Academic Assessment

Module
Year Type
2022/23 Managerial Economics Individual Report

Student Id : 2054158
Student Name : Saim Khan
Section : L5BG2
Lecturer : Hem Krishna Shrestha
Submitted on : 2022/09/22
1. As part of your project's introduction, outline the sales trends in UK
Supermarkets for at least, the past 3 years.

Over the past 3 years the UK grocery market has been exhibiting continuous
growth. As a major part, the supermarket is a form of grocery store, offering a
wide variety of food, drinks, cleaning and other household goods. The
supermarkets sell an ever increasing range of non-food products that puts
them in competition with a wider scope of retailers than traditional grocery
stores or specialist retailers. By 2022,its value was estimated to be more than
200 billion pounds. The United Kingdom has a relatively low inflation rate.
This is accompanied by real GDP growth, and a growing population, has
caused retail sale to significantly increase owing to higher and wider purchase
power.

Reasons for growth in sales have been due to :

 Increasing consumer confidence and low inflation rate: However,

despite the increase in spending confidence among consumers, they
are still price-sensitive and prefer bargain deals. Apart from provision of
quality products, consumers are very alert about the prices and this
makes the UK grocery sector a very competitive market.
 The covid-19 pandemic also had an effect on the sales volumes.There
has been a boost in the sales volumes since the onset of the covid-19
pandemic. This is because there ate fewer trips being made to the
stores hence people purchase in bulk.
 Growing demand for food due to increase in the UK population.
2. A) Some of the leading companies involved in the supermarket industry
and their market shares.

 Tesco:
Tesco is the largest grocery retailer in the United Kingdom, with a 25
percent share of the local market. In its home market, the company’s
strengths are reputed to come from strong competencies in marketing
and store site selection, logistics and inventory management.

 The Co-operative Group:

The Co-op is the UK's largest mutual business, owned by the 4.6
million active members. It is a major food retailer (as measured by its 8
percent of the market and has the largest number of convenience
stores.
 Sainsbury:
Sainsbury is the UK based third largest super market which having
16.9% share in the UK supermarket sector. Sainsbury's has been
described as a 'mass retailer with a niche market strategy trapped
between the lower prices of Tesco and Asda and the more up-market
Marks & Spencer and Waitrose.
 Morrison’s:
Morrison’s was founded over 100 years ago, as a stall in Bradford
market. It has been a family business for most of the time since. The
company grew steadily ‘from market stall to superstore.’ With over 450
stores, it is now the UK’s fourth largest food retailer and holds a 9.9
percent share of the grocery market.
 B) Explain what kind of market structure UK Supermarkets operates
in.
Market structure that UK Supermarkets operate in is oligopoly. In
oligopolistic market structure there are only a few interdependent firms
that produce most of the output and this is exactly what  happens in UK
supermarkets. Oligopoly markets are found across almost every sector
and different countries. In UK it’s dominated by Tesco, the leading
supermarket with the highest market share, followed by ASDA,
Sainsbury’s, and Morrison’s, which all make up the ‘big four’.
In UK there are only a few firms that holds the supermarkets and prices
thus, tend to remain rigid.

C) Compare and contrast the market structure with the three other market
structures you have studied based on price, output and profit.

Price Output Profit:

Perfect Completion determined by market forces Market Forces Normal profits
Monopoly Lowest Output Monopoly profits
Oligopoly Rigid High profits
Monopolistic up to some level can affect price
and output

D) Discuss major barriers to entry in UK supermarkets.

Some of the major barriers are;
 Restrictions on acquiring permissions to open up a new supermarket in UK.
 Economies of scale.
 High research and development costs.

 Ownership of key resources or raw material.

 Completion commissions.
3. Evaluate the impact of COVID-19 pandemic on the performance of UK
grocery retailing. Performance could include the effects on price,
demand, profits, etc.

The Covid-19 pandemic has an overall impact on each and every industry.
Whether it is a normal retail shop, nor it is a multinational conglomerate, Covid
19 negatively impacted every economy. UK is the most affected country due
to Covid-19 at its arrival time. Retailers were bracing themselves for a spike
in demand and even ahead of the measures introduced regarding social
isolation, some 10% of shoppers had stockpiled. Retailers are forced to react
to the differing stages of isolation the population are currently experiencing.
With the impact of the virus stronger on the over-70s, and the advice for them
to stay at home, there has been a need for dedicated shopping hours and
priority delivery slots for this group, whilst younger shoppers are now being
advised, where possible, to not shop online and come into the store. Whilst
this is a minority of consumers, such a spike is enough to place significant
strain on retailers’ stock and logistic networks and of course causes
unavailability. But Later on the country was able to strongly defend the virus.

The outbreak of coronavirus however has caused an increase in consumer

spending in grocery stores across the country. Almost all retail players has
increased its sales by double digit for Aldi, Ireland, Octavo, Lidl sales growth
is 17.6%. This is due to the high demand from customers. But due to the
increasing cost of production and delivery services profit growth is declined in
UK retail chain and Lidl.

4. As part of your conclusion, assess the future for the UK Supermarkets or

grocery retailing market. Do you foresee future growth, stagnation, or decline?

The UK grocery market is predicted to grow by 14.8 percent through 2023, and
according to the food and grocery research organization IGD, this market is expected
to reach a value of £218.5 billion. The main grocery stores operating in Great Britain
are Tesco, which has a market share of 27.4 percent; Sainsbury, 15.4 percent;
ASDA, 15.3 percent; and Morrison’s4l88, 10.3 percent. Together, they cover almost
70 percent of the grocery market and are considered the “Big Four” in the United
Kingdom. Driven by a consumer that is undergoing a demographic and lifestyle
evolution, retailers in every sector are having to adapt in order to both survive and thrive.
The way that people in the UK shop is changing, whether that is for cars, clothes,
technology, property or food, as we see, the next generation of consumers spend money
in a very different ways.
Task Two- Coursework
1. Outline the concept of price elasticity of demand using real-world examples
and discuss factors that affect price elasticity of demand. What is the
implication of the concept of price elasticity of demand in managerial decision
marking?

Price elasticity of demand refers to the % change in quantity demanded of a

good due to a 1% increase in the price of the good. For instance, if a 10%
increase in price Pepsi leads to a 20% decrease in quantity demanded of
Cola, the price elasticity of demand for Cola = -20/10 = -2 .

There are several factors that affect the price elasticity of demand like:
 Nature of Goods: The economics goods are classified into three
categories, i.e. luxuries, comforts and necessities. Elasticity of demand
is highly elastic for luxury goods; is inelastic demand for necessities;
and is more elastic for comforts.

 Availability of Substitutes: When in the market a good has more close

substitutes the elasticity for that good will be high; and vice-a-versa --
Number of Uses of a Good: The single-use goods is less elastic as
compared to multi-use goods.

 Distribution of Income: The consumers in the bracket of lower or

middle income would be highly sensitive to change in the price
compared to high income people whose demand would be inelastic --
Complementary goods: Elasticity of demand is relatively inelastic for
the complementary goods.

 Price of the good: When the price of good is very small, a slight price
change would have no considerable impact on demand.

It is important for managerial decision making as price elasticity of

demand can affect the price decision. If the demand is elastic, the firm
can increase revenue by decreasing prices. If the demand is inelastic,
the firm can increase revenue by increasing prices. And if the demand
is unit elastic, the firm is maximizing revenues.
2. Solution

Formula

Profit = Total revenue - Total cost

Marginal revenue = Change in total revenue when output level rises by 1

Marginal cost = Change in total cost when output level rises by 1

Marginal profit = Change in total profit when output level rises by 1

In the table below, Profit is maximum when marginal revenue = marginal cost
or change in profit

= 0. Thus, the firm should produce 5 units. Raising output level more than it
would reduce
overall profit because of negative marginal profit
Cha
Tota To Marg
Pr Marg nge
Out l tal inal
ofi inal in
put reve co reve
t cost pro
nue st nue
fit

0 0 3 -3 - - -

1 6 5 1 6 2 4

2 12 8 4 6 3 3

3 18 12 6 6 4 2

4 24 17 7 6 5 1

5 30 23 7 6 6 0

6 36 30 6 6 7 -1

7 42 38 4 6 8 -2

8 48 47 1 6 9 -3
3.

Solution

 If both firms pollute, each makes profit £50,000.

 If both firms decide not to pollute, each makes profit of £70,000.

 If firm 1 decide to pollute and firm 2 not to pollute then firm 1 makes profit of
£90,000 and firm 2 £5000 and vice versa.

Part (a)

Firm 2
Pollute Not Pollute
Pollute £50,000, £50,000 £90,000, £50,000

Not pollute
£50,000, £90,000 £70,000, £70,000

Firm 1

Part (b)

Both firms have dominant strategies to pollute and pollute, irrespective of what other firm
does.

The given firm’s strategy is to pollute.

Nash Equilibrium :

(Pollute, Pollute) ------:-(£50,000, £50,000)

Part (c)

(£70,000, £70,000) i-e Not to pollute and not to pollute is cooperative outcome. If they could

search or agree then they can achieve higher pay off.

(Not Pollute, Not Pollute) :- Cooperative Outcome

Part (d)
Game theory analysis describes the different strategies and different pay off related to
outcome. This is very helpful to management in decision making to analyse each outcome.

4.

Part (1)

Solution

Firm “1” has to invest £10,000.

Firm “2” offers firm “1” the following proposal:

Invest £10,000 now and get £11,000 back in 12 months.

Given

Now Investment = £10,000

We can get, at the end of one year = £11,000

Rate of Return = £11,000- £10,000

£10,000

= 10%

If there is firm “1” required rate of return is less than 10%, then it should accept firm 2’s

proposal.

Part (2)

Firm “1’ is considering investing their profit into any of the following two projects.

Given
Project A Project B

Internal Rate of Return 6% 8%

Net present value

88000 61000

Here we find Internal Rate of Return (IRR) and Net present value (NPV) techniques giving

conflicting decisions. If project B has higher IRR but project A has higher NPV.
However, firm 1 would invest into any of two projects mutually exclusive. Therefore, firm
should select project “A” as it has higher NPV as compared to NPV of project B.

Result

Firm 1 should select project “A”.