ECONOMICS PROFIT MAXIMIZATION 2
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Introduction
The company chosen is Amazon. It is public-American electronic commerce which borrowed its name from the Amazon River. It is known for selling books online. Among other products include toys, kitchen wares, electronics, kindle, clothes, sports equipment, audio files and music videos. It was introduced by Jeff Bezos in the year 1994.
Amazon’s market structure
Amazon exhibits an oligopoly structure. Oligopoly has few firms who sell identical products (Mankiw, 2014). A seller is significant to the market. Hence, the decisions of the other firms are affected when behavior is changed by one firm. eBay is Amazon’s key competitor and sells similar items such as electronics and clothes. Other indirect competitors are Alibaba, Barnes and Noble, Microsoft, Oracle, Apple, Walmart, Google, and IBM. Amazon boasts of annual increase in profit. This is attributed to the skyrocketing market share year over year. Its share is now 47% and is expected to increase to 50% by 2021. It was 45% in 2019. As a result, it is the leader retailer of electronic commerce defeating companies such as eBay, Apple, and Walmart by far. It is difficult to enter a market with an oligopoly structure. The costs of establishing the firm are high. The existing firms also have economies of scale, challenging new entrants to compete with it. The existing firms control a large proportion of the factors of production. Such firms also have brand loyalty, patented technology, making it to attract and retain the consumers. Permits and also licenses are needed to join the market.
Trends
Current business cycle stage
The United States is in Expansion stage. Its real GDP reduced in 2019 to 2.3% from 2.9% in 2018. The 2019 rate was assumed as the GDP estimate. However, there was an increase from the years 2016 to 2018. The economy is also expanding because of the drastic reduction of unemployment rate annually.
Real gross domestic product (GDP)
Real GDP is a measure adjusted for inflation which portrays all the products and services value generated by an economy in a certain year (Ryu, 2015). The U.S. real GDP from 2017 to 2019 were $18.108, 18.638, and 19.073 and expressed in trillions, a rise in GDP per annum. This implies a growing economy. The growth is due to Tax Cuts and Jobs Cuts establishment and the weakening dollar. Deficit spending and trade war also affected GDP.
Inflation
Inflation reduced from 2.1% in 2017 to 1.9% in 2018. It however, increased to 2.3% in 2019 because the demand was more than supply.
Unemployment rate
Unemployment is the labor force percentage which is not employed currently but could be (Mankiw, 2014). The unemployment rate in the last three years is 4.1%, 3.9%, and 3.5% respectively. This indicates an annual decline in rate, a sign that jobs is in plenty to absorb the job searchers.
Federal funds rate
The federal rate is the interest rate charged banks when money is lend to them by a particular bank from their reserve balances (Mankiw, 2014). The federal rate of the U.S. was 1.3% in 2017, 2.27% in 2018, and 1.75% in 2019 which is also the current rate. This rate was stagnant at 1.5-1.75% and based on the fact that the current monetary policy is suitable to support sustained economic activity expansion, strong conditions of the labor market, and inflation shifting to the 2% goal. Funds rate is among the most significant interest rates in the U.S. economy. It affects the finance and monetary conditions which, in turn, have an impact on the wider economy inclusive of inflation, growth, and employment (Reicher & Utlaut, 2013). The rate further has an indirect impact on the short-term interest rates ranging from credit cards, auto, to home loans, because the lenders fix their rates focused on prime lending rate.
Current rate for borrowing the funds: “Prime rate”
The prime rate refers to the rate worthy borrowers are charged by banks and is triggered by the federal rate (Mankiw, 2014). The prime rate is 5.5% at the moment.
Trends in demand
Amazon’s products are of high demand. This has placed Amazon as the leading online retailer in the United States. It sales for the 3rd and 4th quarters of 2019 was $69.98 billion and $87.44 billion respectively, showing an increase (Clement, 2020). Its annual net sales in 2019 were $280.5 billion. It was $232.89 in 2018 and $177.87 in 2017. Most of the revenues emanate from electronics sales including other products, sequenced by third-party seller revenues, AWS activities and subscription services. It is regarded as one of the most valuable brands internationally because of its global reach and scope. Via Amazon, the consumers can purchase the goods at a discounted price from large and small companies and other users. its website hosts both used and new goods. Its domination has been through good variety sold at prices which are lower compared to the physical stores. Its brand worth was around $315 billion defeating Walmart, Alibaba, IKEA, Ebay. A key hit in the market was Kindle, the e-reader. It also offered Smartphone, multimedia sticks, and tablets recently to improve consumption of digital media through these devices. This strategy is linked to its digital ecosystem which has audio content and video as value added services for the prime subscribers. Because of its location its services are more common in The North America. Consequently, huge revenue came from Canada and the United states.
Amazon faces high substitute threats because the products sold are not unique. For example, clothes and music are found on other online platforms. The demand for these products is elastic. Hence, due to the presence of substitute, a rise in the price of a commodity solved by Amazon influences the customer to switch to a substitute hence, the demand for Amazon’s will decline. The price elasticity of demand measures the change in quantity demanded to the change in its price. The fixed and variable costs affects the firm’s output level. As costs such as electricity are fixed, it does not matter how much the firm produces as this cost is constant. Variable costs such as labor move in tandem with output. As labor increases so does output.
Conclusion
The market structure of Amazon is that of an oligopoly. As the products are identical to other sellers, Amazon must fix its prices in a manner that they are not extremely high. In addition, the threat of substitutes is high, meaning that the prices are elastic. Amazon thus, offers its products at a discount, enabling it to become the leading electronic market retailer globally. This reveals that Amazon embraces cost leadership. The U.S. is on the expansion stage. Its real GDP will continue rising while the unemployment rate will keep on falling. As the workers are any business lifeblood, Amazon must offer good incentives to motivate which will, in turn, help to attract and retain. The inflation rate is also small thus; Amazon should not expect to extremely increase its product prices in the future. The government also cut back the taxes and the prime rate is also low. The company can borrow funds to invest in the business. The customers’ disposable income is high which will push forward the revenues and sales.
References
Clement, J. (2020). Net revenue of Amazon from 1 st quarter 2007 to 4 th quarter 2019. https://www.statista.com/statistics/273963/quarterly-revenue-of-amazoncom/
Clement, J. (2020). Annual net sales of Amazon. https://www.statista.com/statistics/266282/annual-net-revenue-of-amazoncom/
Mankiw, N. (2014). Principles of microeconomics, (seventh edition). Australia, South-Western Cengage Learning.
Ryu, D. (2015). Fiscal spending and economic growth. Journal of Economic Development, 40(4), 91-105.
Reicher, C., & Utlaut, J. (2013). Monetary policy shocks and real commodity prices. Journal of Macroeconomics, 13(1), 715-749.