TSG Pharmacy: Sales, Demand, and Profit Maximization Analysis Report

This report provides a comprehensive economic analysis of TSG Pharmacy, focusing on managerial economics principles. It begins with an examination of sales forecasting using sales elasticity, considering population changes and their impact on revenue. The report then delves into demand analysis, assessing the effects of price changes on quantity demanded and calculating price elasticity. Furthermore, it explores income elasticity, explaining its meaning and importance in relation to product pricing and consumer behavior. The analysis extends to calculating various microeconomic components such as total revenue, marginal revenue, total cost, and profit, demonstrating profit maximization strategies. Finally, the report provides a brief overview of the company's history and its market structure, concluding with key findings and relevant references.

MANAGEMENT ECONOMIC

Table of Contents
INTRODUCTION ..........................................................................................................................3
PART A...........................................................................................................................................3
1. Analyse the predicted changes in the sales..............................................................................3
2. Effect of change in quantity demanded on price.....................................................................4
3. Meaning and the importance of income elasticity...................................................................7
4. Calculation of different microeconomics components............................................................8
5. Profit-maximization in TSG..................................................................................................10
6. Maximisation of profit and cost minimization 11
PART B..........................................................................................................................................12
Brief history of the company ....................................................................................................12
Market structure.........................................................................................................................13
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18
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INTRODUCTION
Managerial economics is highly concerned with the application of knowledge and concepts
which in turn helps in making suitable decisions. The rationale behind this is that the business
unit can gain a competitive edge over others only when it develops highly competent and
suitable framework. Pricing and output decisions of the firm are highly influenced by the market
structure in which it operates. In this regard, economic concepts provide a high level of
assistance to the firm in achieving the goals and objectives. The present report is based on
different case situations which will develop understanding the aspects of marginal costing.
Through this, the business unit can assess the combination of output through which the cost level
can be minimised. Further, it will also shed light on various market structures and their
characteristics. Hence, it will describe the manner in which market structure helps in setting
suitable prices for products and services offered.
PART A
1. Analyse the predicted changes in the sales
The TSG pharmacy deals in providing medicine by manufacturing antibiotics to
overcome the diseases. These products are manufactured in the assistance of a qualified doctor
who achieved the degree of pharmacists. The major concern of TSG is to sell their current
product by raising the existing level of demand in the market to increase its sales and the revenue
(Almaraz and Serrano, 2016). The primary concern of the top management of TSG is to control
its cost by framing strategies to minimise the overall cost. By minimising the cost in the existing
business of TSG, it will enhance the sales level which in turn will increase the level of profit.
There are different approaches followed by the management of TSG pharmaceutical who will
forecast their sales. The forecasting is an essential tool used by an enterprise of TSG to predict
the future sales and the revenue to know the level of cash flows.
The economics is a study of social science which is highly concerned with the estimation of
different factors of the production. The current concept emphasises on different streams such as
production, distribution of resources and consumption of services offered by an entity. The
extinguishing concept is further divided into different segments such as micro and macro
economics. The focus of TSG pharmacy stresses on the microeconomics approach by utilising
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the market forces (Molina-Azorin, 2016). The demand and the supply of products are assessed
properly to ascertain the real changes taking place in the business about the external market. The
microeconomics has increased the concept of existing business entity by enhancing the sales
level in relation to the external market demand of all the products.
Sales Elasticity= % change in sales/% change in population
This particular measure of elasticity of sales will form relationship among two variables
sales and changes in the population. The changes in population will affect the sales of TSG
pharmacy as the prediction of sales gets better over the years. The current approach will be used
to determine the upward or downward position in the level of sales currently generated by the
business.
The current scenario has presented a situation of identifying the future sales level by
using the elasticity of sales measure to comment upon the existing level of the firm.
Elasticity of sales= Percentage change in sales/Percentage change in the population
1. = Percentage change in sales/ (140000-130000)/130000*100
Percentage change in sales= 0.8*7.69
% change in sale= 6.15%
The results of the above analysis have shown that the increase in the current level of
population has increased the sales level. The level of current sales has increased which showcase
the ability of an entity. It has been assumed that the TSG Pharmaceutical will produce its sales
by 6.15% in the future. The current focus of the firm is on meeting the needs and expectations of
all the customers by gaining their satisfaction and loyalty.
2. Effect of change in quantity demanded on price
Demand and supply are regarded as the major forces of the external market which affect the
internal business environment (Molina-Azorin, 2016). The economics concept has given greater
importance to the demand and supply of a product which further create trouble in the
development of the prices of products. The product is that weapon used by an entity which will
be covered with a blanket of pricing to please the variety of users. The Current business scenario
of TSG Pharmaceutical is focused on establishing a new image in the eyes of its existing
customers and other potential buyers by launching new caplets in the market. The launching of
the current products is to be monitored by assessing its accuracy by using the important
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approaches to the economics (Beamish and Lupton, 2016). The quantity demanded will be
assessed which will further create positive or negative impacts on the pricing of products. The
changes are required to be made in the existing structure which will guide an entity to move
ahead in the business r to earn profit or loss for the business enterprise.
Price elasticity of demand is the important tool used in the microeconomics in which the
relationship between the two variables will be assessed. The quantity demanded will be assessed
about the external changes takes places in the prices developed by an enterprise owner.
Price elasticity of demand= % change quantity demanded/% change in price
-0.85=% change in quantity demanded/£8.50-£7.50/-£7.50*100
% change in quantity demanded= -0.85*13.33%
=-11.33%
The current level of quantity demanded is negative which clearly show that the price and
the quantity produced by TSG Pharmaceutical will decrease. The change in the quantity
demanded is a terminology which refers to the changes in the quantity purchased about the
increase or decrease in the prices set by an enterprise.
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Illustration 1: Contraction of demand
( Source: Schaper, 2016)
The contraction of the above demand for the TSG caplets which is an antibiotics products
are decreasing with the higher changes takes places in the prices (Robison and Ritchie, 2016).
The contraction of demand with the increasing effect of prices has shifted the demand curve to
the left.
Revenue decreasing
The existing business of TSG shows the contraction of demand which incurred due to the
changes takes places in the quantity which is less than compared with the increases in the price.
The buyers of TSG Pharmaceutical have reduced with the increase in prices.
The current concept has decreased the revenue earned by the firm currently with the
increase in the prices as the price sensitive customers has shifted towards the business of its
rivals.
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Revised quantity demanded
Price elasticity of demand= %change in quantity demanded/% change in price
=-1.1= % change in quantity demanded/ 13.33%
Change in quantity demanded= -1.1*13.33%
=-14.66%
The changes in the quantity demanded the same products are not showing the ability of an
enterprise as its gets worse with the passage of time. The changes in the quantity demanded have
increased with the negative figure about the changes taking place in the price elasticity of
demand.
3. Meaning and the importance of income elasticity
The income elasticity of demand is that measures which assess the responsiveness of the
quantity purchased about the changes in the income. The buyer behaviour of an individual will
get affected with its existing level of income (Beamish and Lupton, 2016). The income of a
person will raise the demand in the external market. The rational actor that guide an enterprise to
shift their prices from higher to lower ground with the external market changes. The TSG are
required to ensure the income elasticity of all their products in order to develop their prices to be
offered to the variety of customers. The income elasticity of the products are divided into the
various divisions which are given as below which helps an entity owner in order to make god
decisions:
Positive- The positive changes in the elasticity of demand are explained with the help of its
usage of goods by the buyers. The usage of normal goods by an individual will raise its demand
to use luxury goods. The changes can take place by an increase in the income level of a person to
increase their demands for the luxury products or services. For example, currently, the buyers are
using normal goods of TSG caplets, so their demand will get increases with the passage of time
(Schaper, 2016). The increasing level of income will raise the needs and the expectations of all
the users to purchase expensive products to ensure its health. The health is the true wealth of an
individual which can be improved with the increment in the income. The expectations of an
individual will be increased to fulfil their needs with the increasing income.
Negative- The negative changes takes places in the existing income level of an individual which
shift the demand to the lower level. An individual will uses normal goods at the initial level
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which further declines at the lower level towards the inferior goods. The decrease in the level of
income of an individual will decrease its expectations. For example, initially a person uses rice
and wheat but due to the changes takes places in their income level its demand has shifted
towards the use of maize and ragi.
Zero- This level is that stage at which the changes in the income of an individual will not create
any significant changes in the demand for a product.
Income elasticity= % change in demand/% change in income
The current income elasticity level of the TSG is 0.75 which indicates the good position of the
business enterprise while supplying its products according to the products offered.
Importance of income elasticity
 It helps in forecasting the income level of an individual which will further help in
designing of prices.
 The products will be selected by the business entity on the basis of the current measure
 The variety of goods will be divided into different streams such as normal, inferior and
luxury goods.
 The current elasticity approach will also use as one of the marketing strategies in order to
market all their products.
4. Calculation of different microeconomics components
Different components which are widely used in assessing the performance of an entity about the
external market (Robison and Ritchie, 2016). There are several variables used such as total
revenue, average revenue, marginal revenue, average cost, marginal cost and the total profit. The
primary concern of the business enterprise is to earn higher amount of profit with the passage of
time. The cost minimization is another concept that is associated with the higher amount of
profit. TSG Pharmaceutical has presented a situation of their existing business which is presented
in an equation format.
Total revenue= $ 800Q-$0.20Q2
Total cost=$38000+$250Q+$0.20Q2
On the basis of above two equation which further simplified the equations of marginal revenue
and cost are given below:
MR= (Total revenue/Quantity)= $800-$0.40Q
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MC= (Total cost/Quantity)= $250+$0.40Q
Table 1: Calculation of profit maximisation level
Quantity
produce
d (Q)
Price
per unit
(P)
(value in
$00)
Total revenue
(TR)($000)
Marginal
/
additiona
l
Revenue
(MR)
($00)
Total
expens
es/cost
(TC)
($000)
Marginal
cost/outla
y (MC)
($00)
Average
Cost
(AC)
($00)
Total
amount of
profit (TP)
($000)
Marginal
profit (MP)
( $00)
0 8 0 8 38 25 0 -38 55
100 78 78 76 65 29 65 13 47
200 76 152 72 96 33 48 56 39
300 74 222 68 131 37 436.67 91 31
400 72 288 64 17 41 425.00 118 23
500 7 35 6 213 45 426.00 137 15
600 68 408 56 26 49 433.33 148 7
700 66 462 52 311 53 444.29 151 -1
800 64 512 48 366 57 457.50 146 -9
900 62 558 44 425 61 472.22 133 -17
1000 6 6 4 488 65 488.00 112 -25
The TSG pharmaceutical has given greater importance to all the above variables in order to
identify the profit generated by an enterprise. The generation of the profit is an essential
requirement of the business as the reduction of the cost will result in a higher amount of profit.
The prices are decreases by $40 per the unit which is not good, but these weaknesses have
compensated by the increasing unit. The increasing number of a unit has enhanced the value of
the business entity which further induces the capability of the business enterprise. The focus of
TSG is the reduction of cost to increase their existing level of profit (Gil, 2016). The
maximisation of the profit is the basic objective of the firm by reduces its current obligations
which are essential for an entity in order to meet them in a specific period provided to all the
business entity. The best suitable point of profit maximisation has selected at which all the
components are showing higher and the positive results. The TSG Pharmacy will earn a profit at
600 units produced by them in order to please the variety of customers. The cost incurred at this
level are less than compared with the revenue generated by the business concern at this particular
year. The green colour indicates the higher level of the units produced by the management which
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shows the maximisation of profit by this enterprise. The understanding of the firm will be
increased by using the current results in order to make decisions for the betterment of an entity.
5. Profit-maximization in TSG
1 2 3 4 5 6 7 8 9 10 11
0
100
200
300
400
500
600
700
TSG Pharmaceuticals
Average Cost (AC)($00)
Marginal cost/outlay (MC)
($00)
Marginal/additional Revenue
(MR)($00)
The maximisation of the profit has different perspectives such as short run and long run profit
earned by an individual in a particular year (O'Neill and Harsell, 2015). The profit is the
difference between total revenue and the total cost incurred in the business enterprise. The
marginal revenue and the marginal cost are the two concepts which play an integral role in
determining the profit level of the business enterprise. The above-mentioned results will help an
entity owner in order to make good decisions related to the conducting of business practices in
the best suitable manner. The level of marginal cost and marginal revenue are parallel to each
other which showcase that these costs will run simultaneously in the business of TSG
pharmaceutical. The decisions of this entity will be improved by using various approaches. The
above level of average costs starts with a nominal speed and then raises to the higher level.
The profit maximisation will give higher importance to one of the important concepts of total
revenue and total cost approach. The business will consider all the revenue from various sources
about all kinds of costs. The cost is an important part of an organisation which is discovered
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throughout the process of profit-maximization. The primary aim of the enterprise owner is to
curtail its existing expenses with a clear aim to enhance the existing profit.
Another perspective of the current concept is related to the marginal revenue and marginal cost
incurred in the business of TSG pharmaceutical. The marginal revenue is the production
generated by the firm by taking additional unit produced in business. The marginal revenue is
always greater than the marginal cost incurred by an entity owner by conducting different
practices (Mas-Verdú, Ribeiro-Soriano and Roig-Tierno, 2015). The marginal profit is the
outcome generated by deducting the marginal cost from the current marginal revenue. The profit
earned by an entity reflects the efforts made by all the users of the business who contribute in the
success. The average cost can be controlled by increasing the sales and the revenue. The
increment in the sales will further increase the profit. The marginal profit will determine the
production of units in an enterprise. The production of units is important as the products are
offered to increase the sales of the firm. The marketing of the Pharmaceutical products also plays
an important role as there are different kinds of substitutes exist in the external market. These
competitors will reduce the image of an entity in the eyes of all the customers.
In the current business scenario, the top management of TSG pharmaceutical are required to
assess its existing efficiency on the basis of the results obtained. The 600 units level has
produced the $148000 profit which shows the ability of the business enterprise.
6. Maximisation of profit and cost minimization
Cost is regarded as the basic problem faced by an entity owner who held responsible for
minimising them by applying the variety of skills and various approaches. The dual approach
followed by an entity in which the higher amount of profit is totally dependent on the cost
available in the business (Schaper, 2016). The reduction of the cost will, in turn, increases the
profit of the firm. The higher profit is important to reach the desired aim of the firm to remain on
top from the rivals of the firm. There are various ways which can be used by TSG in order to
resolve the problem of cost minimization which is given as below:
The technical rate of substitution- the unique concept followed by the users of the who intend
to reduce their existing cost by using substitute products. The factors of production are the basic
cost incurred in the business that induces the existing level of expenses in the firm. The usage of
additional cost will be promoted by shifting the demand of cost raw materials towards the less
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expensive. This approach will help the management to save their costs by increasing the sales in
return.
Lagrange method- This is regarded as another important tool used in the minimization of the
cost incurred by the business (Sridhar and Kumar, 2015). The basic concern of an entity is to
reduce their burden by emphasises on its mistakes which will help in optimising its available
resources. The utilisation of all the resources is essential in order to make decisions by finding
out the constraints which are restricting the potential of the firm. The current approach will stress
on the maximum and minimum values in the form of units produced.
PART B
Brief history of the company
For this section, Tesco has been selected which is one of leading British multinational retailer
of UK. It is one of the largest grocery and merchandise retailers who offer high-quality products
to the customers at the affordable prices. The Company has attained the third position regarding
generating higher profit and fifth for the revenue. Tesco has established several stores across 12
countries of the world. It offers diversified products and services to the customers including
furniture, clothing, grocery, etc. Along with this, it is listed on the recognised stock exchange of
London such as FTSE 100.
With the motive to become a market leader, Tesco took over Sainsbury with an aim to enhance
customer base and profit margin. Moreover, the main objectives of the firm are to maximise the
productivity and profitability. Thus, by taking into consideration, such aspect business unit has
developed strategy and policies for fulfilling the goals and objectives. In the present time, the
business unit provides the high level of discounts to the customers to entice more sales and
gaining competitive position over others (Adlakha, Johari and Weintraub, 2015). In the present
time, stiff competition takes place in the retail market which negatively influences the
performance aspect of the firm. In order to cope up with such situation, business unit has placed
a high level of emphasis on social media marketing with an aim to develop awareness among the
customers.
Market structure
The Market structure provides information about the availability of buyers and suppliers.
Through this, the business unit can measure the competition which is prevailed in the existing
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