LN15 Economics and Marketing

Introduction:

Theory of applied economies is important for the contemporary business organizations due to the reason that, one of the ultimate considerations for them is maximization of profit. Thus, initiation of the applied economics will help them to reduce the cost of production, which will in turn help to enhance the profitability of the organizations. However, applied economics involved diverse economic theories, which are applicable in different organizational situation (Kamien and Schwartz 2012). This essay will discuss about the importance of economic theory in the business operation of Sainsbury. It is one of the leading retail organizations in the United Kingdom. Their product portfolio ranges from grocery items to electronic items. However, with the increase in the competition in the market, Sainsbury is facing intense rivalry in the market. Thus, this essay will discuss about the application of different economic theories on the business operation of Sainsbury.

Retail market scenario

According to the reports, retail business of the United Kingdom stands at US$ 358 billion as of 2016. Moreover, it is also been reported that, the retail sales in the United Kingdom will grow at the rate of 3.4 percent per annum (Retaileconomics.co.uk 2017). Thus, the market opportunity is rapidly increasing for Sainsbury. However, in order to tap the growing market potential, Sainsbury should reduce the average cost of their operation. This will help them to offer the products in more affordable price, which will in turn help to cover more customer segments. It is also being reported that, grocery sector among the entire retail market will witness the maximum growth in terms of revenue generation.

                                    

Figure: 1

Market growth of the grocery sector of United Kingdom

Source: (Statista 2017)

The above figure shows that the grocery sector in the United Kingdom will grow at a steady rate. However, in terms of the competition, Sainsbury will face the threat of competition from Tesco and Morrison, which are the leaders in the grocery sector. Thus, it is of urgent need for Sainsbury to have effective economic policies in order to tap the growing market potential.

Cost theory of production

Cost theory will be the ideal applied economic theory for Sainsbury due to the reason that, retail customers can only be attracted by offering more affordable price. Moreover, with the implementation of the cost theory, Sainsbury will be able to reduce their average cost of production, which will eventually enhance the profitability of them. One of the key cost theories is average fixed cost theory. According to this theory, the more will be the volume of production, the less will be the average fixed cost. This is due to the reason that, this theory states that average fixed cost is equals to fixed cost divided by quantity (Shepherd 2015). Thus, fixed cost will always remain same in every variance of volume of production. Thus, the more will be the rate of production, the more the fixed cost will get divided and scattered. This will help Sainsbury to attain the economies of scale.

                                                   

Figure: 2

Average fixed cost curve. 

Another cost theory that will be beneficial for Sainsbury will be the theory of marginal cost. Marginal cost refers to the addition of the extra cost with the increase in the output of one unit. Thus, with the increase in the output, marginal cost also increases. However, according to the theory of marginal cost, in the initial stage, the rate of increase in the marginal cost is lower compared to the rate of increase in the production. Moreover, economies of scale also become effective with the increase in the production, which further reduce the marginal cost. However, after the breakeven point, marginal cost will again start to increase with the increase in the production (Nas 2016). Thus, it is important for Sainsbury to identify the point up to which, they will attain the lowest possible marginal cost. Accordingly, they will have to maintain their level of production. It will help them to have the minimum marginal cost.

                                       

Figure: 3

Marginal cost curve 

Price elasticity theory

Price elasticity theory will also help Sainsbury to reduce the elasticity of their products. Price elasticity of demand refers to the change in the demand of the products with the change in price. Thus, the more will be the substitutes in the market, the more will be the competition, which will increase the elasticity (Gordon, Goldfarb and Li 2013). Customers will switch to other substitutes in case of increase in the price of the particular product. Moreover, this theory also states that, the more will be the distinctiveness and necessity of the products, the less will be their elasticity in the market. This is due to the reason that, the more unique will be the products, the more value it will create for the customers compared to their competitors. Thus, this theory should be implemented in order to offer distinctive products and services to the customers (Glanz, Bader and Iyer 2012). The more distinctive products will be offered by Sainsbury, the less will be the substitute effect in the market. Thus, the elasticity will also be less for their products, which will enable them to have the own pricing strategies rather than offering products in market determined price.

                                         

Figure: 4

Price elasticity of demand 

Limitations of the economic theories

Though the above discussed theories will help Sainsbury to have the minimum cost of production and minimum rate of competition, but these theories are having certain limitation also. One of the key limitations of marginal cost theory is difficulty in determining the breakeven point of production to which, the marginal cost will be minimal (Delis, Losifidi and Tsionas 2014). Moreover, with the impact of various macro economic factors, the change in the marginal cost will be more frequent. Limitations of price elasticity of demand include difficulty in offering distinctive product or service in the retail sector. Majority of the players in this sector are offering similar products and thus it is difficult more distinctive features with the products. In addition, offering distinctive products is difficult due to the reason that, majority of the retailers trade the end products rather than manufacturing those.

Conclusion:

Thus, from the above discussion, it can be concluded that, applied economies are having utility for the contemporary business organizations such as Sainsbury. Application of the above discussed theories will help Sainsbury to reduce the cost of production and enhance the profitability of the organization. Thus, it will help them to offer their products in more affordable prices compared to their competitors. This essay also discussed about the importance of determining the elasticity of demand for the product offerings and initiation of steps to reduce the impact of competition in the market.

Reference:

Delis, M., Iosifidi, M. and Tsionas, E.G., 2014. On the estimation of marginal cost. Operations Research, 62(3), pp.543-556.

Glanz, K., Bader, M.D. and Iyer, S., 2012. Retail grocery store marketing strategies and obesity: an integrative review. American journal of preventive medicine, 42(5), pp.503-512.

Gordon, B.R., Goldfarb, A. and Li, Y., 2013. Does price elasticity vary with economic growth? A cross-category analysis. Journal of Marketing Research, 50(1), pp.4-23.

Kamien, M.I. and Schwartz, N.L., 2012. Dynamic optimization: the calculus of variations and optimal control in economics and management. Courier Corporation.

Nas, T.F., 2016. Cost-benefit analysis: Theory and application. Lexington Books.

Retaileconomics.co.uk. (2017). UK Retail Stats and Facts | Retail Economics. [online] Available at: https://www.retaileconomics.co.uk/library-retail-stats-and-facts.asp [Accessed 29 Dec. 2017].

Shepherd, R.W., 2015. Theory of cost and production functions. Princeton University Press.

Statista, M. (2017). UK grocery retail market value 2007 to 2017 | Forecast. [online] Statista. Available at: https://www.statista.com/statistics/295669/grocery-retail-market-value-by-in-the-united-kingdom-uk/ [Accessed 29 Dec. 2017].