The Economic Environment

The Economic Environment

Economic

Importance of stability; impact on business of changes in the economic environment (growth, recession, ripple effect); levels of inflation; availability and cost of credit; labour; changes in government policy (legal, fiscal, monetary).

 

Demand

Influenced by affordability; competition; availability of substitutes; needs and aspirations of consumers

 

Supply

Influenced by availability of raw materials and labour; logistics; ability to produce profitably; competition for raw materials; government support.

 

The economic environment is made up of millions of individual decision makes who buys and sells goods (public, businesses & suppliers), borrowing and lending money (banks), raising taxes (government) and changing interest rates (Monetary Policy Committee.)

 

The Importance of stability:

Stability exists when business people can make forecasts for the short and medium term about likely demand. Like when you supply goods to someone on credit and they pay you back. You can also borrow money and you expect the repayments to be the agreed amount.

 

Impact of changes in the economic environment:

 

Growth

This is the opposite of an economic recession. This occurs when goods are being produced and consumed, and incomes are rising

 

Recession

This occurs when people involved in a business become more cautious, customers cut back on spending (save more) & fewer goods are produced.

 

Ripple Effect

§  Customers spend less

§  Businesses cut back on stock

§  Producers cut back on production

§  Producers cut back costs (workers)

§  Unemployment + less income = cut

§  Back more on consumer spending

 

Levels of inflation:

Inflation means there is an increase in the cost of living. Furthermore, consumer price index measures the change in the cost of a fixed basket of products and services, including housing, electricity, food and transport.

 

Availability and cost of credit:

Interest rates are set by the Monetary Policy Committee for the Bank of England. When interest rates raise it costs more to borrow money.

 

Labour:

For most businesses, the wage bill makes up for 70% of all costs. During a recession, it is much easier for employers to obtain labour with the required skills. During a growth period, a labour shortage can occur and wages are rising.

 

Changes in Government Policy:

This manages stability and growth, low inflation, available credit, low interest rates and also high access to suitable supplies of labour. Monetary Policy decides on how much money is available and the Fiscal Policy reduces/increases taxes.

 

Demand and Supply:

Demand

This is the quantity of goods or services that consumers will buy at a particular price.

 

Supply

This is the quantity of goods that a supplier is willing to provide at different prices.

 

Factors that influence demand:

§  Affordability

§  Competitions

§  Availability of substitutes

§  Level of income

§  Needs and aspirations of customers

 

Factors that influence supply:

§  Availability of raw materials

§  Logistics

§  Competition for raw materials

§  Government support

 

Elasticity of demand:

This is a measure of how much the quantity demanded of a product responds to change in price.

 

Elastic:

When demand is very responsive to price changes

 

Inelastic:

When demand is unresponsive to price changes

 

Price Sensitivity:

This tells a business how sensitive demand is to changes in price

 

Influence of branding on price sensitivity:

The aim of branding a product is to create a relatively inelastic demand for the product

 

Global interaction:

§  Supply chain – made up of a series of links starting with the raw materials through to the finished product

 

§  Ownership of business – the overseas business that is part or fully owned is called a subsidiary

 

§  Reducing ability of government to regulate global business – foreign multinational companies bring jobs, investment & pay business taxes but they are hard to regulate as the change production and location quickly

 

Procurement (Buying):

Recession

§  Cut back on buying stock

§  Scaling back operations which could lead to unemployment

§  Finding cheaper methods

§  Reusing old machinery

§  Stocking cheaper brands

 

Growth

§  Buying more stock

§  Expanding – buying more shops

§  Feeling confident to experiment with more methods

§  Explores more transport links

§  More employment

§  Buying more machinery

§  Stocking more products/more expensive products

 

Transportation of Goods:

Recession

§  Finding cheaper ways to transport

§  Lower wages for those in transport delivery

§  Reduce staff

§  Reduce purchasing of goods which means less delivery is needed

 

Growth

§  Investing in more transport links due to needing to have more stock

§  Higher wages

§  Can transport further

§  Can afford further afield

§  Larger carbon footprint

 

Promotion:

Recession

§  Lack of cheaper/alternative methods

§  Reduce advertising

§  Reduce wages

§  Increase unemployment

 

 

Growth

§  More confidence – enables them to explore with more methods of media to communicate with their buyers – increases demand

§  More staff

§  Can afford to advertise more

§  Buying more advertisement spaces

 

Recruitment:

Recession

§  Reduce staff number

§  Cut back on employing

§  Only employ highly skilled people

 

Growth

§  Employ more staff

§  This will increase profit

§  Better wages