on the other hand is also an important factor for business organizations. The interest rates, the inflation rates, the unemployment rates among other economic factors influence the business operations. In the United Kingdom, the rate of unemployment is generally low and hence most people have purchasing power. As a result, businesses are able to sell more. The rate of inflation is favorable as well as the rate of interests. The relatively low rate of interests encourages business to borrow and expand their operations. Social environment has all to do with the way people behave. Organizations should sell the goods and services that are in line with the culture of the region in which they operate. The UK is among the countries with the most advanced social environment (Bowhill, 2008). The people of UK have good living conditions; they have access to information and all the basics. They are open to new things and hence business organizations can deal with any goods and services as long as they do not have a negative effect on the people. The culture of the UK is one that is open to new things and is good for business operations. This is a favorable factor to business. Technological environment should also be a major consideration. UK is a country where technology is well advanced. This encourages businesses to be innovative and inventive. It is a factor that factors the development and growth of business organizations in the country. Finally, the legal structure of UK is designed in such a manner that it is easy for organizations to start operations. No much legal requirements for the new entrants. This encourages businesses to establish operations in the UK. Few sanctions also help the business to behave in a relatively free manner. Task 2 Significance of international trade to UK business organizations International trade has increased so rapidly especially with the increase in globalization over the last couple of years. One of the reasons as to why organizations prefer to operate in the international scene is due to the fact that they are able to expand their market base. The business organizations in the United Kingdom have been involved in the international trade in a significant way. They benefit by expanding their consumer base (Van & Lewer, 2007). They are able to grow and expand their operations by participating in the international trade. In addition, they are able to purchase different goods and services in the international market. In other words, they are able to access what is not available in the UK at the international market. Another benefit that organization in the UK can accrue from participating in the international trade is that they can have a chance to lower their production cost. For instance, they can opt to shift their production operations to countries where costs are low. This helps them maximize their profitability. International trade can also encourage domestic competitiveness, a factor that will lead to growth of organizations in the UK. International trade also facilitates the protection of businesses through the laws made by the World Trade Organization (WTO). International trade also helps the United Kingdom on maintaining their balance of payment. When the nation buys goods and services from outside the country, it needs money to pay for those goods. Spending money from their budget allocation or from the money generated from within the country could have negative implications to the economy. This is because the money generated from within may not be effective to finance imports and at the same time finance the internal development projects. The nation also needs to sell goods to other nations so as to generate money that can be used to finance imports. International trade provides the UK with the market where it can sell its goods to generate the money and in turn ensure balance of payment. Impact of global factors on UK business organizations The economy of the UK is one that highly depends on the international trade. In order to understand the effect of the global factors on the UK business organizations, the external environment can be analyzed. Political status in the international scene is one factor that can affect business organizations in the UK. The level of bureaucracy in the international markets for instance will affect the efficiency of the businesses. Global trade control regulations can limit or encourage the expansion of businesses. Threat of terrorism has had a negative impact on the UK businesses. Tariffs in the international markets also affect the prices and the operation costs (Bowhill, 2008). The global economy also affects businesses in the UK. The global economic crisis leads to poor performance of organizations. The World Bank also affects the businesses in that it dictates the amount of money to be availed at a given time. Globalization on the other hand has led to growth and development of business organizations in the country. Technology has been advancing so rapidly over the past few years. The level of technological infrastructure in the international market affects the innovativeness of businesses in the UK (Bowhill, 2008). With the advancing technology, businesses in the UK are able to advance their innovations. Technology has also improved the level of communication which in turn has improved the performance of business organizations in the UK. It has also improved competitiveness of organizations. The social status in the international market has effects in the business operations in the UK in that changes in family values due to globalization has led to changes in buying behaviors of people. Hence the UK business organizations have to change the products they offer in order to meet consumer demands. The increase in mobility of people also affects the number of customers available to the UK businesses and hence the level of sales and profitability. International competitiveness also affects the performance of the UK businesses in that increased competition puts pressure on them and may also reduce their share of the market. Impact of policies of the European Union on UK business organizations The European Union makes policies that affect the business operations in the international scene. For instance, due to the increased issues regarding the environment, the EU passed a policy known as the Kyoto Protocol in the bid to regulate environmental damage (Grubb, et al. 1999). The policy recognizes that the developed countries are more responsible for the increased environmental and hence place heavier burden on them. They pay higher tariffs for their impacts on the environment. Most of the developed countries have agreed to the Kyoto Protocol and hence it is legally binding to them. They pay tariffs based on the amount of carbon dioxide they emit. Therefore, the higher the level of carbon dioxide that a country produces, it pays higher amount as compared to others. This has affected the UK in that it has to find ways of reducing the level of emission. Most of the production industries in the country use coal energy and they emit carbon dioxide during the production processes. For the country to be able to continue with its level of production, it has been forced to look for modern technology for production. UK is also a member of the G- 20 and hence any policy passed by the EU that affects the G-20 countries will affect the UK organizations. The Rio Earth Summit is a conference that is held in Rio de Janeiro, Brazil to address the environmental issues in the world (Great Britain, 2013). Issues regarding the environmental degradation have been of much concern among the international leaders and hence they have been looking for ways in which the same can be countered. The Rio Earth Summit has its own policies that have to be followed by the member countries. The EU is a member and any policies that are passed in this conference have an effect on the business organizations in the country. Reference List Bowhill, B. (2008). Business planning and control: Integrating accounting, strategy, and people. Chichester, England: Wiley. Dwivedi, D. N. (2009). Essentials of business economics. Noida, U.P: Vikas Pub. House Pvt. Ltd. Great Britain. (2013). Outcomes of the UN Rio+20 Earth Summit: Second report of session 2013-14. London: Stationery Office. Grubb, M., Vrolijk, C., Brack, D., Royal Institute of International Affairs., & Energy and Environmental Programme (Royal Institute of International Affairs). (1999). Kyoto protocol: A guide & assessment. London, England: Energy and Environmental Programme, Royal Institute of International Affairs. Guisán, S. M. C. (2005). Macro-econometric models: The role of demand and supply. Hyderabad, India: ICFAI University Press. Van, . B. H., & Lewer, J. J. (2007). International trade and economic growth. Armonk, New York: M.E. Sharpe. Wetherly, P., & Otter, D. (2013). The business environment: Themes and issues. Oxford : Oxford University Press Read More