Answer to Question No 1: Consumer sovereignty in financial management and economic policies

Running head: FINANCIAL MANAGEMENT AND ECONOMIC POLICIES
Financial Management and Economic Policies
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1FINANCIAL MANAGEMENT AND ECONOMIC POLICIES
Table of Contents
Answer to Question No 1:..........................................................................................................2
Answer to Question No 2:..........................................................................................................4
Answer to Question No 3:..........................................................................................................5
Answer to Question No 4:..........................................................................................................7
Answer to Question No 5:..........................................................................................................9
References................................................................................................................................12
Appendix..................................................................................................................................14

2FINANCIAL MANAGEMENT AND ECONOMIC POLICIES
Answer to Question No 1:
Consumer sovereignty means the buyer enjoys the power to choose the product and
its supplier from options available to him. In this situation, the buyers influence the producer
in making certain production decision. On the other hand, the profit maximization in the
perfect competition means the producer will adjust the output to optimum level and produce
the goods in cost efficient manner to earn maximum possible profit.
Consumer Sovereignty: In a perfectly competitive economy, there are numerous buyers and
sellers, and all of them enjoy a freedom in their decision-making. In such a situation, it is
assumed that there is a complete flow of information in the market and all the buyers are fully
aware of the market conditions. They make their purchase decision rationally, and as there
are various options available to them, they chose the supplier accordingly who is offering
reasonable price and suitable terms. Consumers’ chose those suppliers who can supply the
highest quality goods in cheapest price (Cowie 2014). Degree of consumer Sovereignty
depends on market structure and certain situations. If the market is highly competitive then
consumers will enjoy high degree of consumer sovereignty. In the other end in a monopoly
market, a very low degree of consumer freedom can be witnessed.
Profit Maximization as the firm’s objective: From the producers’ perspective, a firm can
earn super normal profit only in short run but in the long run, they can earn only the normal
profit. As there are no barriers for entry and exit for a firm in a competitive market, in
attraction of the supernormal profit, new firms will enter the market and as a result, total
supply in the market will increase. In a competitive market, producers need to consider the
requirements of the consumers to remain in the competition. It gives a challenge to the
producers to be more cost efficient and innovative. In a competitive market, producers are
just the quantity adjuster; they have a minimal influence in the price. The only thing they can

3FINANCIAL MANAGEMENT AND ECONOMIC POLICIES
do to maximize their profit is to make their production process efficient and set their output at
the optimum level. So, in a perfectly competitive market producers are just a quantity adjuster
(Kiefer and Rada 2014).
Equilibrium Price in the Competitive market: In a competitive market, the equilibrium
price is determined by the market forces. No single buyer or producer have any influence in
the equilibrium price. It depends on the demand and supply in the market. If the demand is
more than the supply in the market, then the piece will increase and the producers will be
earning an above average profit for that time. In attraction of the above average profit, new
entrants will enter the market and as a result, the total supply in the market will increase. If at
any point of time, the total supply in the market is more the total demand, then the price will
decrease and inefficient producers will be incurring losses, which will lead them to stop
production and exit from the market. This process continues until an equilibrium price is
achieved by the market forces where the total demand and the total supply become equal.
Consistency of profit maximization with consumer sovereignty: Profit maximization does
not always mean to earn a supernormal profit at any cost. In competitive market to earn
maximum profit, the producer needs to make innovative product and be efficient in producing
them. In a competitive market, if a firm wants to maximize their profit, they will be
addressing all the consumers’ needs and preferences, because without being efficient in
serving consumers’ product needs in the market no individual firm can survive for a longer
period.
In conclusion, it can be said that, the profit maximization have some negative impact
on the consumers, but in the competitive market, profit maximization leads to consumer
sovereignty. To survive for a long term in the competitive market and to achieve success in