Analysis of Profit Maximization and Consumer Sovereignty in Competitive Economy

FELM 4026
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Contents
Part 1: Analysis of statement that profit maximization is linked or consistent with the consumer
sovereignty in the competitive economy.........................................................................................3
Part 2: Critical examination of market structure, demand and supply where consumers buy goods
or services from several companies to fulfil the requirement..........................................................4
Part 3: Profit Maximization and Wealth Maximization..................................................................6
Part 4: Environmental Policy of the UK Government.....................................................................7
Part 5: Financial Calculation.........................................................................................................10
References......................................................................................................................................11
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Part 1: Analysis of statement that profit maximization is linked or consistent with the
consumer sovereignty in the competitive economy
Consumer sovereignty is defined as the ability and freedom of the customers to decide
their own of range of different goods and services. In another words, consumers are ones that
decide regarding how the resources has to be allocated and what exactly it is needed to be
produced. Consumer sovereignty is regarded as the most important concept of today’s classical
economy. As per this concept, consumers have their own discretion power to choose between the
list of suppliers and firms. Consumers will prefer those suppliers that are ready to supply best
quality goods at cheapest price as compared to other market players. The economic theory
related to consumer sovereignty helps to ensure the proper functioning of free market. It helps to
promote the healthy competition in the market and companies tries to solve the needs of
consumers through providing best in class products or services and charge consumers on the
basis of value added to the goods or services provided (Nipun, 2018). In this context, the concept
of market economy defines invisible hand which means consumers prefer certain goods over the
list of goods available in market place. It means those entities will be rewarded that produces
goods and services that are in demand. Companies that fail to provide goods that are in demand
or win the hearts of consumers will either have to improve the quality of goods they are offering
or they have to exit the market (Pettinger, 2018).
In economics there is great importance to the competitive market as term competitive
market helps to understand the market position and level of consumer sovereignty exists in the
particular market. Competitive market refers to the market place where there are large numbers
of producers who compete with each other in order to satisfy the requirements of consumers. It
means in the competitive market there is no single producer and no single customer but there are
group of producers who compete with each other to satisfy the needs of customers who exists in
that market place. The competitive economy or free market is regarded as the profit motive as it
is the reason that forces the companies to enter in this market. The most basic economic theory in
this regard states that profit is earned by the company when they gain the sales or revenue and it
exceeds the total cost of production (Economics Online, 2019).
Below diagram illustrates the consumer sovereignty in more detail:
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(Source: http://www.economicsdiscussion.net/goods/concept-of-consumers-sovereignty-goods/
25147)
The above diagram clearly shows profit maximization can be only be achieved when
company satisfy the needs of generated in the market place. For example, if customers wants
product X and company is delivering product Y than it is not possible to achieve the profit
maximization motive by the companies that exist in the competitive economy. So, it can be said
that objective or requirement of profit maximization is very closely linked with the consumer
sovereignty and this phenomenon exists more in the competitive environment (Tadajewski,
2018).
Part 2: Critical examination of market structure, demand and supply where consumers
buy goods or services from several companies to fulfil the requirement
A market place where there exists large number of sellers that provides differentiated
products and they are close substitutes to each other is called monopolistic competition or
Contestable market. In this market place, there exists large number of sellers selling products or
services that are similar but not identical. It goods and services sold by sellers compete with each
other regardless of price. In the current economic market place, mostly there exists the
monopolistic competition market structure as companies believe to add some unique
characteristics to their products or services that made their offerings different from other. It is the
main feature of the monopolistic competition. The products and services offered in monopolistic
market structure remain very close substitute for each other and it is main reason why price of
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