Essay Sample on Consumers in Charge: How Consumer Sovereignty Impacts Industry

Introduction

Consumer sovereignty is an economic concept which assumes that consumers are free and able to choose between different suppliers and firms. In this case, consumers are rational and will use their discretion to select the basket of goods which is the cheapest in the market and of the best quality (Fellner & Spash, 2015, pg.394). Consumer sovereignty is critical for the industry as it awards firms which are efficient and helps in aiding firms to increase productivity. Due to this, consumer sovereignty influences the decisions of the producers by ensuring they increase the product quality as well as improve productivity to meet consumer demand. Most firms use consumer sovereignty in the pursuit of profits.

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In the pursuit of profits where there is consumer sovereignty, producers will have to meet consumer demand and expectation. Therefore, this means that firms will have to reduce the economic costs involved in the production of goods and services to ensure the products and services meet consumer needs and preferences. In this case, consumers are willing and able to choose products of their choice. In this case, the market demand is referred to as consumer demand or derived demand as consumers influence it. Consequently, there is minimal competition in the market since consumers drive the demand in the market.

If firms want to ensure profit maximization, they have to produce goods which generate the highest revenues to earn more profits by reducing the cost of production. Due to this, the firms will produce products which are demanded more by consumers that can generate higher profits in the market (Edres & Radke, 2018, pg.21). Also, to ensure maximum profits, there is a need to ensure there is minimal competition in the market. Minimal or little competition is critical for consumer sovereignty in the market because to maximize profits the presence of many firms will lead to sharing revenues which in turn reduces the entire profits of the firm. The competition will lead to firms generating reasonable profit which may be difficult to sustain. Firms instead of making profits they will increase productivity to meet the consumer demands in the market.

An example is in the automobile industry, wherein the event demand for cars increases, the automobile companies start to demand the inputs such as land and other raw materials which are scarcely generating a derived demand in the market. Therefore, due to this, the demand for cars increases, which leads to increased revenues for automobile industries resulting in maximum profits for the firms.

All in all, firms should able to capitalize on consumer sovereignty to ensure profit maximization in their firms as they always increase productivity to meet consumer demand (Reisman, 2018, pg.193). Henceforth, firms are willing and able to reduce the production costs to ensure the products they produce meet what consumers want in the market. Profits are maximized when the firm increases its output to improve the utility of consumers as well as benefit from increased consumer demand, thereby leading to high revenues which are offset against low cost of production leading to profit maximization.

Market Structure, Demand, and Supply

Tesco and Morrison's are the two of the five largest supermarkets in the United Kingdom including Safeway, Asda, and Sainsbury. The United Kingdom, supermarkets mainly operate under an oligopoly market structure as few large firms are competing among themselves (Taylor, 2018, pg.1). Tesco is the largest oligopoly supermarket operating a market share of about 27.7% while Morison's works a market share of approximately 10.6% as shown in the figure below.

Figure 2: United Kingdom Supermarket Market Share from 2015-2019

Source: https://www.statista.com/statistics/280208/grocery-market-share-in-the-united-kingdom-United Kingdom/

Many sellers characterize the market, but there are only a few firms in the United Kingdom supermarket industry. There are high barriers to entry for other firms into the market since the existing firms enjoy economies of scale; for example, Tesco has opened stores in almost every significant towns within the United Kingdom. Also, Morison's is working hard to acquire Safeway which makes it difficult for other firms to enter the market.

Moreover, these firms sell at low prices to bar other company's entries into the market. However, these firms in the United Kingdom oligopoly supermarket industry are interdependent of each other since when one company adjusts its prices, the other companies also respond the same way to ensure competition is level among them. However, the market structure is very beneficial to the consumers as they can enjoy same prices of products in the market as all the firms compete at the same price level and they provide highly differentiated products from which the consumer can choose from.

Market Demand and Supply

There are many consumers compared to the total number of sellers in the market. However to meet consumers' needs and preference these supermarkets have established many stores across the country to supply consumers with commodities, for example, Tesco operates about 7000 stores (Tesco Annual Report, 2018) while Morrison's operates about 491 stores (Morrison Annual Report, 2018). By opening many stores across the United Kingdom, companies can supply consumers with goods and services.

Prices in this market are highly competitive, and firms are price givers. These companies operate in oligopoly which makes prices competitive and consumers are price takers since they will have to buy at the prices set by the firms. Prices are similar among all competitors in the oligopoly market which means the market has no price competition. However, consumers can suffer from high prices if the firms set the prices of goods and services higher since there is no government intervention into the oligopoly market.

The demand curve of the industry is a kinked demand curve due to interdependence in the market. Any firm that applies above the kinked demand curve equilibrium is elastic whereas the ones operating below the equilibrium is very inelastic. The prices do not change easily, and there are similar products in the stores of supermarkets. The firms strictly follow the kinked demand curve to avoid losses since the equilibrium in the market is achieved when the marginal revenues are equal to the marginal cost of the company.

Comparison and Contrast of Wealth Maximisation and Profit Maximisation

Wealth maximization is the process through which a company's management increases the value of the firm by multiplying the market value of the shares capital of the company for example increase in the share price of a company over time. On the other hand, profit maximization is the increase in the company's incomes as a result of cost minimization (Hemimway, 2017, pg.939).

Wealth maximization is regarded as a long term business decision as it involves the increase in the value of the entire business entity over a long time. Profit maximization is considered as a short term process as it aims at showing the performance of the business within one year by indicating the profitability of the firm. Therefore, in this case, when a company intends to ensure profit maximization, it will increase the prices of its products to ensure it generates higher revenues. In wealth maximization, the company may reduce the value of the shares to increase the value of the company for an extended period to ensure the value of common stock increases gradually over time.

Profit maximization is used as a tool for measuring the operational efficiency of a company, for example, the ability of the firm to generate incomes as well as meet its expenses within a financial year. Wealth maximization, on the other hand, aims at gaining a significant market share by the company. Increase in the market share involves ensuring consumer satisfaction, attaining market leadership and gaining a competitive edge.

Wealth Maximisation is Superior to Profit Maximisation

Wealth maximization is more superior as it a significant concern of the company investors as they always to increase the value of their shares. When a firm to attain wealth maximization, the shareholders can pool out capital from the company and invest somewhere else. Wealth maximization is essential as it incorporates two critical aspects of the business.

First, wealth maximization considers the time value of money. In this case, the value of future cash flows of the company is discounted appropriately at a particular discount rate to determine the resent value of the cash flows. Investments are evaluated on these terms to determine whether the company would be worthwhile in the future as shareholders are always concerned about the long term growth of the company rather than short term profit consideration.

Second, wealth maximization incorporates risk and uncertainty in the business (Padfield, 2017, pg.415). The management cannot ignore uncertainty in the long run since investors have risked their money to ensure they can gain returns on the investments. Therefore, managers cannot be reckless in evaluating uncertainty as this may lead to loss of trust in the business and investors can withdraw their investment. If this happens, the company is adversely affected leading to a loss in the market value as a reduction in the value of shares. Also, in the estimation of the discount factor, the risk is incorporated by evaluating the equity beta and market risk of the industry. For example, the weighted cost of capital of the company is estimated by the cost of equity which utilizes market risk and equity beta of the company's stock.

Business Economics Concepts

Environmental Policy

Environmental degradation is a threat to the sustainability of future generations and threatens the quality of life. The United Kingdom government is committed to ensuring environmental sustainability which means all companies are tasked to adopt the environmental policy of the country. Environmental sustainability and planning have to be incorporated into the company's decision making to ensure that all firms are committed towards the achievement of the United Kingdom environmental policy. Firms are required to present an environmental report as well as to conduct environmental audits which indicate their impact on the sustainability of the environment.

The environmental policy requires the commitment of firms towards achieving sustainable development. The companies have to strive to meet the United Kingdom, European, as well as the international environmental regulations by minimizing waste, ensuring efficient use of energy as well as preventing pollution (Bowen & Stern, 2010, pg.2). Therefore, this will aid in controlling carbon emission as well as other harmful substances into the environment leading to environmental sustainability.

Fiscal Policy

The United Kingdom aims at reducing the overall spending and taxation as a share of national GDP of the entire country. In the financial year 2018-2019, the government aimed at reducing the overall expenditure and taxes to boost the gross domestic product of the United Kingdom. The net borrowing is also estimated to reduce to 22.6 billion which is about 1.1% of the GDP (UK March 2019 Economic and Fiscal Outlook, 2019, pg.4). The United Kingdom also aims at lowering the interest rate on debt as a motive to increase the gross domestic product. Also, the government aims at capitalizing on the financial gains such as increases in the incomes from tax receipts to ensure growth in the GDP. The government also aims at increasing the fiscal budget deficit to account for the increase in the budgetary demands for example...