economic conditions & markets 3.10
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Analysing economic and market conditions
Unit:1 Understanding the Business Environment
Lesson Objectives
• LO1 - Identify the economic impacts on a business.
• LO2 - Discuss how changes in the competitive structure of a market can affect businesses.
• LO3 - Highlight how unpredictable external influences on the market can affect an organisation.
Recap on Business Plans
The 3 main areas you need tolook into are:
1. Economic Indicators.
2. Changes in the competitive structure.
3. Unpredictable external influences.
Economic Indicators:
• Inflation
• Unemployment
• Exchange Rates
• Interest Rates
• Economic Growth
InflationDefined: a general rise in the price level overa period of time (averages around 2%). Due To recent petrol increases this is now 2.1% Measured by:
– RPI – Retail Price Index– RPIX = RPI – mortgage
interest payments– RPIY = RPIX – indirect – taxes and local authority tax– HICP – Harmonised Index of Consumer Prices
(From November 2003)
Unemployment
Defined: the number of people in the workforcein a country who are looking for a job, but cannotfind one.
• Policies designed to help those who want to work get work:
– Strong economy.– National Minimum Wage and changes to
welfare benefits.– ‘New Deal’ and ‘Employment Zones’.– Investing in education and training.– Investing in diversity.
Exchange Rates
Defined: The rate at which one currency can be exchanged for another.
e.g. £1 = €1.39, £1 = $2.04
Influences the perceived prices of imports and exports and therefore costs and competitiveness.
Exchange Rates - effects on business
Appreciation – value of £ against other currencies rises, e.g. £1 = €1.39 to £1 = €1.49.
Exports harder to sell abroad (foreign traders have to give up more of their currency to get same amount of £ - export prices appear to rise.
Imports appear to be cheaper – buyer in UK gets more foreign currency for every £.
Exchange Rates - effects on business
Depreciation – value of £ against other currencies falls, e.g. £1 = $2.04 to £1 = $1.96.
Exporters benefit – foreign traders get more £ for their currency – export prices appear to fall.
Importers – have to give up more £ to get same amount of foreign currency – appears import prices have risen.
Precise effect of both depends on Price Elasticity of demand for imports and exports.
• Monetary Policy:• Changes in the rate of
interest to help control the level of expenditure in the economy and therefore the level of inflation
• In hands of the Monetary Policy Committee – (MPC) of the Bank of England
• Significant effects on business activity:
Interest Rates
• Rising Interest Rates:– Likely to depress consumer spending.– Increases the cost of borrowing – impacts on
investment decisions.– Increases existing loan costs – the more
highly geared the greater the impact.– Affects exchange rate – could impact on
sales abroad (exports) or cost of imported resources.
• Falling rates have the opposite effect.
Interest Rates – affects on business
Measured by Gross Domestic Product (GDP) –the value of output of goods and services in theeconomy over a period of a year:
– Measured by adding up total incomes (Y) or total expenditure (E) or total output of industry
– Appropriate growth levels in UK too high - economy overheating, too low - economy stagnating, resources unemployed
– Actual growth of 2–2.5% seen as being sustainable
Economic Growth
• Low growth – business sales low, profit margins tight, excess capacity, orders reduced, excess stock, redundancies.
• High growth – business sales rising quickly, profits rising, skill shortages, inflationary pressure on prices, capacity squeezed, stocks running down.
Economic Growth – effects on business
Output
Time
Potential Growth
Actual Growth
Excess capacity – Recession
Slowdown
Growth
Boom
Economic Growth – The Business Cycle
• firms operate in markets, these are structured differently
• we can look at three different types of market structure and find examples of each:– monopoly– duopoly– oligopoly
Changes in the Competitive Structure:
Monopoly
• a market structure where there is a single seller of a unique product
• no competition, as the firm = the market
• potential for abuse of monopoly position• the market may be a natural monopoly
– having competition amongst firms in this kind of market would be costly
Example of Monopoly
• there may be significant savings to be had from having one company running the market
• Network Rail are responsible for the maintenance and upgrading of the UK rail network
• is it safer to have one company in charge?
Duopoly
• two large producers or sellers• exactly two equally dominant firms
seldom found• tend to compete or collude
Example of Duopoly
• global aircraft market• two dominant firms are Airbus and
Boeing• how do they compete with each
other?
Oligopoly
• markets dominated by a small number of large firms
• the most common types of market• large firms are involved in selling
either identical or very similar products
• significant barriers to entry into the industry
Example of Oligopoly
• the personal and domestic care product markets
• dominated by:– Unilever– Procter and Gamble– Colgate-Palmolive
Unpredictable External Influences:
• This can include events such as ‘September 11th’ or the London bombings, which can impact on both individual organisations and the economy as a whole.
Activity
Read 51 – 62 in IGCSE Business Studies answering questions on Page 56 and 62. And by read, I mean READ!!!! Skip this at your own peril