Financial and Economic Literacy

Running head: FINANCIAL AND ECONOMIC LITERACY
Financial and Economic Literacy

FINANCIAL AND ECONOMIC LITERACY 1
Q1.
Consumer Sovereignty is said to be an idea which talks about customers who influence the
decision of production. The customer’s spending power means they effectively vote for
goods. Businesses will respond to the preferences of the consumer and manufacture products
asked by the customers in the market. It is a manifestation of the invisible hand (Pettinger,
2018).
Many other researchers argue that consumer sovereignty is a myth. Businesses manufacture
products and take the support of marketing techniques in order to vend the products to the
customers (Manzerolle and Smeltzer, 2011).
Profit Maximization is said to be, long run or the short run procedure by which a company
can define the input, price, and output levels that result in the highest profit. This concept
follows the neoclassical approach according to which economics focus on defining the
outputs, income distribution, and goods through demand and supply (Ali, Al-Aali and Al-
Owaihan, 2013).
According to the consumer sovereignty theory, customers will select from diverse services
and goods, and the suppliers and services behind them at their will. The customers will opt
for the least expensive products that provide the best quality as they are normal human beings
who understand their own needs and wants. They are said to be sovereigns or kings of their
own lives. It is the consumer sovereignty which confirms that a market operates efficiently
and professionally since it provides a reward to the business that is well-organized and can
offer products that are needed by the customers (Durden, 2018).
The customers tell the manufacturers regarding what type of service or goods they prefer
through the price mechanism. Because there is obviously a resource scarcity, due to which all

FINANCIAL AND ECONOMIC LITERACY 2
the wants of the customers cannot be met (Durden, 2018). Therefore, the customers have to
make a choice from the available services and products from different producers.
Few of the wants of the customers will be higher and urgent in comparison to others.
Therefore, the customers will be ready to pay extra prices for these required services and
goods. This reflects that the manufacturer of those services and good will earn higher profit.
If the customers wish for specific service or product and the product is not needed by the
customers at urgent basis, then he/she will not pay extra prices and will try to purchase that
product at lower prices. Manufacturers of these services and products will have to deal with
less profit in comparison to the manufacturers of products with higher demand. Because the
producer has an incentive for profit, they will obviously create more products that are
presently in the high demand among customers (Durden, 2018).
On the other side, the supply of the services may also have an influence on the value placed
by the customers on that product. When a product has low value in the mind of the
customers, then that product is manufactured in high supply, then the customers will then
desire to pay low prices for the same product. On the other hand, if the manufacturer put a
limitation of the supply of the product because of low demand, then its relative value in the
mind of the customers will increase and the customer will be ready to pay a higher cost
(Durden, 2018).
The cost of products and services in the market are hence a measure of relative values of
those products in the mind of the customer (Durden, 2018).

FINANCIAL AND ECONOMIC LITERACY 3
Q2.
Market Structure
A market is said to be the set of seller and buyers, usually denoted to as mediators, who
through their interface, both potential and real, define the set of goods and price of the good.
The notion of market structure is hence considered as those features of a market that affect
the behavior and outcomes of the companies operating in that market. The key aspect that
defines the market structure is a number of market agents, buyers and sellers, negotiation
strength of buyer and seller, the capability to set prices, degree of differentiation, and product
uniqueness (Wang, 2010). Some of the types of market structure are:
Perfect Competition – It is the most effectual market where products are manufactured with
the help of efficient methods and high amount of factors. This market is comprised of intense
competition. Besides this, this market offers homogeneous products to the customers, as the
airline industry (Azevedo and Gottlieb, 2017). For instance, British Airline offers the same
services to the customers that are offered by other different airline companies present in the
industry across the world. The airline industry is involved in offering services which are to
get the customers from one location to another location.
Monopoly – The monopoly market structure raises number of entry barriers and businesses
involved in the structure possess strong control over their prices and also they can manage the
supply of their services which can result in increasing the product demand because a
company with monopoly structure has maximum of the market share which can support them
in deciding the low prices of their products to extinguish their rivals (Zeuthen, 2018). Tesco
follows the market structure of monopoly.
Oligopoly – Oligopoly is the market structure where the industry has a small number of big
dominant businesses that possesses control over the market (Fonseca and Normann, 2012). In