Business Economics Assignment: Production Decisions In UK Economy From 2010-2019

Question

Task:
Business Economics Assignment Question: Production decisions in UK manufacturing between 2010 to 2019

Task 1: Answer the following question
“When and why do inputs and costs impact the production decisions related to the supply of goods and services? Explain these economic concepts using examples from within the UK economy between 2010 and 2019” (2 companies for examples)

Task 2: Answer the following question
“Define and explain how perfect competition or a highly competitive markets impact the supply of goods and services? Explain these economic concepts applied to a specific highly competitive UK-based industry between 2010 and 2019” (2 companies for examples)

Answer

Introduction:
It is stated herein business economics assignment that production decision in present business world is a complex endeavour that firms often fails to estimate the same underpinning determining factors. Theoretically there is input and cost that influence the actual supply of goods and services. As per generic basic economic idea, when firms enjoy economies of scale, where the cost of input is reduced through continuous business and cost of production is low, firms gain higher revenue and it influence them to produce more efficiently until economies of scale is present (Krugman and Wells 2020). However, in real world, there are various other factors like market condition, consumer preference, political and socioeconomic situation that influence the production decision of the firm (Mankiw 2018). When it comes to market structure, then different market has different characteristics based on the level of competition existing. For instance, there is perfect competition, where firms are free to move in and out into market and consumers have all information regarding market readily available. On the other hand, there is monopoly, where only single firms operate and market information is not available to the consumers. Underpinning the market scenario, supply of goods and services also changes. Though the present study, analysis has been done to understand when and why inputs and costs influence the production decision of supply of goods and services considering the case of the UK economy from 2010 to 2019. Additionally, it has also discussed how high market competition influence the supply of goods and services in case of the UK-based industry during 2010 to 2019.

Task 1:Impact of inputs and costs on production decision
As stated by Krugman and Wells (2020), inputs and costs are two main factors that influence the production decision of the firm. Through triggering change in the production factors firm alter their production decision in order to meet the market requirement. When it comes to inputs, there are four different categories used in production process, which are(Krugman and Wells 2020):

Labour (L): This is the primary input that firm using to make production. By labour, firms consider physical labour who are able to do specific task as required. Labours can be skilled and unskilled or semi-skilled. Depending upon the labour skill, they are assigned with the task that influence the production decision of the firm.

Capital (K): It is a major crucial input for the production decision making by the fir. Based on the capital type it can be differentiated as financial capital, natural capital, human capital and social capital. As the financial capital, cash is considered, whereas, natural capital is ores, social capital is tangible resources like public space and human capital is skilled labour(Krugman and Wells 2020). On the other hand, fixed capital is there, which are machineries, factories, robots, factors of production that aids the firm to make production. Thus, capital is crucial input element that influence the firm to make their production decision.

Land (N): It is one of the most important input for the production as depending upon the nature of business, land provide place to operate business and do the business. For instance, if the production is associated with the agriculture, then based on the land, firms make their production. Whereas, if the case of the machinery production is considered, then on the land firm makes its fixed assets like factory to produce the final output. Hence, land is one of the major inputs that firms utilise in its production decision.

Materials (M): Through this input category, all type of raw materials like ore, wood, oil, etc is explained. Besides, intermediate products like lumber, plastic, aluminium etc. is also explained through this type of input category. This type of material is crucial for the production decision as it influence the ability of firm to continue production.

Though there are four different categories of inputs, firm do not need all the four types of input all the time to make output. Different firms need different combination of input to make their production. The way in which specific firm mix its inputs is called production process of the firm. Underpinning the input types mentioned above, production function of firm can be mentioned as follows: Output (Q) = f (L, K, M, N)

If the firms uses, two types of inputs, L and K, then the production function can be mentioned as: Q = f(L, K). Providing the actual amount of input and capital into the production function, firms can determine the maximum amount of the output. If the firm wants to maximise its output, then it needs to produce in such a point where the marginal cost (MC) is equated(Krugman and Wells 2020). Considering the production function, the firm can maximise its output, however, it cannot go beyond that; hence to enhance the output, firm need to enhance its factor of input in the same proportion as it is required to produce final goods and service. In the short run firm makes production decision based upon the marginal productivity of the labour. When marginal productivity of labour equates with the total productivity of the labour, firm achieves production maximisation in the short run(Mankiw 2018). However, in long run as the firm faces diminishing returns to scale, it operates as per isoquant, where output change depending upon the combination of capital and labour(Krugman and Wells 2020).

Production of the goods and services require making choice regarding the input factors for the firm. As these choices are largely depending on the cost of the inputs, hence, cost is also a major factor that influence the production decision of the firm. Cost are majorly three types which are as follows:

Fixed cost: It is the cost which is fixed over time and irrespective of operation of the firm, business need to incur this cost. Fixed cost does not change over time in short run, however, in long run it may change as the market situation changes.

Variable cost: It is the cost that firm incur when it makes production. Based on the level of production, variable cost tends to change and depending upon the economies of scale, variable cost change at higher or lower speed.

Total cost: It is the total cost of production that firm incur due to production of one unit of goods and services. Total cost is formulated by summing variable and fixed cost and it is essential part of determining the production process.

To make production decision, firms also consider the marginal cost and average cost. Marginal cost is the cost of producing one unit of goods or services(Mankiw 2018). Whereas, average cost is the average cost of production incurred by the firm to produce all its goods and services(Krugman and Wells 2020). Depending upon the process of production, when firm’s marginal cost is equal to the revenue, then firm need to shut its business operation and thus, it is considered as the shutdown point. On the other hand, when the cost of production, which is total cost equal to the revenue, then firms achieve breakeven point where no profit or loss is gained(Mankiw 2018).

Based upon the analysis, case of the Tesco can be mentioned which has demonstrated good use of cost and input to enhance its business operation. For instance, during 2010 it has employees 300373 and during 2019 it had 464505 employees. During 2010, Tesco had 4836 stores around the UK and by 2019 it has become 6933. In order to keep the business competitive, it has strategically enhanced its store number from 4836 in 2010 to 6993 during 2019 (tescoplc.com 2020). Revenue of the business has also increased by 12% during last one decade demonstrating the fact that the firm has used good use of labour and capital in order to enhance its business operations. Identical situation can be seen for the Unilever, where a reduction in labour can be observed during 2010 to 2019 (167000 to 149867); however, number of stores and the cash flow has increased by 23% (unilever.com 2021). This has caused the firm to enhance its revenue through effectively influence the means of production and changing business output.

Task 2: Impact of perfect competition on supply of goods and services
Market competition is a crucial element that influence the supply of goods and services. Depending upon the market situation, firm make their production decision that influence the supply of goods and services in the market. Considering the market competition situation, market is of four types:

• Perfect competition
• Monopoly
• Oligopoly
• Monopolistic

Perfect competition defines a market situation where large number of seller and buyer is present and the firms are price taker rather than price maker(Krugman and Wells 2020). In perfectly competitive market, firms operate in such a situation where price is determined by the market demand and supply situation through invisible hand and both the firms and consumers have complete information regarding the market situation(Mankiw 2018). Here market entry and exit have no barrier and the firm’s sales homogenous products. On the other hand, monopoly is such a situation where market competition is nil as single firm operates in the market where the sole firm is price maker. Here barrier to entry is very high and firm use price discrimination strategy to make profit through producing lower than the aggregate demand. Both the perfectly competitive market and monopoly is extreme market condition which are not present in large amount. Whereas, oligopoly and monopolistic conditions are such situation where market competition is high and existing is also visible in different market situation(Krugman and Wells 2020).

In oligopoly market, market competition is high as identical firms operate in same industry and the products are differentiated based on the uniqueness. On the other hand, monopolistic firms operate in such a market situation where large number of sellers and buyers are present and the products are almost identical. In this type of market as the number of sellers is high, the market competition is fierce. On the other hand, firms pose high entry of barrier that restricts the new firm to enter into the market(Krugman and Wells 2020).

Underpinning the demand of the market situation, firms make supply decision here. For instance, as the perfectly competitive market has high market competition owing to presence of large number of firms, market output is high. With higher information regarding the market situation, consumer pose higher demand. Also, due to high competition, market price in the perfectly competitive market is relatively lower than the other market situation(Mankiw 2018). Hence, the demand is high here and the firm produce higher output in order to make higher profit through quantity maximisation. On the other hand, in monopolistic market situation, as the competition is high, firms consider the profit maximisation through the unit sales. Higher the number of quantities demanded, in monopolistic market, firms produce higher output(Krugman and Wells 2020).

In order to explain the situation case of the car market can be considered. In the UK car market, there are more than 30 automotive brands operating that sell 17 million cars each year. Among all these, there are 8 brands which have highest market concentration. As the market is oligopoly in nature and firms enjoy high level of market concentration, firms here make supply decision based on the first mover step (Mankiw 2018). When the market leader takes production decision, other firms follows the path and make their response to deal with the change in the production. In the monopolistic market, if the case of the hotel industry is considered, then there is large of number of service providers and large number of consumers are present. With the low market concentration, hotels follow the market decision in order to make the supply decision. When the vacation season comes, firms makes the rooms costlier and make most of the rooms of the hotel available for rent. Whereas, during offseason, hotels make the price cheap and availability of the rooms become lower due to maintenance. This way, utilising the market competition, firms in UK in auto and restaurant industry during 2010 to 2020 has expanded its supply. As per the Focus2move.com(2020), UK auto market produce more than 17 million cars and trucks during a single year. Moreover, as per oecd-library.org (2020), UK tourism industry has increased with a 3.2% growth rate during last one decade and it is supposed to increase at 12.2% rate since 2018.

Conclusion:
Underpinning the above analysis, it can be seen that production process of the firms is influenced by the inputs and the cost of production. Through influencing the capital, labour, material and land firms alter its output. On the other hand, technology is another important factor that enable the firm to combine the factor of production. Through developing the technology of production firms can enhance its output. Through the case of the Tesco and Unilever it was observed that through altering the capital and labour combination firms has enhanced their profit significantly. Moreover, as the capital and cash inflow has increased over the time during 2010 to 2019, firms have increased their supplies too. On the other hand, when the market driven approach of analysing supply of goods and services is considered, then it has been observed, market competition can influence the supply to a large extent. If the market structure is oligopoly or monopolistic in nature, due to higher competition, market produces higher amount of output. In perfect competition, where market competition is highest, it is observed that firm produced higher output and lowest output can be observed in case of the monopoly market situation.

As the firm in monopoly faces lowest competition, thus the price remains high allowing firm to make supernormal profit reducing the consumer surplus. Situation was analysed with the example of the car market, where firms operate in oligopoly market structure. Due to high competition, firms often depend upon the advertisement to make unique selling proposition that enable it to capture consumer. On the other hand, through the case of the UK hotel industry, it has been observed that it operates in monopolistic market situation where the firms face high competition. In order to achieve market concentration, they consider price promotion and marketing strategy. Demand is the main driving factor of supply in this industry.Hence, through the analysis, it can be concluded that the supply of the goods and services mainly influenced by the input, price and the market competition situation. With the increased competition, supply tends to increase and when the firms face increased cost of labour and capital and other input of production it faced rise in cost and fall in supply due to reduced demand.

Reference:
Focus2move.com 2020. Focus2move| British Vehicles Market - Facts & Data 2021. Available at: https://www.focus2move.com/british-vehicles-market/

Krugman, P., Wells, R. and Graddy, K., 2016. Essentials of Economics. New York: Worth Publishers,

Incorporated.https://anglia.primo.exlibrisgroup.com/discovery/fulldisplay?docid=cdi_proquest_ebookcentral_EBC6643920&context=PC&vid=44APU_INST:ANG_VU1&lang= en&search_scope=CSCOP_APU_DEEP&adaptor=Primo%20Central&tab=Everything&query=any, contains,Essentials%20of%20Economics&offset=0

Mankiw, N.G., 2018. Essentials of economics. Business economics assignment Eighth edition. ed. Australia: Cengage Learning.https://anglia.primo.exlibrisgroup.com/discovery/fulldisplay?docid=alma998973733102051&context=L&vid=44APU_INST:ANG_VU1&lang=en&search_scope= CSCOP_APU_DEEP&adaptor=Local%20Search%20Engine&tab=Everything&query=any, contains,Essentials%20of%20Economics&offset=0

Oecd-library.org 2020.OECD tourism trends and policies 2020. https://www.oecd-ilibrary.org/sites/2ac0c5e9-en/index.html?itemId=/content/component/2ac0c5e9-en

Tescoplc.com 2020. Five-year record. https://www.tescoplc.com/investors/reports-results-and-presentations/financial-performance/five-year-record/

Unilver.com 2021. Archive of Unilever Annual Report and Accounts, Unilever global company website. https://www.unilever.com/investor-relations/annual-report-and-accounts/archive-of-annual-report-and-accounts/