Finance and the Economy

Sainsbury’s plc

Student ID No. 4025976

Word Count 2541

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Question 1.

Financial instability

Capitalism is dependent on the markets where shares bonds and other financial assets
are being traded. This type of trading is very volatile and often experienced booms and
busts. During the boom period the investors take some decision in the thirst of more
capital accumulation and the markets get carried away by irrational exuberance causing
assets to the spike in value. This type of aggressiveness in the market soon changes into
crash at the time of market sentiment change. This lead to a down turns the market. The
downturn in economic conditions brings unemployment and recession in the
economies. It has been e experienced in the past that economies suffered many long
term recessions. The people lost their jobs and their living standard declined.

In equality

In capitalism the equality of wealth distribution never met and it is rightly said that the
wealth is concentrated in just few hands.The benefits of capitalism are rarely equitably
distributed. Wealth always concentrated to few hands this is because most of the
resources rest with elite and they accumulate it while paying less salaries to the labor
force hence multiply their investment and re invest their profits. Besides, capitalists can
pass on their wealth to their kids. It is general phenomenon those who born to well to
do families are much more likely to do well because they enjoy better opportunities of
education through inherited wealth and resources.

Monopoly Power

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In market economy few firms become so powerful that they become monopoly. It
means they start producing most of the market share for that particular product. Once
they become monopoly they start exploiting consumers by charging high prices and
limiting the production. Consumer often does not have any other choices but to buy
from these monopolies for the product. For example industries which produce
electricity, consumers have no other choices but to pay the prices such industries charge
to customers. Monopolies like Standard Oil purchase other competitors and become
monopoly in nineteenth century and then became very profitable business.

Capitalism is the economic system where private individuals own and control property
wealth. Demand supply forces freely set prices in the market. It is also known as free
market economic system. USA is an example of capitalist’s economic system.

The foremost feature of capitalism is the urge to make profit. As Adam Smith, the 18th
century philosopher and father of modern economics, said: it is not that we get our
dinner due to baker, butchers and brewer but because of their self-interest to earn
profits. Both parties seek to maximize their utility that’s why they transact for their own
self-interest. It is this rational self-interest that can lead to economic prosperity.

In the capitalist economy all capital assets such as factories, railroads and mines can be
privately owned. Labor, a factor of production can be purchased for salaries and wages.
Capital gains could be earned from investment being made and the prices allocate labor
and capital between competing uses. Private property might be tangible assets like land
and buildings and intangible assets like stocks and bonds etc.

Adam smith further says that in free economic conditions firms enters an exit the
market at their choices, further there remains intense competition among business and
it is the customer which gets benefit for that competition. There is a market mechanism
that determines the prices of the commodities. Resources are allocated as per market

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demand. If consumers want a specific product then producers spend resources to
produce that product and this of course provide them with better reward; hence
business maximizes their wealth and society maximizes their social welfare or utility.

Q2

The UK market experienced deflation during 1920s and that deflation remain there till
1930. This deflation was due to tight monetary and fiscal policy of the government.
Besides, Govt tried to overvalue exchange rate. After the world war the economy of UK
started growing and it experienced moderate inflation.

During 1970s the rate of inflation reached to doubled figures and crossed benchmark of
25%. The reason for this sky rocketing inflation was due to the rising oil prices in the
world. Another reason for high inflation was that the wage rate also rising as labour
unions were becoming powerful during 1970s. They were demanding increased wages
as cost of living was increasing during that time.

During 1980 the UK again experienced an economic growth. The country’s economy
was rising with the steady growth of 4% to 5%. Due to this economic boom in the
country the demand pull inflation observed. Linked with this growth, an inflation of 8%
in the economy was observed.

UK experienced deflation during 1920 and 30, it means the value of UK money
increased in those years, however the unemployment was high and economic growth
was lower. Inflation rose during 1970 because high demand pull and increase in wages.

The country experienced periods of cost-push inflation during the years 2008-2013. The
reason of this inflation was again the rising of oil prices in the world. Another reason
was that pound was devalued and govt was charging higher taxes. All these
contributed to cost push inflation and general price level starts increasing. The

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producers has to face higher cost of production like they bought expensive raw material
, paid higher wages hence their cost of production increased thereby leading to
inflation.

Question . 3

Price Q Demanded Q Supplied

(cents per kg) (millions of KG per week)

30 160 80

40 150 90

50 140 100

60 130 110

70 120 120

80 110 130

90 100 140

100 90 150

a)

The equilibrium price is where the quantity demand equates the quantity supplied.
From the table above the equilibrium price will be 70 as it’s the price where Qd and Qs
both are 120. Equilibrium quantity is 120 kg.

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b)

If the price is set at 40 cents here the quantity demand would be 150 KG and Quantity
supplied would be 90 KG. This price is less than equilibrium price which is 70 cents.
These lesser price consumers will demand more and producers will sell less. There
occurs a shortage of 30 KG.

c)

If the price is set at 80 cents here the quantity demand would be 110 KG and quantity
supplied would be 130 KG. This price is more than the equilibrium price which is 70
cents. This more price would attract suppliers to supply more that is 130 KG whereas
people would demand less at this higher price and they only demand 110 KG. Hence a
surplus of 10 KG would occur in the market (Titley and Moynihan, 2018)

d)

Following is the demand and supply diagram prepared fro m the given data which
shows that market is in equilibrium at price 70 cents and quantity demand and supplied
at this point is 120 million KG

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Q4

Executive Summary

The venture to be planned is about salt products (smeda, 2016). There is an ever rising
demand of salt products in European countries. The major reasons behind such
popularity are that the salt contains natural curative properties which make it distinct;
besides its distinctive color composition also makes it lucrative for decorative
articles/shapes. Pakistan has huge reserves of salt therefore cheap and skilled labor is
available. Cheap raw material therefore provides a better and lucrative opportunity for

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such type of business venture. The project I ve chosen pertains with the manufacturing
of salt products such as salt soaps, candle stands and salt lamps etc. salt lamps have
become increasingly popular product as an alternative medicine and act as natural
ionizer which releases lots of negative ions and hence oxygen which removes lethargy
and provide activeness to the body. My unique selling point to start this business is my
ability to generate leads/orders of the product as I ve got strong social networks besides
I would produce quality products and customer satisfaction which enable me to
provided competitive edge among competitors (SMEDA).

PESTLE

Political

Political factors do impact on business activities. Export of salt lamps and other
products to other countries require good political relations with other countries where
potential exports are to be made. I ve planned to export my products to European
Union and to USA. The relations with European Union are good and my business has
got potential in the said market. However relations with USA are volatile and it is
feared that this market is not that much responsive.

Economical

Economic conditions doe’s impact a lot on the consumer’s buying choices. Covid -19 is
the major issue which prevails around the globe and aggregate demand of general
public is decreasing. In lieu of decreasing demand the products of business might not
get its targets.

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Social

Social factors should also be taken into account. Salt plays a crucial role in human
health. It is essential for nerve and muscles functioning and involves in the regulation of
fluids in the boy. People are well aware of this fact and they find a product which is
pure and of good quality to increase their quality diet.

Technological

Before the launch of the product I would ensure that what technology the competitors
are using in production process.

Legal

Salt is food item and the governments are very particular about the contents of the
product. There are different legal requirements for the production of salt products.
Compliance of all the required rules may increase cost of production. Besides, child
labor is an issue in Pakistan. I have to make sure that ISO 9000 certification should be
obtained so that assurance report provide better confidence to foreign buyers. This
could be done to comply with strict compliance with the standards of hygiene at
processing and final stage.

Environmental

Salt mining requires mining with primitive tools which provide emission and noise
pollution. I need to ensure that new technology should be in place so that
environmental hazards could be avoided.

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Q5

a)

Public goods are those goods which are provided by the govt. These are also called
merit goods like parks, roads, hospitals and schools. It is general phenomenon that
merit goods are under produced and under consumed whereas demerit goods are over
produced and over consumed. As the merit goods are under produced therefore the
govt provides such goods to the public. Unlike the private firms the Govt has no profit
motives. Govt collect money in the form of taxes and provide public goods out of that
profit. Food is a private good and private individuals produce it. They produce it for
profit and is readily available in the market for consumers (Titley, B. and Moynihan, D.,
2018)

b)

There are many causes of monopoly the major causes are as follows:

Huge Capital is needed

Monopoly require huge capital that’s why there are few business. High cost is a barrier
to entry for competitors. As new business may not join in so the monopoly may take
advantage of it.

Legal Protection

Another very important cause for a monopoly is the legal protection provided by the
Govt. The govt may not allow any other such business to operate. Hence the business
may become monopoly as legal protection is be provided.

Ownership of key resources

If the business own key resources then it becomes a monopoly as such raw material is
essential and limited so the owner of resources enjoy the status of monopoly.

Innovative product

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The business may have invented a product for which it got patent and copy rights.
Other business cant use such technology hence the business may become monopoly.

C)

As monopolies are bad for general public as they exploit them. They charge higher
prices and produce less of a product. Therefore every govt is in pursuit of reducing the
control of monopolies so that general public may not be exploited. The govt take
following steps to reduce the control of monopolies. It may break up the firm which has
become a monopoly. For example Microsoft has become a monopoly business and the
Govt of USA split it into two. Another way to avoided monopoly provide regulation for
mergers. The last one is to capping the prices, the govt may impose a lowering prices
and the company may get losses.

Part B
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Is the company liquid

The Current ratio can be calculated by comparing company’s current assets and current
liabilities. It should be more than 2. It means to pay its current dues of 1 the company
should have 2. Companies with current ratio more than two are highly liquid
companies. Sainsbury current ratio is worked out as 0.63 which is very poor and the
trend is worsening from 2018 till 2020. However its major competitor Tesco liquidity
ratio worked out as 0.73 which again is not good but better than Sainsbury’s. It means
Sainsbury’s current ratio is not good as compared to its peers.

The quick ratio shows more liquid assets therefore stocks are minus from current assets
while arriving at quick ratio. Stocks are considered as slow sale item therefore it is not
included in the closing stock. If the company has quick ratio of 1 or more then it will in
a good position however Sainsbury’s quick ratio worked out as .49 which is again very
poor and it seems that Sainsbury cannot increase its short term liquidity in near future.
The Tesco have also poor liquidity ratio but is better as compared to Sainsbury’s.

Does the company manage its assets efficiently?

The inventory turnover ratio is calculated by comparing the cost of sales with average
stocks. The formula is as under

Cost of sales/Average inventory

A company with higher inventory turnover shows number of time the stock is sold as
compared to its total cost of sales. The more the number the better the results in the
form of profitability and revenues. If we compare Sainsbury’s with Tesco we found that
Sainsbury’s inventory turnover is 15.58 whereas Tesco inventory turnover worked out
as 24 hence Tesco is more efficient than Sainsbury’s.

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Does the company’s debt load suggests that the company is in trouble

The debt to equity ratio is calculated by comparing the total debt and equity. A
company with higher debt to equity ratio is carrying high risks

Sainsbury’s has low debt to equity ratio it means it has taken fewer loans as compared
to its peers. Hence its insolvency risk is quite low as compared to its peers. It also means
that Sainsbury’s is less geared as compared to other business in the same industry.

Compare profitability of your chosen company

Gross profit ratio is very important as it provide earning capacity of any company it the
amount which is excess earning the company has made to cover its other expenses over
the cost of sales. Gross profit is found in line with other business in the same industry.

Ne t profit ratio is worked out by comparing net profit to sales.

Gross margin of Sainsbury’s and Tesco are almost same but net margin of Sainsbury’s is
quite lower as compared to Tesco this shows that Sainsbury’s other expenses were more
and the management was unable to control other expenses. (Wood’s F, Sangster , 2012)

References

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About.sainsburys.co.uk. 2020. Results, Reports and Presentations. [online] Available at:
<https://www.about.sainsburys.co.uk/investors/results-reports-and-presentations> [Accessed 4 March
2022].

Jahan, S. and Saber, A., 2015. Finance and Development, June 2015. Finance & amp; Development,
52(2), p.1.

Pettinger, T., 2022. Problems of Capitalism - Economics Help. [online] Economics Help. Available at:
<https://www.economicshelp.org/blog/77/economics/problems-of-capitalism/> [Accessed 9 March
2022].

Stimpson, P. & Farquharson, A. (2015). Cambridge International AS And A Level Business Course book.
3rd ed. Cambridge: Cambridge University Press, p.545.

Smeda, (2016). Pre-Feasibility Studies (English). [online] Smeda.org. Available at:

https://smeda.org/index.php?option=com_phocadownload&view=category&id=122&Itemid=308
[Accessed 7 March. 2022].

Titley, B. and Moynihan, D., 2018. Complete economics for Cambridge IGCSE and O Level. 3rd ed.
Oxford: University of Oxford Press, p.63.

Wood, F. and Sangster, A., 2012. Frank Wood's business accounting 1. 12th ed. Harlow: Financial Times
Prentice Hall.

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