Business Economics Report: Beautifico Case Study and Economic Analysis

This report provides a comprehensive economic analysis of Beautifico, a hair salon considering a transition to a PLC, covering various economic concepts. It begins by addressing the economic problem and the advantages and disadvantages of operating in the private sector, including agency proble...Read More

BUSINESS
ECONOMICS
Contents
1

INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
a. Economic Problem..............................................................................................................3
b. Advantages and Disadvantages of Business operating in Private Sector including Agency
problem...................................................................................................................................3
c. Changes in Taxes................................................................................................................4
d. Difference between ‘change in demand’ and ‘change in the quantity demanded’.............4
e. Difference between ‘Long-Run’ and ‘Short-Run’..............................................................5
QUESTION 2...................................................................................................................................5
a. Supply and Demand Diagram.............................................................................................5
b. Economies of Scale............................................................................................................6
c. Price Elasticity of Demand (PED)......................................................................................6
d. Diseconomies of Scale.......................................................................................................6
QUESTION 3...................................................................................................................................7
a. Factors considered by Banks for provisioning a Credit Rating and its impact on Beautifico
................................................................................................................................................7
b. Market Failure, types and remedies....................................................................................7
c. Macro Economic Indicators................................................................................................8
d. Business cycle and inflation...............................................................................................8
QUESTION 4...................................................................................................................................8
a. Free Trade area and EU Members......................................................................................8
b. Impact of Changes in Exchange rates on UK Businesses..................................................8
c. Contractionary Fiscal and Monetary Policies.....................................................................9
CONCLSUION................................................................................................................................9
REFERENCES..............................................................................................................................10
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INTRODUCTION
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.
QUESTION 1
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:
Advantages: 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.
Disadvantages:
 Registration Process: The process to register a private limited company takes much
longer than a sole proprietorship.
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 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
Definition 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.
Determining Factors 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.
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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.
QUESTION 2
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.
Figure 1: Supply and Demand Diagram
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.
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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.
QUESTION 3
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;
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 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
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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.
QUESTION 4
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
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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.
CONCLSUION
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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REFERENCES
Books and Journals;
Brickley, J., Smith, C. and Zimmerman, J., 2015. Managerial economics and organizational
architecture. McGraw-Hill Education.
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.
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