Business Economics Report: Analysis of Rolls Royce Business

This report delves into the application of business economics principles, using Rolls Royce as a case study. It begins with an introduction to business economics and its scope, followed by an analysis of demand and supply dynamics, price setting mechanisms, and elasticity concepts. The report ...Read More

Business Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Scope of economics................................................................................................................1
Model of Demand and Supply................................................................................................2
Price setting in market with demand and supply....................................................................3
Elasticity of demand and supply.............................................................................................4
Production function and cost models.....................................................................................5
Market structures....................................................................................................................6
Market failure and Role of government.................................................................................8
Circular flow of income and GDP..........................................................................................8
Economic Indicators...............................................................................................................9
Aggregate demand and aggregate supply curve...................................................................10
Fiscal and Monetary policy..................................................................................................12
Exchange rate and international rate....................................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Business economics is an approach through which quantitative data is analysed in relation to
business and factors contributing towards diversity of business to determine market behaviour.
Through application of economics in business stability economic development in the country is
evaluated so that actions of business can be determined. In this project report economics will be
applied on the Rolls Royce business to access demand and supply, price setting, elasticity and
production function (Buckley, 2016). Rolls Royce is one of the leading producer for aero engines
for civil crafts and corporate jets. Together with this market structure, role of government, flow
of income, inflation and GDP is for businesses. Aggregate demand and supply and government
policies in the economic is defined with their effect on business environment.
MAIN BODY
Scope of economics
Economics is generally defined as the process which is applied in the society so that
usage of limited resources can be made in the best productive manner. Economics deals with the
process of production, distribution and consumption of goods and services available in the
economy as a resource. Economics has a wider scope as it is applicable at local level and also on
global level so that usage of resources can be made in the best productive manner.
Opportunity cost is one of the important concept defined which provides information regarding
loss suffered for using one alternative over other. This is also determined as befits forego in
choosing the one course of action over other (Merigó, Rocafort and Aznar-Alarcón, 2016). For
example- If an individual posses some specified money and have option to invest it in property
or to start a new business. Any option when selected will leads to loss of profits which can be
generated by selecting the other option. Opportunity cost is calculated as-
Opportunity Cost = Return on most profitable investment selected - Return on
investment to Pursue.
Production possibility frontier is an curve that defines production of two products which
can be produced when both are produced using same finite resources. This economics term used
to provide information to business organisations to determine which goods needs to be
minimised for production of other when same resources are used. For example- using a fixed
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resources 10000 apples can be produced and 15000 oranges can be produced. Now, to maximise
production of one commodity other needs to be decreased.
The concept of opportunity cost when applied to Rolls Royce organisation then it is
analysed that opportunity cost of manufacturing cares of different pricing to grab large market
share is available to company. Together with this several opportunities available in the market
which is not acquired to make investment in present business and profits that could be generated
will be termed as an opportunity cost for Rolls Royce organisation.
Model of Demand and Supply
Demand is defined as consumers desire to buy a product or service by representing their
willingness to pay a price demanded for the offered product. Analysing demand for the offered
goods and services is important for businesses to make a plan so that consumers can be served in
best suitable manner (Draijer, 2020). Law of demand states that when all the other things in the
economy is held constant then rise in price of goods will reduce the demand in the market.
Model of demand helps to identify the quantity which consumers are demanding by offering
goods and services at different prices.
Supply is the total goods and services that are offered by business organisations to serve
them to consumers. It is referred as an amount amount available to be served to consumers by
business organisation at specific range of prices. Model of demand and supply helps to determine
at what price specific goods are demanded and supplied.
Demand for the cars offered by the Rolls Royce organisation is increasing continuously
which leads to increment in the price of the offered goods. At the present time organisation is
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operating at full capacity which leads to restriction in the supply to a certain level. As demand
keeps on growing at continuous basis but supply can be made to the capacity of the plants and
this leads to increase in the prices of the goods offered by the Rolls Royce organisation.
Price setting in market with demand and supply
Demand and supply model is an economic concept which is used to determine price of
the goods and services offered in the market ( Spieth and Schneider, 2016). Demand possess
inverse relationship with price i.e. higher the price will results in lower the demand for goods and
services. On the contrary supply possess positive relationship with price i.e. high price will
results in more and more availability of goods and services offered in the market. Prices for each
commodity in the market is highly influenced through its demand when supply is set constant.
High price of a good or service will reduce its demand and supply is not affected then
equilibrium where demand and supply become equal will be set lower then the original one.
When demand is kept constant and supply increases then also it will results in minimising the
equilibrium prices of the product. Demand and supply have a inverse relationship with each
other. To determine price demand will be analysed and higher demand will leads to setting high
price of the product and low demand will result in setting low price. When supply is considered
for setting price of the product in that case more supply will results in low pricing and less
supply will results in setting high pricing for the product and service offered.
Demand and supply of Rolls Royce organisation establishes equilibrium price for the cars
and engines offered by the organisation. As demand for luxury cars are increasing and supply is
stable. This situation leads to set equilibrium at higher price where low quantity will be
demanded. Since, Rolls Royce focuses on providing quality products by charging higher price so
the concept of demand and supply for determination of pricing of products is not that relevant to
any other organisations.
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Elasticity of demand and supply
Elasticity of demand measures consumer response to change in quantity demanded as a
result of change in prices and all the other factors in the economy is kept constant. Their are
different products available with different types of elasticity. Different type of elasticity is
defined as follows-
Perfectly elastic demand: As per this elasticity of demand change in price of good and
service can results in generation of infinite demand or eliminate total demand for the product and
service offered (Howell, 2019).
Perfectly inelastic demand: When price of the product can not affect its demand then it
is termed as perfectly inelastic.
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Relatively elastic demand: When change in demand is more then change in price of
goods and services.
Relatively inelastic demand: Change in demand is less then change in price of the
commodity offered.
Unitary elastic demand: Change in the price is same as change in change in the demand
of the product and service offered.
Elasticity of supply is defined as the degree of responsive of quantity supplied in the
market with change in the price of the commodity offered. The concept of elasticity of supply
represents opposite results with elasticity of demand.
As Rolls Royce organisation is serving quality products at premium price and slight
change in price will not make demand elastic. A huge amount of change in price will bring slight
changes in the demand for goods offered by Rolls Royce. So, it can be termed that Rolls Royce
organisation possess relatively inelastic demand. As plants of the organisation are operating at
their highest capacity and this makes elasticity of supply inelastic.
Production function and cost models
Production function represents a numerical relationship among physical inputs and
physical output used for production of goods in business organisation (Achim, Borlea andMare,
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2016). A production function can be presented in tabular form, through graphical presentation
and through a function. All these forms define relationship among input and output involved in
production. Their are different types of production function as follows-
Increasing production function: In these type of production function inputs keeps of
increasing in comparison to outputs.
Decreasing production function: As per this production function level of input
increases in terms of output.
Constant production function: Production function which do not changes relationship
among input and output is termed as constant production function.
Rolls Royce due to adaptation of technological improvement is moving towards
decreasing production function in which usage of raw material is decreasing as wastage is
minimised. This helps in improving operations management and minimising cost of production.
Cost model is an mathematical equation which helps in estimating cost of product and
service cost models are important for business organisations as it helps in analysing different
types of cost involved other then price of the product used for generation of goods and services.
Usage of cost estimation model helps in analysing the real cost incurred for goods and services.
Through this price of the goods and services offered to general public is determined by adding a
certain amount of profits in cost. As all the goods and services offered by Rolls Royce is of
premium range and cost estimation is essential so that budgets can be prepared on the basis of
estimated cost at each stage of production.
Market structures
Market structure is referred to the degree of competition available in the market for goods
and services offered to sell by business organisations. Analysing the market structure helps
business to set their marketing and pricing policies on the basis of level of competition available
for their served goods and services. Their are five types of market structure available in an
economy which are as follows-
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Perfect competition: This form of market structure is available with large number if
buyers and sellers who are selling homogeneous products without any restriction. Business
possess a goal of profit maximisation and have perfect knowledge of market conditions.
Monopoly: Market where one seller is serving large number of buyers and available with
entry restriction for other business organisations. Cross elasticity of demand in such markets are
low. Their is no close substitute of the products offered in such markets and business
organisations have a all control over supply (Bi, Davison and Smyrnios, 2017).
Duopoly: This is a special market structure where two sellers available and both are
working individually with no agreement. Event they work independently but price of one will
affect other and goods provided by them are close substitute of each other.
Oligopoly: Market structure where few businesses selling similar or different products.
Their is low amount of competition in the business and actions of one organisation affects other
business unit.
Monopolistic: Market where large number of sellers available with different products
and no restriction is available to make entry in such markets for other businesses.
Rolls Royce organisation in oligopoly as there are only few sellers like Audi, BMW,
Land Rover, Bentley, Porsche providing similar products with some unique features. Amount of
competition of the company is not high and they serve to a particular group in the society.
Market failure and Role of government
Market failure is a situation in which inefficient allocation of goods and services are
made. Market failure results in number of uncertain situations and acts through which
environmental and social welfare loss is initiated. For example- air pollution, noise pollution,
greenhouse gas emission and acidic rains (Maliranta and Nurmi, 2019). Social inefficiency is
achieved when negative effect is created on social and ethical behaviour of general public.
Government plays important role in order to control market failure by allocating resources
efficiently and providing marginal benefits. Negative effects are minimised and positive effects
are enhanced when market failure incurred. Taxes are imposed for factoring of negative effect.
Pollution control regulations are imposed on all the business organisations and environmental
laws which controls each form of negative effect of market is introduced and modified as per
requirements. A balance is established among business activities and environmental protection.
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Government regulates tax policies and the import export regulations that affects Rolls
Royce organisation while operating at global level. Several market failures are supported by
government by taking all the corrective actions so that auto-mobile industry can be protected.
Circular flow of income and GDP
The circular flow of income is referred as the movement of income throughout the
economy. In this flow movement of income of household are analysed form their hand to the
government in form of taxes and to businesses for purchased of various goods and services
offered by them. Their are four sector in an economy through which movement of income takes
place. Households, business organisations, government and foreign. In order to ensure circular
flow of income in the economy injections must be available. Investments, government purchases
and exports helps in injecting funds in economy. Their are certain leakages in the circular flow of
income such as savings, taxes and imports which made extraction of finances in the economy.
Establishment of equilibrium is important and circular flow of income helps in analysing the
problem of disequilibrium. Through maintaining balance among injections and leakages
equilibrium is maintained effectively. Circular flow of income helps in estimating GDP of the
country as it is calculated through consumer spending plus government spending plus business
investments plus sum of exports minus imports.
Huge amount of revenue is generated from businesses and Rolls Royce contributes in
high ratio so that growth in GDP can be maintained. As a business organisation income is flowed
throughout the economy by making sales and providing the funds to employees and making
various investments.
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Economic Indicators
Economic indicators are termed as some of the factors that represents economic
conditions of an country. Some of the economic indicators are as follows-
Employment: This factor represents number of employed individuals in the economy.
Through this economic indicator level of consumer income is evaluated and the scope of
spending in the economy is identified to manage flow of income in effective manner. It is a key
indicator of the economy as all the factors in the economy is affected in positive and negative
manner through such indicator (Du and O’Connor, 2018).
Inflation: It is referred as an increase in the price of goods and services year to year and
results in diminishing purchasing power of consumers in the economy. Through this indicator
rate of inflation if identified in the economy and all the efforts are initiated by the government in
order to maintain high inflation.
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Business Cycles: It represents fluctuations of the economic activities such as production
and employment. Their is a rise in the activity which make it reach to the peak and then it starts
declining in the output and make economy to reach at the bottom.
Rolls Royce organisation contribute towards generation of more and more amount of
employment in the economy. This also helps in creating some of of stability in the inflation so
that growth in the economy can be maintained.
Aggregate demand and aggregate supply curve
Aggregate demand is termed as a total of all the goods and services demanded in the
economy at various possible price levels. Aggregate demand is the sum of the components such
as investment, consumption, government spending and net exports. It is important to analyse
aggregate demand in the economy as change in aggregate demand leads to change in income and
output of various goods. Change in the aggregate demand can be initiated with fall in the interest
rate or with improvement in technology as both will improve amount of output produced.
Through aggregate demand curve all the quantity demanded in the economy at different price
level is identified.
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Aggregate supply curve represents total quantity of output firms produce and sale in the
economy at different price level. This curve helps to depict the concept of national income. This
curve is important to determine quantity supplied in the economy when change in the supply of
various goods and services are made due to price factor.
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Fiscal and Monetary policy
Policies which are implemented by the government in order to adjust spending levels and
tax rates to monitor and influence a national economy. Objective of fiscal policy is to ensure that
full employment level is achieved and growth rate in the economy can be stabilised (Peric and
Vitezic, 2016). In an underdeveloped economy fiscal policies helps to accelerate the rate of
capital formation and investment. Monetary policies are termed as sister policies to fiscal policy
and implemented by the central bank of the nation. These policies helps in managing financial
activities in the economy through controlling and maintaining money supply. Monetary policies
helps in maintaining a liquidity position in the economy so that growth and development can be
maintained and rate of inflation is stabilised.
Fiscal and monetary policies applied on the different economies where Rolls Royce
operates. All these policies needs to be consider so that organisational policies can be formed in
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such manner that they complement fiscal policies of the nation. Considering monetary policies
helps in preparation of financial budget and policies of the business in effective manner.
Exchange rate and international rate
Exchange rate is the price of one currency in terms of other currency. Exchange rate are
of two types one of fixed and other one if floating. Fixed rate of exchange is decided by the
central bank of each nation and floating rate is decided by the market condition of demand and
supply. Rate of exchange plays important role in trade of economy as internal trade practices are
based and influenced through exchange rate of one currency over other. Balanced payment
methods and overall economic permanences is based n the exchange rate of the country. When
trade practices are made outside the national boundaries of a country then it is termed as
international trade practices. In helps business to expand at large scale and economic conditions
of one nation is affected through amount of international trade practices performed.
As Rolls Royce is operated in different nations so rate of exchange is one of the
important factor for demand, supply, pricing and export strategies. All the policies of
international trade must be followed so that rate of exchange can be set as per financial policies
of the country.
CONCLUSION
From the above project report in business economics it has been concluded that business
organisations possess grate influence towards success and failure of a economy. Demand and
supply of various goods in the economy helps in establishing equilibrium so that stable growth in
the economy can be achieved. Pricing of all the goods is affected through demand and supply as
all the goods possess some amount of elasticity with pricing policies. Market structure,
production functions and cost models affects demand and pricing of offered goods. Government
plays important role in order to maintain circular flow of income, setting macroeconomics
policies. International trade brings injections in the economy and affected through exchange rate
in different economies of the world.
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REFERENCES
Books and Journals
Achim, M. V., Borlea, S. N. and Mare, C., 2016. Corporate governance and business
performance: Evidence for the Romanian economy. Journal of Business Economics and
Management. 17(3). pp.458-474.
Bi, R., Davison, R. M. and Smyrnios, K. X., 2017. E-business and fast growth SMEs. Small
Business Economics, 48(3), pp.559-576.
Buckley, P. J., 2016. International business: economics and anthropology, theory and method.
Springer.
Draijer, C., 2020. Best practices of business simulation with SAP R/3. Journal of Information
Systems Education. 15(3). p.5.
Du, K. and O’Connor, A., 2018. Entrepreneurship and advancing national level economic
efficiency. Small Business Economics. 50(1). pp.91-111.
Howell, A., 2019. Ethnic entrepreneurship, initial financing, and business performance in
China. Small Business Economics. 52(3). pp.697-712.
Maliranta, M. and Nurmi, S., 2019. Business owners, employees, and firm performance. Small
Business Economics. 52(1). pp.111-129.
Merigó, J. M., Rocafort, A. and Aznar-Alarcón, J. P., 2016. Bibliometric overview of business &
economics research. Journal of Business Economics and Management. 17(3). pp.397-
413.
Peric, M. and Vitezic, V., 2016. Impact of global economic crisis on firm growth. Small business
economics. 46(1). pp.1-12.
Spieth, P. and Schneider, S., 2016. Business model innovativeness: designing a formative
measure for business model innovation. Journal of business Economics. 86(6). pp.671-
696.
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