Business Economics Report: Analysis of Tesco's UK Business Environment

This business economics report provides a comprehensive analysis of Tesco's operations within the UK market, examining key economic concepts and their impact on the company. The report begins by exploring the economic problem of scarcity, demand and supply dynamics, and resource allocation challenges faced by Tesco. It then delves into different market systems, including perfect competition and monopoly, and assesses their influence on Tesco's pricing strategies and overall business behavior. The report further investigates the implications of pricing and business objectives on firm operations, analyzing how prices are set in various market structures and their effects. Additionally, the report examines changes in the UK economy, macroeconomic policy tools, and the country's economic performance in the global market. It concludes by discussing the theory of comparative advantage, the advantages and disadvantages of free trade, and the impact of emerging economies and economic shocks on both developed and developing economies. The report utilizes Tesco as a case study to illustrate these concepts and provide practical insights into the complexities of business economics.

BUSINESS ECONOMICS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 &1.2 Economic problem of scarcity and demand and problem of resource allocation as
well as equilibrium between demand and supply.......................................................................3
1.3 & 1.4 Importance of different market systems and opportunity cost....................................4
1.5 Importance of elasticity.........................................................................................................5
TASK 2 ..........................................................................................................................................6
2.1 Implication of pricing and objectives on firm business operations.......................................6
2.2 & 2.3 Way in which prices are set in different market structures and impact of same on
firm behavior...............................................................................................................................6
2.4 Impact of rules and regulations on firm and market structure..............................................7
TASK 3............................................................................................................................................7
3.1 Changes in the structure of UK economy in 21st century and its impact on business
environment of firms...................................................................................................................7
3.2 & 3.3 Tools available to met macro economic policy changes and success of government
policies in achieving macroeconomic objectives........................................................................8
3.4 Economic performance of economy on global market.........................................................8
TASK 4............................................................................................................................................9
4.1 & 4.2 Theory of comparative advantage and relevant illustrations and advantage as well as
disadvantage of free trade to nations on the basis of case study.................................................9
4.3 & 4.4 Impact of emerging economies on developed economies and impact of recent
domestic and global economic shocks to the economy............................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
INDEX OF TABLES
Table 1: Economic performance of UK...........................................................................................8

INTRODUCTION
Tesco is one of the largest retail chain in the UK. It has number of stores in the UK and
mentioned firm is taken in the report to carry out research. This report is prepared on the
economy and micro and macro economic issues are covered in the report. In the report demand
and supply related issues are discuses in detail. Along with this, different market systems are also
explained in the report in context of firm. In the middle part of report, economic performance of
UK in comparison to other nations is compared and comments are done on same. At the end of
the report, free trade and its positive and negative impact on economy are discussed in detail.
TASK 1
1.1 &1.2 Economic problem of scarcity and demand and problem of resource allocation as well
as equilibrium between demand and supply
If we look at the world economy then it can be observed that there is great imbalance
between demand and supply. There is very high demand for the products in the market but there
is supply of goods in the market and due to this reason there is high inflation rate in some of the
nations of the world. In UK also there is gap between demand and supply of the goods in an
economy. It is proved from the fact that in the mentioned nation inflation rate is rising
consistently. After month of October 2015 inflation rate increases from 0.1 to 0.5 and this means
that prices of edible items and other consumer durable and non durable good increased in the UK
(Cusack, Iversen and Rehm, 2006). There is no stability in the inflation rate and this reflects
that demand for products is huge in the UK market but there is less supply of goods in the
market. Hence, it can be said from the analysis of facts of inflation rate that there UK is facing
economic problem of scarcity and demand. In such economic problem it is very difficult for
Tesco to run its business in the profit. Most of the peer firms of Tesco are reducing their product
price. This is done because due to inflation rate consistent hike price of products is increased. In
such a situation in order to maintain market share firms are reducing their product price. Due to
this reason profitability of firm is declining continuously (Arnold and Hussinger, 2010). In order
to manage UK economy and profitability of the firms it is very important to bring stability in
price of goods and to curb or to reduce inflation rate. In order to do this central bank can increase
interest rate and by doing so demand can be reduced and can be bring in alignment to supply of
goods. This may bring stability in price and firms may earn profit in the business.

Doing resource allocation is a big challenge for UK and companies of the mentioned
nation in their business operations. This is because in UK resource allocation is leave on the
market forces and with change in situation resource allocation automatically get changed. Many
times due to absence of government intervention resources does not allocate properly. Hence,
available resources are not optimally used in the UK (Deardorff, 2014). Tesco is also facing
problem in allocating its resources in efficient and effective manner. Due to consistent economic
fluctuation firm is facing lots of problems in managing their financial and human resources. If is
clear that when recession comes in existence unemployment rate reached at its peak level and
firms reduce their labor force. Currently, also firm is facing problem in taking decisions related
to the extent top which it must increase its workforce. Hence, resource allocation is also one of
big problem for UK and firms operating in this nation.
Way in which equilibrium between demand and supply can be achieved in the UK economy
In order to achieve equilibrium between demand and supply it is necessary to bring both
equal or in alignment to each other. Current scenario is that in UK inflation rate is rising and
GDP growth rate is also fluctuating which means that production is fluctuating in the UK.
Hence, target for UK government is to bring stability in the inflation rate and in the GDP (Bems,
Johnson, and Kei-Mu Yi., 2012). In order to bring both equal central bank need to increase
interest rate. This will make availability of loan dearer to the people and their demand for
products will decline. Hence, in this way according to current supply level demand in the market
will adjust and there will be equilibrium between demand and supply in the UK.
1.3 & 1.4 Importance of different market systems and opportunity cost
Following are the different economic systems and their importance are as follows:- Perfect competition- This is the market structure in which there are number of buyer and
sellers and former entity have good knowledge about the product. Buyers have lots of
alternatives and if they does not want to buy product from one seller then they can buy
same product from other seller. Tesco operate in this market structure because there are
number of small and large retail firms in the mentioned nation (Constitutes, 2014). This
market structure greatly affect firm because competitors like Lidl, Aldi, Morrison and
Sainsbury are reducing their product price and this force firm to sell its product at lower
price. Due to this reason firm face loss in its business and it close some of its retail stores
in the UK. Hence, this market structure is negatively affecting firm.

 Monopoly- Under this there is single firm in the market and number of buyers. Due to to
absence of competitor firm company sale its products at a very high price and take price
and output decision at their own level. Teso does not fall in this category which means
that this market structure does not affect the firm.
 Monopolistic competition- In this market structure there are few sellers and buyers and
they sale products that are different from their competitor product in terms of features
(Carlin and Soskice, 2005). Tesco does not come in this structure because there is no
difference in products of mentioned firm and its competitors.
Opportunity cost refers to the benefits that firm doers not receive because it failed to
make multiple uses of same asset. Tesco is facing loss in its business and it close some of retail
chains in the UK. It open new retail in the India instead of opening premises in other part of UK.
In UK firm have strong presence but it does not make use of its image in the mentioned nation
for increasing its profit level. Instead it make investment in India where no one know its name.
Hence, benefit that firm does not receive because it make investment in India instead of UK is
the opportunity cost for the firm (Andrade, et.al., 2009). It will take time to make money in India
and hence in initial years in India firm may earn very low profit. Hence, this decision may
negatively affect the firm.
1.5 Importance of elasticity
Elasticity of demand refers to the change in demand of goods due to change in price.
Currently, in UK there is very high demand for retail products. This happens because every year
thousand of students comes in UK for study and due to this reason population of UK is
increased. Hence, demand increases in the UK but supply remain same due to less elevation in
profitability and availability of loan from banks (Bowen and Sosa, J2014). There is great
importance of concept of elasticity of demand for Tesco because by using this concept managers
of the firm can identify that in past time with different level of demand to what extent products
price changed that are sold by the competitor retail firms. On the basis of use of this concept and
analysis of data managers of Tesco can predict possible price changes that competitor firms of
mentioned firm can make. Hence, on the basis of results of prediction firm can make wise
business decisions.

TASK 2
2.1 Implication of pricing and objectives on firm business operations
Pricing strategy of the Teco is putting negative impact on the firm. In order to survive in
the market it was necessary for the firm to sale its product at reduced price. Tesco sale its goods
at low price which increase its market share but reduce its profitability. This indicate that price
strategy which firm follow does not benefit it instead bring its business from profit to loss. But
firm does not have any option and its is forced to follow low price strategy (Valadkhani, 2005).
In order to bring business in profit by following this tactic firm can follow cost control strategy
in its business. Under this it can control its expenses and can eliminate unprofitable activities
from the firm business operations. By doing so business can earn profit in the highly competitive
industry. Objectives are putting positive impact on the firm because it help firm managers in
identifying the direction in which they needs to work in order to achieve organization objectives.
Managers take various steps that can help organization in achieving its objectives. Thus, it can be
said that objectives positively affect business organization.
2.2 & 2.3 Way in which prices are set in different market structures and impact of same on firm
behavior
There are different market structures like perfect, monopolistic, monopoly and oligopoly.
Prices are set in different way in these market structures. Tesco fall in perfect competition market
and here prices are determined by the firms by looking at the prices at which competitor firms
are selling their products. This is done because products are same and same can not be sold on
the basis of features. Hence, price is only factor by using which firms compete with their
competitors. So, it can be said that this market structure heavily affect the firm (Gandolfo,
2013). In case of monopoly market structure price is determined by the firm at its own discretion
because there are no competitors in the market. In case of monopolistic market due importance
are give on quality of the product and according to quality, price of the product is determined by
the firms. In case of oligopoly market structure there are few firms that operate entire industry.
These firms determine their product price by looking at a price at which competitors are selling
their product. In this way pricing decisions are taken in different market structures.
Firms behavior is greatly affected by the market structure and its operations. This
happened because no firm can survive in the market by ignoring its competitors. Market

structure is simple group of firms which have different or same product and well as pricing
strategies. Firm needs to perform better then or same to companies that are operating in the
relevant market structure. By doing so firm can either keep its market share same or it can
increase its business at a rapid rate in the industry. Thus, it can be said that market structure and
its operation greatly affects Tesco and its business decisions.
2.4 Impact of rules and regulations on firm and market structure
Rules and regulations are having negative impact on the business firms of retail sector of
UK and market structure of its retail industry (Hook, et.al., 2011). European union bring some
costly regulations that are negatively affecting retail industry of the UK and its retail industry
market structure. Some of restrictions are also imposed in the other nations of the Europe. Like
in Belgium rule is bring that no retail firm can give more then 33% discount on its products.
According to new rules and regulation for commencing business in the European nations now it
is necessary to take license and doing registration of the business. Hence, many new changes
comes in UK and these are promoting competiton among the firm. Due to such rules cost and
profitability of firms increases and decreases. Hence, in order to survive and to remain ahead
firm operating on this market structure and industry are taking steps to give tough competition to
the competitor firms (Eaton, Kortum and Kramarz, 2011). Thus, it can be said that UK rules
and regulations are affecting Tesco and relevant market structure.
TASK 3
3.1 Changes in the structure of UK economy in 21st century and its impact on business
environment of firms
Structure of the UK economy changed at a rapid pace in the 21st century. In this century
its retail industry change at a fast pace. During this century many new technological
advancement happened in the nation and focus was on research and development related to
technology and other domain of study. This enhance nation growth rate at a fast pace in 21st
century. In this century many new business models were introduced in the UK economy in 21st
century which were adopted by many business firms (Dunning, 2014). All these greatly affects
business environment of retail industry of the UK. Due to identification of various business
models retailers of the UK start making large retail chain of their stores and start selling multiple
products at their stores in 21st century. They start selling multiple products under one roof.

Gradually, this business model was adopted by many retail firms of the UK and in order to
increase market share firms start selling their products at a low price. This bring big change in
the business environment of UK retail industry and low level of competition between firms in
same industry become fierce. Hence, it can said that changes in the structure of UK economy
bring change in business environment of UK retail industry.
3.2 & 3.3 Tools available to met macro economic policy changes and success of government
policies in achieving macroeconomic objectives
Macro economic policies bring many changes in an economy. Sometimes changes in
these policies bring positive change in an economy and some times same policy bring negative
change in an economy. If there is positive impact of then there is no problem but if policy put a
negative impact on an economy then it is a matter of concern for the firm (McMillan, 2013).
There are many tools that are used by the UK government and central bank to bring economy on
growth track. Monetary policy is one of them and by using this policy money supply is increased
or contracted in an economy. If previous changes economic policy put negative impact on
economy then by making adjustments in interest rates economy is bring on track. Fiscal policy is
another component which is used to bring economy on track. By using this policy adjustments
are made on income tax and public expenditures. Hence, these are two tools that are used to met
economic policy changes. UK government follow quantitative easing policy under which money
supply is increased in an economy. Main target of UK government was to increase or bring
stability in the nation GDP. Its main target was to reduce unemployment rate in an economy. UK
government successfully achieve these two targets (Chapagain and Hoekstra, 2008). This is clear
from the fact that unemployment rate of UK reduced from 5.6 to 5.1. GDP of the UK is stable at
0.6 and it is clear from the fact that by following this policy both objectives are achieved by the
UK government.
3.4 Economic performance of economy on global market
Table 1: Economic performance of UK
GDP Unemployment rate
Inflation
rate
USA 1.4 5 0.9

UK 0.6 5.1 0.5
Germany 0.3 4.3 0.3
China 6.7 4.05 2.3
Interpretation
In terms of GDP it can be said that UK performance is moderate but good from Europe
point of view. If we look at inflation rate then it can be seen that in UK this rate is in control and
lower then other nations. This is good indicator and it indicate that economy is on growth track.
Unemployment rate is still high in the UK and it is matter of concern for the UK. Entire
conclusion is that UK is giving moderate performance if compared to largest and rich nations of
the world. ECB devise monetary policy by considering economic health of each and every
member nation (McMillan, 2013). Hence, monetary policy always does not give full benefit to
the UK. This may be one of the main reason responsible for moderate performance of the UK
economy.
TASK 4
4.1 & 4.2 Theory of comparative advantage and relevant illustrations and advantage as well as
disadvantage of free trade to nations on the basis of case study
As per theory of competitive advantage one must compare opportunity cost of producing
goods across the nations. If goods can be produced at cheaper rate in the foreign nation then
they must be produced in relevant nation across the border (Sinha, A., 2016). Means that firm
must focus on reducing its product production cost. India have well developed pharmaceutical
industry but then also its companies purchase API ( Active pharmaceutical ingredients) from UK
because research and development cost is very high for mentioned ingredient of medicines. This
is best illustration for theory of competitive advantage.
The benefit of free trade is that nation company doing business on the foreign land and it
bring profit back to the nation and this contribute to nation growth in many ways. From the case
study of Vodafone it is observe that it expand business in the India and presently its market share
in India telecom industry is 37%. which means that it is sending million dollar of profit to UK
which it earned from India. Thus, Vodafone is giving significant contribution in nation success.
The main limitation of free trade is that many times foreign nation company's that enter in to
domestic land capture entire industry and start dominating same (Liu, C., 2016). Chinese firms

maintain strong hold in many industries of UK. In 2014 Chinese companies grow at 44% in UK
and domestic firms grow at 4% only in the mentioned nation. This means that market share of
UK companies fall in their own industry relative to Chinese company's. Hence, this is major
disadvantage of free trade agreement to UK.
4.3 & 4.4 Impact of emerging economies on developed economies and impact of recent domestic
and global economic shocks to the economy
Emerging economies are putting positive impact on developed economies because latter
type of economy is on growth track and there is high demand for products and services.
Developed nations firms are earning good profit in the developing nations (Anderson and et.al,
2013). Thus, developing economies are positively affecting developed economies. Developing
nations companies are operating in the UK and they are giving huge employment opportunity to
the people. Hence, emerging economies are having positive impact on the developed economies.
Recent domestic and global economic shocks put negative impact on economy. When new about
China poor economic performance comes in market stock market of UK fall by high percentage
points and this trend remain continue for some days. Hence, million dollar of amount goes out of
stock market in these days (De Grauwe, 2014). Inflation rate of UK is also increasing and price
of goods elevated due to which UK firms are earning less profit in their business. Hence, it can
be said that recent domestic and and global economic shocks adversely affecting UK economy.
CONCLUSION
On the basis of above discussion it is concluded that economy of the nations are very
sensitive and small change in same greatly affect people and firms profitability. Government
must always try to bring equilibrium between demand and supply because by doing so growth
rate of nation can be accelerated and inflation rate can be controlled. It is also concluded that
nations must promote free trade but must prepare some rules that prevent negative impact of free
trade on domestic firms.

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