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Assignment Activity 1:  Understand economic principles to explain how prices are determined in an organisation’s market

AC 1.1 Evaluate the factors affecting the prices of goods or services in the market in which the organisation operates, using microeconomic principles

• Demand and Supply: If demand exceeds supply, prices go up, and vice versa, when the demand declines and/or supply increases.
• Cost of Production: The more it costs to produce, i.e. such expenses as raw materials or labour may have to pay a higher price, but if there is low cost, then prices decline.
• Market Structure: Under perfect competition, prices are determined by the forces of supply and demand, but in the case of a monopoly or oligopoly, there can be some price flexibility.
• Consumer Preferences and Income: Increased demand from changed preferences or increased income increases prices.
• Government Controls: Taxes, subsidies, and price controls from the government influence prices.
• External: Acts of God or some other changes in the global market influence prices to change.
• Competition: Increased competition lowers prices whereas lower competition raises the prices.

AC 1.2 Evaluate the impact of market conditions on the organisations financial performance

Overall, market conditions are an important determinant of the financial performance of an organisation. Some of the key determinants are as follows:

• Economic Conditions: Reckoning and inflation would entail a reduction in volume sales and an increase in cost whereas an increase in interest rate would alter both borrowing decisions as well as investment decisions.
• Supply and Demand: A change in demand or disruption in the supply chain can alter revenue as well as operational costs.
• Competition: High competition would result in losses because of price reductions and increased marketing costs.
• Government Policies: Taxation, subsidies, and rules can affect direct as well as indirect costs along with net income.
• Market Sentiment: Investor confidence, as well as consumer sentiment, affects share prices as well as product demand.
• Technology: Any technological shift cuts down the cost but also gives competitive threats if others innovate first.

AC 1.3 Evaluate the responsiveness of consumers and suppliers to price changes in the organisations market

To find out whether the consumer or supplier response is elastic toward price change:

Price Elasticity of Demand (For Consumers)

• Elastic Demand: Consumers respond very much to price changes (e.g. non-essential goods).
• Inelastic Demand Consumers do not respond much (e.g. essential goods).

Price Elasticity of Supply (For Suppliers)

• Elastic Supply: Suppliers respond very easily and promptly to price changes.
• Inelastic Supply: Suppliers cannot respond easily because of some production-related constraints.

Market Conditions

• Competitive: The higher the level of competition, the more elastic the demand.
• Substitutes: For example, the higher the availability of substitutes increases the elasticity of demand.

Time Horizon

• Short Term: Not highly responsive.
• Long Term: More responsive.

Assignment Activity 2: Understand economic principles to explain the impact of competition on an organisations market

AC 2.1 Describe the current barriers to entry and exit for the market in which the organisation operates, for new and existing suppliers

Lack of Resources:

New suppliers may not have the required resources to properly service the exit process, including closing debts, consolidating assets, or managing employee reductions.

Brand Image:

The new supplier does not have a strong brand image yet. Even so, early exit leads to reputational loss when the suppliers fail to fulfill orders or other obligations to customers.

Debt and Financial Stress:

A newcomer who relies on debt to enter the market may suffer financial stress or bankruptcy if it is driven out of business before it achieves profitability.

AC 2.2 Evaluate the implications the competitive environment has for the organisations prices and financial performance

• Companies differentiate prices according to market positioning and the price sensitivity of buyers. Since it is a competitive market, and no one wants to lose customers, cutting prices is the only way to attract buyers into the market. Premium pricing serves as a quality indicator in niche markets.
• Profit Margin and Revenue: The competition turns the course of a price war wherein profit margins get shrunk. Companies need to maintain costs within tight boundaries and at the same time manage value with competitive pricing.
• Financial Performance: Competitive pressures would affect the ROI and profitability of the organisation. Economies of scale can also enhance financial performance, whereas under-pricing or over-discounting may damage long-term profits.
• Strategic Adaptations: Organisations can innovate or differentiate to keep competitive prices while being profitable, and thus, financial planning for the long run is very much necessary to adapt to the changes in the market over time.