Economics plays a crucial role in determining how the scarcely available resources are allocated among various functional units not only on a macro-economic level but also from a household point of view. This report aims to provide a comprehensive view on the field of Economics through a case study on a hair salon business ‘Beautifico PVT Ltd’ whose founder, Yulia Chang is contemplating to transition the business into a PLC.
a. Economic Problem
The field of economics is centred on optimal allocation of resources. Each and every society faces Economic Problem (Brickley, Smith and Zimmerman, 2015). This situation exists since there is less number of factors of production and endless number of wants or desires. Thus, an economic problem includes the resolution of following questions:
- How to Produce?
- What to Produce?
- For whom to Produce?
b. Advantages and Disadvantages of Business operating in Private Sector including Agency problem
For a Private Sector such as Beautifico PVT Ltd., there are certain advantages as well as disadvantages which have been enumerated as under:
- Restricted Liability: The liability of shareholders is limited to their stakes in the business. Thus, at the time of financial problems, this helps in protecting the personal assets of such stakeholders.
- Perpetual Succession: A Private company such as Beautifico have a separate legal entity. Thus, a private limited business continues even when the owners die or leave the company. Hence, a company can sue or be sued, transact and repay debts.
- Registration Process: The process to register a private limited company takes much longer than a sole proprietorship.
- Dilution of Ownership: A private sector business such as Beautifico may have a large number of shareholders. As a result, there is a wide presence of ownership division in such companies (Cooter and Ulen, 2016).
In the context of given case scenario, Yulia may encounter an agency problem while transitioning from her business from Private Limited to PLC. This can be defined as a conflict of interest between the stockholders (principal) and the management (owners) of the Beautifico. If the stockholders do not feel that the company’s actions are intended towards maximizing their shareholder value, the company may run into an agency problem. In order to resolve such a situation, a principal may incur agency costs which are internal that the principal has to bear so as to minimize the risk of facing such a situation.
c. Changes in Taxes
With the changes in inflation and other macro-economic variables, an economy’s government may increase or decrease rates regarding various taxes. Some of the most prominent of these charges are Value Added Tax (VAT), Custom Duty and Corporate Taxes. These are indirect taxes imposed by HMRC on various goods and services.
In the context of given case scenario, Beautifico is a private sector business which provides hair salon services to its customers. The current rate of VAT, custom duty or Corporate taxation on such organisations is standard rated that are added to their selling prices. If this tax rate increases, the selling price of such services will become higher making it expensive for the customer to avail such services.
d. Difference between ‘change in demand’ and ‘change in the quantity demanded’
Basis of differentiation
Changes in Demand
Change in the quantity demanded
This concept depicts a shift in demand curve which may result due to expansion or contraction in demand.
This concept depicts a shift in increase or decrease in quantity demanded along the demand curve.
Shift in demand curve may result due to an alteration in prices of complements, substitutes and tastes or preferences of the customers among others.
The determining factor for a change in the quantity demanded of a given product or service due to change in prices.
e. Difference between ‘Long-Run’ and ‘Short-Run’
In Economics, the term ‘Long-Run’ includes a time-period wherein the wages and prices are flexible whereas the concept of short-run includes a period wherein only price adjustment is in the hands of the management which can be altered through the number of units produced by them.
a. Supply and Demand Diagram
Supply and Demand are two opposite yet related forces which tend to impact one another in an inverse proportion (De Grauwe, 2018). While Demand for a product or service increases with the decline in its prices, supply of such offerings may increase with an increase in price and fall with a decline in price and vice versa.
In the context of the given case scenario, the aforementioned diagram can help Yulia to determine how Beautifico may be impacted due to the ongoing Brexit Negotiations and the uncertainty surrounding this topic. As per the above diagram, a demand curve is denoted by ‘D’ whereas Supply curve is denoted by ‘S’. Since the company has more supply and less number of customers, it can be said that right now there is an excess supply or surplus. It is important to note that the point where supply and demand for hair salon services is in equilibrium is denoted by price $1.40 and letter ‘E’. If the brexit results in increasing the prices of such services, it is possible that the company may face lesser number of customers as the price would be expensive (above-equilibrium price) and vice versa.
b. Economies of Scale
The term ‘Economies of Scale’ can be defined as that competitive advantage which an organisation may possess due to obtaining efficiencies in terms of operations which enable them to reduce their per unit costs as more and more products are manufactured. In the context of given case scenario, the two main economies of scale of Beautifico are as follows:
- Low prices charged for hair, skin products and luxury blow dry;
- Increased Tourism and Domestic Demand of its products resulted in deliverance of such services at a large scale for an economical price.
c. Price Elasticity of Demand (PED)
This concept indicates the degree of responsiveness present in a product or service due to change in its prices. Thus, depicting a percentage change in quantity demanded for a percent change in their prices. Price Elasticity of Demand may vary among different goods and services. Mostly, if Price Elasticity is zero, demand for such products is perfectly inelastic and vice versa. Conversely, if PED is between 0 and 1, the demand is inelastic. If PED = 1, demand is unitary elastic. Lastly, if PED>1, the demand is proportionately responsive to a percent change in its price (Dahl, ;2017).
d. Diseconomies of Scale
These can be defined as the cost disadvantages which result in an increase in per unit costs for a business as they increase their production scale. In Beautifico, these diseconomies may be caused due to:
- Increase in Herbs prices, natural oils and moisturiser prices imported from China, Australia and India;
- Changes in cost of custom duty and exchange rates that may impact the herb prices along with energy prices.
a. Factors considered by Banks for provisioning a Credit Rating and its impact on Beautifico
For a corporate, the bank takes into the following factors to award an organisation such as Beautifico a credit rating:
- Likelihood of Defaulting by the company;
- Credit rated on numerical scales such as FICO;
- Level of Financial Risk that can be undertaken by the business;
- Promptness of the business to repay its obligations.
For a business such as Beautifico a higher credit rating would help them obtain finances from various lending institutions in an effective manner without many restrictions and vice versa. Thus, giving the business an assortment of options in terms of financial expansion.
b. Market Failure, types and remedies
A Market Failure can be referred to as an economic situation wherein ineffective individual incentives for rational behaviour do not furnish rational outcomes. As a result, there is inept distribution of goods and services in the market. These may be classified as under:
- Externalities: It is a benefit which is not inclusive in the selling price or the cost of production (McConnell, Brue and Macpherson, 2016). For instance, Pollution due to residual emission is an opportunity cost imposed on others who do not participate in market exchange. This can be rectified through government intervention wherein they impose regulations in the form of taxes to prevent market failures.
- Market Control: This situation arises when buyers and sellers sides pressurise the price of a good or quantity exchanged. For instance, monopoly can result in creation of undue advantage for a business over others. This can be rectified through imposing of regulations regarding monopolistic practices by government.
- Asymmetrical Information: Imperfect information among buyers and sellers may result in controlling of goods and services’ prices in an unfair manner. For instance, hoarding raw materials in times of recession. Again this can be rectified through government intervention.
c. Macro Economic Indicators
A Macro Economic Indicator is one which depicts the information conveyed by a piece of economic data and enables economists to forecast future possibilities for a given economy. These may be Leading, lagging and coincident indicators. Leading is one which moves before the economy such as Yield Curve, share prices and lagging are those who move after the economy like Consumer Price Index (CPI) and Gross National Product (GNP) (Pigou, 2017). Changes in such variables may result in either increasing or decreasing the overall demand of the hair salon, Beautifico’s services based on the disposable income left with the customers to avail such services.
d. Business cycle and inflation
During expansion phase of a business cycle, the inflation is the highest.
a. Free Trade area and EU Members
The reasons why European Union member countries’ businesses benefit by transacting in the Free trade area have been enumerated as under:
- Removal of Trade Barriers;
- Decrease in business costs;
- Improvised efficiency among businesses;
- Elimination of Monopoly and other such anti-competitive practices;
- Healthier competition opportunities
b. Impact of Changes in Exchange rates on UK Businesses;
With the recent changes in Pound/Euro Exchange rates along with Brexit, it can be said that the UK Businesses may face certain amount of slump due to the deprivation of benefits that the nation enjoyed as a member of European Union. Hence, the businesses may have to ensure that their operations as well as profitability are not compromised due to the changes in exchange rates and other political moves.
c. Contractionary Fiscal and Monetary Policies
A contractionary fiscal policy is one wherein the government reduces their overall expenditure and increases tax rates. On the other hand, a Contractionary Monetary Policy is one where the government aims to reduce inflationary pressures by increasing the cost of borrowing and reducing the money supply in the economy (Tietenberg and Lewis, 2016). For a business such as Beautifico, these may result in payment of higher taxes with costlier financial assistance available from lending institutions. This may lead the business to face:
- Funding issues;
- Allocation of Resources in an optimal manner; and
- Reduction in profit margins as higher taxes would be required to be paid on services provided by the hair salon.
From above report it can be concluded that economical aspects play a crucial role in determining the current as well as future strategies of a business. Thus, it becomes essential for a business manager to have complete knowledge regarding the terminologies used in Economics so as to understand and harness opportunities provided by micro as well as macro-economic variables.
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- Cooter, R. and Ulen, T., 2016. Law and economics. Addison-Wesley.
- Dahl, R. A., 2017. Politics, economics, and welfare. Routledge.
- De Grauwe, P., 2018. Economics of monetary union. Oxford university press.
- McConnell, C., Brue, S. and Macpherson, D., 2016. Contemporary labor economics. McGraw-Hill Education.
- Pigou, A., 2017. The economics of welfare. Routledge.
- Tietenberg, T. H. and Lewis, L., 2016. Environmental and natural resource economics. Routledge.