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Economics Assignment: The United Kingdom Economy


The economic power of a country is measured by the nominal GDP and purchasing power parity (PPP). Using GDP, the United Kingdom is ranked as the fifth largest economy in the world and the second largest one in the whole Europe. According to the purchasing power parity, the United Kingdom is the ninth largest country in the world and the third largest one in the whole Europe. In addition, the UK participates in various forms of export and import trades. Generally, the UK has one of the most globalised economies in the whole world. More than 70% of the UK GDP is contributed due to the service sector, which greatly dominated in the country.

The widely invested areas include the financial service sector, aerospace industry, automotive industry, pharmaceutical industry, and the energy sector. Prosperity in the United Kingdom is not uniform because some parts of the country are contributed more per-capita GDP than other parts of the country. HM treasury and the Department for Business, Innovation and Skills are the bodies of the government that are involved in the British Economy. Interest rates in the UK are set by the Monetary Policy Committee of the Bank of England which is the central bank of the UK. The currency of the UK is the sterling pound, which is also valued in other parts of the world. The country has joined many trade unions including World Bank, European Union, United Nations, etc. Similarly to the other countries of the world, the UK follows the theories connected with economics of demand and supply. All business organisations within the country are affected by these theories and struggle to obtain equilibrium with the scarce resources and very high demand. This paper will discuss the managing strategies of a typical organisation in the UK and the influence of several economic factors within that country on their performance.


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Scarcity, Choice and Opportunity Cost


In order to produce goods and services, any organisation uses various resources. These resources are called factors of production and include land, labour, capital, and enterprise (Sheshinski & Weiss 2009, p. 285). Any company operating within a normal economic system will have limited factors of production. Such a situation is called scarcity of the resources (Leiter & Warin 2007, p. 4).

For example, True North is a pharmaceutical company in the UK Located in London. It is not easy to obtain the land for establishing a firm in London city. Due to the fact that there are many pharmaceutical companies in London, it is difficult to obtain qualified personnel to work in this organisation, and many qualified personnel would prefer to work in a more competitive and well-paid firms. True North is a developing firm and will, therefore, have limited qualified staff. In addition, the capital to invest in new technologies is always not sufficient (Ravn & Uhlig 2002, p. 372). All the above mentioned aspects show that all the factors of production are scarce to this organisation, which means that the available resources are limited to accomplish all the demands of the company.

The problem caused by the scarce resources is that the organization has to determine the best use of the limited funds, which is not always easy. The organisation also has to determine the mix of goods and services it intends to produce so that it can fully utilise the available resources. The maximum utilisation of the available resources always presents a problem because the resources tend to be strained in the process (Dhyne at el. 2006, p. 181). Allocating these resources to the appropriate use is also a difficult task. For example, taking capital, as the resource required widely by the organisation, which determines whether it will be used to improve company’s infrastructure or venture into another type of profit making activity is a hard decision.

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Opportunity Cost

Opportunity cost basically refers to the following foregone alternative (Konieczny & Skrzypacz 2005, p. 629). The resources are scarce and, therefore, it is necessary to take the decisions whereas there are certain wants, which are inevitable in the process of making choices. In order to find proper solution regarding the issue which wants to satisfy first, the organisation management defines a list of preference and needs, which must be satisfied. The most important demand should be satisfied first, followed by the next one in the list, etc. (Rotemberg 2012, 1187). The most urgent demand of the True North pharmaceutical company is to employ more qualified personnel and to purchase good vehicles for drug delivery. The organisation would prefer to obtain qualified personnel first using the available resources before obtaining good vehicles. In this case, good vehicle is a foregone alternative.

Market Systems

It is worth noting that there are two types of the market economy. The first one is free-market economy. In this type of market, the resources are owned by the private investors, and the government has no control the allocation of these funds. Prices in the market are basically determined by the forces of demand and supply. The buyers and sellers act according to their own interests. In this type of the market, the organisation’s management has full responsibility of determining how to allocate resources and influence their use in order to maximise the profits generated (Leiter & Warin 2007, p. 4). The concept of opportunity cost is therefore widely used by the investors in this type of market.

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The second type is the planned market economy. In this type of market, the resources are owned by the government. The government allocates the resources to the investors whereas the price of goods and services are determined by the government. However, most businesses have no opportunity to define which wants to satisfy first (Leiter & Warin 2007, p. 4).

The third type is the mixed market economy. In this type of market economy, the government owns and allocates some resources while private investors also own and allots other funds. This is the exact scenario in the UK. Some resources in this country are owned by the government while others are controlled by the investors themselves. For example, the supply of energy, such as gas, electricity and fuel, are basically owned by the government, which has also full control over its utilisation (Leiter & Warin 2007, p. 4).

Elasticity of Demand

Demand can be defined as the quantities of goods or services a buyer is willing and able to buy at a given price in a certain period of time (Marquez 2004, p. 371). Demand is widely affected by the price because increase in price of a commodity leads to a significant decrease in the quantity demand for that good whereas the reverse is true. True North pharmaceutical company uses this theory when determining the price for their drugs. If they set their rates abnormally high, the quantities of the drugs demanded will decrease. However, if they set their prices too low, the quantity of drug demanded will be also decreased.

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The total revenue earned by a firm is obtained by the product of price and the quantity demanded. In any market, most firms will struggle to obtain the maximum total revenue. In order to achieve this goal, the values of both the price and the quantity demanded must be very high. However, due to the fact that the prices of goods increase the quantity demanded, most firms will struggle to obtain and equilibrium where the prices and the quantity demanded are maximum within a market (Marquez 2004, p. 371).

If the quantity of goods or services highly changes with slight changes in the price, the demand of that good or service is considered to be elastic. If the quantity of goods and services demanded do not easily change with the different prices, that good or service has an inelastic demand. Concerning the goods or services that have inelastic demand, their investors will tend to increase the prices in order to maximise the total revenue earned by such organisation (Dhyne at el. 2006, p. 181). However, pharmaceutical products from one company have an elastic demand.

Market Structures

Price determination is a very important factor to any firm. In True North pharmaceutical industry, pricing of commodities is the entire responsibility of the company’s management. In the UK, there are many pharmaceutical organisations producing such line of drugs as True North. Therefore, concerning the issues of pricing, the company’s management has to bear in mind that they participate in a competition. Setting too high prices will scare away the customers, and they would prefer to buy the same line of drugs from the competing firms (Dhyne at el. 2006, p. 181). On the other hand, if the prices are too low, the company’s total revenue will reduce. When setting the prices of the drugs, the company aims at obtaining maximum profit while remaining competitive within the market. The ability to vary the rates upwards, while being competitive within the market, is called market power. Obtaining market power is the sole objective of True North organisation. When obtaining the prices of the company, the management has to understand the type of the market structure they are operating in. Basically, there are four types of the market structures (Dhyne at el. 2006, p. 181).

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Perfect Competition

This type of market structure offers the investors limited market power. The reason is that in this type of market, the buyer possesses all the information about the prices of the commodities. Moreover, there are many competing firms producing identical product and, therefore, the buyer has a choice. Another feature of this market is that the firm is relatively small as compared to the entire market. The prices in this type are entirely set by the forces of demand and supply, and the firms can do nothing to control the prices. This type of market normally exists in small-size businesses that cannot entirely differentiate them from other firms (Nakamura & Steinsson 2007, p. 77).


This type of market exists in a situation where there is one large firm operating to serve the whole market demand. In this type of the market, entry of the new businesses is extremely costly and, therefore, new businesses cannot easily enter the market. The firm operating in such type of business can greatly influence the prices because they are not determined by the forces of demand and supply. The firm enjoys exceptional profits because even if the company decides to raise its prices to a certain level, the quantities demanded remain relatively constant (Nakamura & Steinsson 2007, 77).

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Monopolistic Competition

In this type of the market structure, there are many small firms, which sell differentiated goods and services. Entry and exit into the market is easy. The firms can vary their prices to some extend but still maintain the customers. However, great variation of the cost may affect the quantities demanded. Prices in this type of market are determined by the interaction between marginal cost (MC), Marginal Revenue (MR), and the demand. If MR curve, MC curve and demand curve are all drawn on the axis, where there is MC curve interest, the MR curve gives the maximum quantity to be sold and the maximum prices of the goods. The point of interaction between the MC and MR is projected to the demand curve then to the x and y axis, which gives the maximum quantity and maximum price respectively (Nakamura & Steinsson 2007, p. 77).

Oligopolistic Competition

In this type of market, there are few firms which sell differentiated goods and services. Each firm influences to some degree on other firms selling the same type of goods. The goods or services, which the firms sell, might be typically homogenous or differentiated. Differentiation is done through branding and packaging, otherwise the goods or services are identical (Nakamura & Steinsson 2007, p. 77). The demand curve in this type of the market is dropping, implying that the increase in prices will lead to the decrease in quantity demanded.

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Unlike other demand curves, this one has a kinked region. The kinked region is found along the demand curve of this market resulting from the influence of the firms on each other. For example, if one company in this type of market decides to reduce greatly the prices , other firms within the same market will venture in other forms of promotion that will make that company decrease the cost, which will incur heavy losses and maintain the same quantity demanded. Prices in this type of market structure are basically determined by the collective agreement between the firms (Nakamura & Steinsson 2007, p. 77).

Pharmaceutical companies in the UK have monopolistic competition type of the market structure. The reason is that there are many pharmaceutical organisations in the UK that sell the same line of drugs whereas these medicaments have been differentiated by branding, some minor components, and packages. The prices are influenced by the company to a small extend, but they are majorly decided through the interaction of demand curve, marginal coast curve, and the marginal revenue curve (Nakamura & Steinsson 2007, p. 77). In order to make the pricing decision, the company has to analyse thoroughly the demand, marginal cost, and the marginal revenue.

The UK government influences the decision of the prices in all the markets structure because they follow corresponding policies. For example, the Fair Trade policy is designed to protect the consumer from being exploited by the seller. A firm, which is operating in a monopoly type of the market structure, should decide the prices by its own. In addition, it seems that the firm will set high prices because their growth in this type of the market structure does not lead to a decrease in quantity demanded (Nakamura & Steinsson 2007, p. 77). Consumer knowledge policy is another policy that affects pricing in any type of the market structure. This policy enables the consumers to obtain all the information about UK produced goods and services as well as to compare the goods and services before them.

Structure of the UK Economy in the 21st Century

The changes in the structure of the UK economy in the 21st century were influenced by the country’s politics During Tony Blair reign the major differences occurred in the UK economy. One of the changes that Blair introduced was to privatise some of the public firms and industries. Privatisation of these companies increased their efficiency, and thus creating more job opportunities. During his reign, Blair also cancelled the excessive tax that the previous governments have bestowed on its citizens (Rotemberg 2012, p. 188).

The efforts to improve the UK economy seemed successful until 2008, when the economy of the UK entered a period of economic recession. During that time, inflation, unemployment, and interest rates, which had been relatively low, increased tremendously. For example, during this period unemployment rate has reached a peak of 2.5% since 1990s. As a country, the UK experienced high income deficit, which was caused by the fact that many manufacturing companies experienced the deficit in their production process (Lunneman at el. 2006, p. 78). The UK revenue during this recession period was obtained from exporting financial services, but most manufactured goods and services experienced the deficit.

The UK faced economic shock because the prices of the commodities were constantly rising. Another circumstance was due to the financial turmoil. On an international scale, according to the report released in February 2015 by the office of the National Statistics board, it was indicated that the level of the UK economy has decreased from fifth in the whole world to ninth (Marquez, 2004). However, the board released a more positive report that the labour market of the UK was more resilient and the inflation of the country was stable enough as compared to other countries in the world that experienced the same economic recession.

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In order to solve some of these problems, the government provided application of some macroeconomic tools. These tools included monetary policy, which was concerned with the changing interest cash rate that is basically the interest on the overnight loan in the money sector. The government influences this process by either increasing the cash rate interest or reducing it. If it is decreased, more people within the population will borrow cash from the money sector, which will increase the total amount of money in supply and vice versa. Increased amount of money in supply might mean new investments that can boost the country’s economy. Pharmaceutical industries are affected by this fact because the supply in the economy increases, and more people manage them correspondingly in the process of buying more drugs. This has negative effect in the global scale because the UK currency might lose its value due to which the export goods will earn low incomes.

Another tool used by the government is the fiscal policy. This is concerned with the changes in levels of the government spending, borrowing as well as the levels and types of taxes levied by the government. If the amount of money in supply within the economy increases, the government can use this tool to regulate the effect of the increased money supply. Regulation is provided by raisin the types and amount of taxes levied as well as reducing government expenditure and increasing government borrowing (Woodford 2003, p. 61). This serves to reduce the amount of money in supply.



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