Economics: Micro and Macro theories
Assessment 1
HND Retail Management 2B
Jeannie Reid
H&M (Hennes and Mauritz AB) is a Swedish fashion company which was established in 1947. H&M is the second largest fashion retailer in the world and has over 4,500 stores in 62 countries. The headquarters of H&M is in Stockholm, Sweden and the first store was opened in Västerås, Sweden which opened in 1947. H&M opened its first store in the UK In 1976 in London.
Fixed costs and variable costs are added together to get the total cost. Fixed costs are an expense which remains the same, regardless of the product production. Fixed costs must be paid by a company, in order to keep the organisation going. Fixed costs include rent, utilities such as electricity and water, office supplies such as computers, and advertisement costs. The fixed costs for H&M include EPOS systems, rent and rates, fixtures and fittings and advertisement. Variable costs are costs which vary depending on the production of products. This means that as product production increases, a company will need to purchase more products such as materials and packaging, and when the product production decreases, a company will spend less money on expenses such as materials and packaging. The variable costs for H&M include packaging, materials, wages for employees and delivery and shipping costs.
Average cost is the total cost (fixed and variable costs) divided by the quantity of the product made. Average costs may affect H&M as if there is a decrease in sales of the product, it will mean there will be less money for the other costs. This will mean that there will be less money spent on more product production, leading to a loss in sales. However, this could also have a positive impact on H&M as if the sales of their products increase, this will mean there will be more money to create new products and this could result in an increase in sales. Marginal costs are costs which will make a difference to the total cost as one more line of production has been added. The expense of producing one more unit is then added on to the total cost.
2. Oligopoly is where a few smaller organisations share a large part of a market. An example of an oligopoly is the soft drink company Coca Cola. Within the Coca Cola organisation, there are a few smaller firms such as Glaceau smart water, Fanta, Sprite and Powerade. All of the organisations within an oligopoly produce and sell the same or very similar products or very different products for example, the vast majority of firms within the Coca Cola organisation produce and sell soft drinks where as the firm “PepsiCo” has various different firms such as Walkers crisps, Pepsi and Quaker which all produce different products. The competition between the firms in the oligopoly is not based on price, but each firm within the organisation might offer things such as delivery, vouchers, customer service and loyalty cards in order to encourage the customers to interact with their firm.
It can be difficult for a firm to enter an oligopoly as there are various factors which will effect a firms ability to enter. The first factor which will effect a firms entry into an oligopoly is the high cost in which it takes to start up their business. Another factor which will effect a firms entry into an oligopoly is the fact that the will need to gain a level of ownership to all of the resources that they will need. Another factor that will effect a firms entry into an oligopoly is copyright laws. A company must ensure that all the products that they are producing abide by the copyright law. A company must also ensure that they get copyright on their own products so that other businesses will not copy their products, resulting in a loss of money for their company. The final factor which will effect a firms ability to enter an oligopoly is restrictions and laws created by the government. A company must ensure that they are abiding by government restrictions and laws in order to keep their business open.
A firm within an oligopoly must take the other firms within the oligopoly into account as they are all linked and in some ways they are all dependent on each other. This means that all firms within the oligopoly is effected by all of the firms actions, therefore they cannot overlook the actions of the other firms within the oligopoly as this may effect the price of their product, and it may result in a decline of profit. This is known as mutual interdependence.
3. A monopoly is where one firm is dominating a market due to its large market share within their particular market. An example of a monopoly is the company “Google”. Google is the largest and most popular search engine in the world, and 90% of the internet users in the world choose to use Google, thus meaning that it is the most dominating firm within their market. Another example of a monopoly is public transport companies such as Scotrail. Scotrail is the leading transport firm within Scotland as they are Scotland’s only train operator. As they are Scotland’s only train operator, people are dependent on them, this means that they have the ability to increase their prices and customers will still pay and use their service as they are dependent on it.
As firms within a monopoly have a large market share, it might scare other firms from entering the market, meaning that there is a shortage in competition for the leading firm. This means that the leading firm will not have to reduce prices in order to get consumers to buy their products. The leading firm within an oligopoly will make it as hard as possible for other firms to enter their market as this will help them keep a high market share. They make it difficult for other firms to enter the market by using methods such as claiming ownership of all the resources that they use, copyrighting all of their products as this will make it much harder for companies to create the same product and creating a good brand image so that consumers will become loyal to that brand.
4. Profit maximisation is where firms make decisions based on the amount of profit they can gain from a product. Firms must decide on how many people they should employ and where they are going to purchase the materials that they require to make the product from. In order for firms to get the largest possible profit from their product, they conduct a calculation to analyse the additional revenue and the additional price from an extra unit of output. If the marginal revenue from making an extra product is greater than the marginal cost, the firm will create the additional product as it gives more to to the revenue rather than to the costs, and this will boost the profit. The firm will then keep making the product until the marginal revenue is the same as the marginal cost of making the product.
5. An alternative theory to the objective of profit maximisation is WJ Baumol’s theory, “sales revenue maximisation”. Baumol believed that a firm should put more effort into increasing their sales revenue rather than focusing on increasing profit margins. This theory believes that if product profit is adequate, firm managers should put a large amount of effort into maximisation of the firm’s sales.