Business Economies Issues - Essay Example

BUSINESS ECONOMIES THEME-2 Business is the social science of managing people to organize and maintain collective productivity towards accomplishing the organizational goals and also for generating profit. For the successful running of the business organization, it is essential to develop various theories like Production theory and Cost theory. In this regard, it is very eager to make an analysis about the company and its competitive context by taking in to account the product range, competitive strategy and market structure. Similarly, competitive strategy in a business include-1. Cost leadership. 2. Differentiation. 3. Focus. An analysis of both Production and Cost theory of a product is vital. So agricultural and food marketing is taken as an example of this. Agricultural product is occupying a major role in food marketing management. Raw material, land, labor, capital and other factors are required for undertaking production. Consider the example, manufacturer of the product who developed an improved marketing plan. Company profit objectives were tied to exploiting volume markets through mass marketing. Product development policy covers compatibility, market potential and financial objectives. Three types of innovation is important for food manufacturers.1. new marketing methods and techniques to increase the operational efficiency, 2. new products or services to add more value to its products, 3.new business organization,ie cooperative food processor, joint ventures between firms or marketing channels. Concentration should be given to the product by reducing the volume of production and the product should be stored and transported; and an adequate reduction in the marketing cost. As an analytical tool, the growth share matrix has the advantage of being simple and quantifiable in nature. Production is dependent on technology, mixture of factors of production and price as well as the marginal productivity. “In economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labor, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of Production”) it will use. The theory involves some of the most fundamental principles of economics.” (Theory of Production, 2007). Production means conversion of inputs in to outputs. Mainly there are three aspects to the production process- 1. 1. The quantity of the goods produced. 2. The quantum of the commodity produced. 3. The form of the goods produced. Many factors may contribute to the failure of a new product, but the main cause behind this is the inability to predict the customer response. Systematic analysis or tests used to shorten this failure. These include concept testing, market positioning tests, product and market testing. General public is being asked to give their respond to a product idea; it could give rise to several product concepts. For example: 1. A snack food for people in a particular occasion, find that they are insufficient to consume a full meal. 2. A food high in energy, is acting as a part of the nutrition intervention programme. 3. An easily digested food for people, whose medical conditions prevents them from eating solid foods. 4. A health food for people active in sports. 5. A food for babies for sustaining their health and to promote their growth. The total product of a variable factor of production determines what should be the possible output level. The average physical product is the total product divided by the number of units of variable input employed. It is the output of each unit of input. Where as the marginal physical product of a variable input is the change in total output due to a one unit change in the variable input. Allocation of resources and the effective distribution mix of capital may vary according to the industry level and technology. “Rather than looking at the inputs used in production, it is possible to look at the mix of outputs that are possible for any given production process. This is done with a production possibilities frontier. It indicates what combinations of outputs are possible given the available factor endowment and the prevailing production technology.” (Production Theory Basics, 2007). In micro economics, production is the act of making things and products that will be sold commercially. Production decisions concentrate on what goods to produce, how to produce them, the costs of producing them, and optimizing the mix of resource inputs used in their production. This production information can then be combined with market information to determine the quantity of products to produce and the optimum pricing. Production theory is an outcome of- 1. Production efficiency. 2. Factors of production. 3. Total, Average and Marginal product curve. 4. Marginal productivity. 5. Diminishing returns to inputs. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Based on the supply and demand, it is possible to identify the prevailing competitive strategy in the market. It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. But if the price is below average variable cost at the profit-maximizing output, the firm should go into shut down its business activities. In micro economics, market failure means, there is no appropriate allocation of resources and inadequacy in the availability of goods and services to consumers. Market failure may takes place due to monopoly, externalities etc. Cost theory mainly deals with various costs like Total Cost (TC), Average Cost (AC), and Marginal Cost (MC). Total Cost means, the sum total of both fixed and variable cost. In order to determine the price of a product, it is essential to taken in to consideration both fixed and variable cost. Average cost means the total cost divided by the number of units produced. “It is important to understand that firms maximize profits by considering the marginal cost, not the average cost.  The difference between the average cost and the sales price does determine the profits per unit once the profit maximizing quantity is determined, but the profit maximizing quantity generally does not maximize profits per unit.” (Average Cost (AC)). Marginal cost means, the increase or decrease in costs as a result of one more or one less unit of output. “When average cost is declining as output increases, marginal cost is less than average cost. When average cost is rising, marginal cost is greater than average cost. When average cost is neither rising nor falling (at a minimum or maximum), marginal cost equals average cost.” (Average Cost, 2007). The unit cost goal, the planning target, is based on the estimated volume of output or workload expected. If actual output is different from expected output, actual unit cost may be different from the unit cost goal. Productivity can change for a variety of reasons. These include changes in the basic production process (i.e. substituting machines for labor), specialized education or training for employees and changing the technology employed in the production process. Variance analysis is a managerial accounting method to determine the difference between actual and expected unit cost. Cost analysis means, economic evaluation, efficiency assessment, cost benefit analysis etc “In economics, the cost-of-production theory of value is the theory that the price of an object is determined by the sum of the cost of the resources that went into making it. The cost can be composed of the cost of any of the factors of production including labor, taxation, capital, land, or technology.” (Cost of Production Theory of Value). So it is necessary to give stress on both Production and Cost theory in the point of view of business, by taking in to consideration the various micro economic concepts and other appropriate analytical tool for decision making. THEME-3 MARKET STRUCTURE AND PRICING- The concept of market structure is central to both economics and marketing. “In economics, markets are classified according to the structure of the industry serving the market. Industry structure is categorized on the basis of market structure variables which are believed to determine the extent and characteristics of competition. Those variables which have received the most attention are number of buyers and sellers, extent of product substitutability, costs, ease of entry and exit, and the extent of mutual interdependence.” (Fischer, Charles. C). The structural variables in marketing are- 1. Perfect competition. 2. Oligopoly. 3. Monopoly. 4. Monopolistic competition. In this particular theme, we should select a specific market structure, i.e. Oligopoly market. Oil industry is taking as an example in this regard. The deals are constant in the oil business, a few recent deals and considerations at the strategies involved. One strategy is being considered is cutting down the total number of rigs, and they are also been planning further acquisition to occupy a fragmented market. Oil companies are giving stress on price fluctuations which is based on the rules of supply and demand. This industry occupying an oligopoly power in the market with each participant possessing sufficient market power to set any price with out considering its competitors. The strategy had several aspects; one among them was to eliminate the excess supply of gasoline in the market. The most important question is that how to eliminate the gasoline oligopoly and to restore the real competition among the market participants. Oil companies have taken number of steps to protect their oligopoly from new competition. They have virtually eliminated the independent dealers from the market and other suppliers of gasoline have no avenue of entry in to the market. By taking this example as a base, following is a brief explanation about various market structures. 2. Perfect competition- It is an economic model of marketing structure in which no producer and consumer have the power to influence the prices. It is giving stress on the supply and demand concept. Perfect competition requires economic equilibrium in order to maintain its homogeneity, equal access and free entry to the market areas.. The main assumptions in this regard are-1. Each firm produces only a small percentage of the total market output, so there should no control over the market price. 2. Freedom for the entry/exit to the market. 3. Firms are producing homogeneous products that are substitutes for each other. “Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand.” (Economics Basics: Monopolies, Oligopolies and Perfect Competition, 2007). OLIGOPOLY- It is a market dominated by a small number of sellers. In an oligopoly, firms operate under imperfect competition and which reflects inelasticity below market price and elasticity above market price. In the case of fuel prices, it is found that gasoline prices have risen considerably during the last decade and now touches a new high of $3.10/gallon. The main reason, besides the fact of rising crude oil prices, is the fact that gasoline, being an inelastic commodity, its consumption cannot be reduced inspite of the price hikes, because shortage of supplies can shoot up the prices without affecting sales volumes. The price of crude is on the rise and this impacts on gasoline prices also, the major reason for the changes in the prices of gasoline could be linked with the rising prices of crude, and there has also been an increase in the prices of ethanol, a proportion of which is used in gasoline. The Management decisions facing most companies is whether there should be further investments in refinery capacity, since, it has been proved that the refinery capacities have not been commensurating with the demand for gasoline in USA. However, there has been a clarion call from the President of the USA, Mr. Bush to create greater production of alternative renewable fuel like cellulosic ethanol and coal based diesel which could relieve the demand for gasoline and hence resolve the problems of high fuel costs in the future. It has become imperative to seek alternative fuel bases in order to arrest the high gasoline costs, and it should be done in the near future. The heavy import bill for crude should be relieved thus saving foreign exchanges and creating a better balance of payment situation. For this the basic assumption is that the costs of implementing new renewable fuel technologies would be economically feasible, and in the long run would create a demand for its products thereby reducing dependency on conventional forms of fuel like gasoline etc. “Market situation in which each of a few producers affects but does not control the market. Each producer must consider the effect of a price change on the actions of the other producers. A cut in price by one may lead to an equal reduction by the others, with the result that each firm will retain approximately the same share of the market as before but at a lower profit.” (Oligopoly. 2007). Market situation in which a small number of selling firms control the market supply of a particular good or service and are therefore able to control the market price. This encourages non price competition, through advertising, packaging, and service-a generally nonproductive form of resource allocation. By evaluating the aforesaid market, environmental economics have to focus its observation on energy prices and potential environmental problems resulting from fuel consumption. The oligopoly has created a market concentration and market control that manipulate supply and price of petroleum products. Competition in the energy sector particularly in the petroleum industry is important to the health of the economy and other regions of the country. A competitive market encourages competition, bring lower prices, better services and encourages innovation. MONOPOLY- It is a market dominated by a single seller. It is a persistent market situation where there is only one provider of a product or service; it means a firm that has no competitors in its industry. “It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of efficiency can raise a potential competitors value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives.” (Monopoly, 2007). MONOPOLISTIC COMPETITION- A monopolistically competitive firm acts like a monopolist in that the firm is able to influence the market price of its product by altering the rate of production of the product. These firms are inefficient in nature due to the price regulation matters. Unlike in perfect competition, this firm does not produce at the lowest attainable average total cost. But it is ensure that a competitive industry will provide importance on- homogeneous product, free entry to the market etc. “Market situation in which there may be many independent buyers and many independent sellers but competition is imperfect because of product differentiation, geographical fragmentation of the market, or some similar condition.” (Monopolistic Competition, 2007). Micro Economic Concepts- Micro economics aims to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. A thorough analysis of micro economics helps in both industrial organization and regulation. Fundamental concepts in micro economics are- 1. Elasticity of the product. 2. Consumer and producer surplus. 3. Aggregation of individual demand to market demand. 4. Competition. 5. Efficiency. Micro economic firm may analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. Pricing of a product is also as vital as the market structure. It is the process of applying prices to purchase and sales orders based on quantity, fixed amount and other relevant factors. The price setting is mainly evaluates on the price being charged by the competitor and the profit attainment through price fixation. The adequate price fixation will cover the major three concepts of marketing like, 1. Achievement of the financial goals of the firm, 2. it fit the realities of the market place, 3. Proper adaptability of Marketing Mix variables. We take up the case Study of China’s food retail chain, Suguo, China’s food retail market has made tremendous progress and the onslaught of foreign competitors has forced China’s domestic supermarkets to remodel and revitalize themselves to compete with foreign supermarkets The Supply chain Management has been put into forece to lower operating and running costs and decreasing production and enhancing revenues ina highly competitive environment. Efficient and effective methods were formulated in order to keep produce fresh and nutritious for customers. The methodology used was to get respondents from managers of supermarkets and suppliers. During the course of the study it was found out that multi supplier and multi level interaction with suppliers were the mainstay of the supermarket . Since vegetables were highly perishable a great deal of attention was focused on maintaining quality and enhancing shelf life of products . If Sugou wished to retain their position as a leading supermarket in China it would be necessary to effectively control costs and provide value addition to customers . Moreover it would also be necessary to maintain and develop long term ties with suppliers for constant supply at affordable costs. . Conclusion:- Market structure and the pricing decision are correlated due to its practical and technical importance in the industrial economy. It is very important to taken in to consideration the production and cost theory and the market structure and pricing. For the successful attainment of the pre-determined goal of a concern, from the very beginning stage it self a proper implementation of the planned program is crucial. For this, the selection of the product is essential. Product should have elasticity in demand and supply. Moreover it should occupy an appropriate market place, which is able to compete with the competitors’ product. For this it is necessary to evaluate the market structure and the pricing policy by the proper application of both production and cost theory. Implementation of marketing strategies, applicability of Porter’s Five Force model and the evaluation of PEST Analysis is using as a main component for solving the various marketing and economic issues. The selection of any of the aforesaid technique is enough sufficient to over come several problems and for the further improvement. Works Cited Theory of Production. (2007). Encyclopedia Britannica Online. Retrieved May 20, 2007, from http://www.britannica.com/eb/article-9106207/theory-of-production Production Theory Basics. (2007). Wikipedia. Retrieved May 20, 2007, from http://en.wikipedia.org/wiki/Production_theory_basics Average Cost (AC). Econ Model. Retrieved May 20, 2007, from http://www.econmodel.com/classic/terms/ac.htm Average Cost. (2007). Wikipedia. Retrieved May 20, 2007, from http://en.wikipedia.org/wiki/Average_cost Cost-of –Production Theory of Value. (2007). Retrieved May 20, 2007, from http://en.wikipedia.org/wiki/Cost-of-production_theory_of_value Fischer, Charles. C. What Can Economics Learn from Marketing’s Market Structure Analysis? B>Quest. Retrieved May 20, 2007, from http://www.westga.edu/~bquest/1997/ecnmkt.html Economics Basics: Monopolies, Oligopolies and Perfect Competition. (2007). Investopedia ULC. Retrieved May 20, 2007, from http://www.investopedia.com/university/economics/economics6.asp Oligopoly. (2007). Encyclopedia Britannica Article. Retrieved May 20, 2007, from http://www.britannica.com/eb/article-9057021/oligopoly Monopoly. (2007). Wikipedia. Retrieved May 20, 2007, from http://en.wikipedia.org/wiki/Monopoly Monopolistic Competition. (2007). Encyclopedia Britannica Article. Retrieved May 20, 2007, from http://www.britannica.com/eb/article-9053412/monopolistic-competition Read More