6. External Influences on Business issues Flashcards
stages of the business cycle
Growth– when GDP is rising, unemployment is falling and there are higher living standards in the country. Businesses will look to expand and produce more and will earn high profits.
Boom– when GDP is at its highest and there is too much spending, causing inflation to rapidly rise. Business costs will rise and firms will become worried about how they are going to stay profitable in the near future.
Recession– when GDP starts to fall due of high prices, as demand and spending falls. Firms will cut back production to stay profitable and unemployment may rise as a result.
Slump– when GDP is so low that prices start to fall (deflation) and unemployment will reach very high levels. Many businesses will close down as they cannot survive the very low demand level. The economy will suffer.
Gross Domestic Product (GDP)
the total value of output of goods
and services in a country in one year.
recession
when there is a period of falling GDP.
Impact on businesses of changes in employment levels, inflation and Gross Domestic Product (GDP)
- Changes in employment: Affect the ability of a business to recruit new employees and incomes of customers. If unemployment increases, it is easier to recruit employees as more people to choose from. Income levels have fallen thus sales of business decrease. Business that sell cheaper products can increase sales
- Rising inflation results in business costs increasing. Prices of products increase, fall of sales of the business. rising prices of essential products mean customers have less income available to purchase non-essential products
- Increasing GDP means the economy is growing, business benefit from increase sales as less unemployment and people have more income to buy products, However difficult to recruit new employees if unemployment starts to fall.
Government economic objectives
- Low inflation
- Low unemployment
- Economic growth
- Balance of payments between imports and exports
Low Inflation
Inflation: the increase in the average price level of goods and services over time.
The problems faced with high inflation:
-Workers wages will not buy as many goods as before, Peoples Real incomes will fall. Real income:the value of income, and it falls when prices rise faster than money income.
-Prices of goods produced in the country will be higher that other countries, Thus people will buy foreign food instead, Jobs in the country will be lost
-Businesses unlikely to expand and create more jobs in near future, living standards likely to fall.
Therefore, by having low inflation it encourages businesses to expand and make it easier for country to sell its goods and services abroad
Low unemployment
-Unemployed people dont produce any goods or services. Total level of output will be lower than it could be
-Government pays unemployment benefit to those without jobs, high unemployment will cost the government a lot of money, which cannot be spent on other things such as schools or hospitals.
Therefore, low unemployment helps increase output of country and improve workers living standards.
Economic growth
Economic growth means living standards of the population is likely to increase. When GDP falls it causes:
- As output falls, fewer workers needed thus unemployment occurs
- Average living standards of people fall, as number of goods and services they can afford to buy in one year will decline.
- Business owners will not expand their business as people will have less money to spend on products they make.
Balance of payments
Records the difference between a country’s exports and imports
Exports
Are goods and services sold from one country to another
Imports
Goods and services bought in by one country from other countries
Exchange rate
The price of one currency in terms of another, ex: 1 Pound : $1.5
Exchange rate Depreciation
The fall in the value of a currency compared with other countries.
Fiscal policy
Any change by the government in tax rates or public sector spending.
Increasing government spending and reducing taxes will encourage more production and increase employment, driving up GDP growth.
Monetary policy
Change in interest rates by the government of central bank.
Increasing interest rates will discourage investments and consumption, causing employment and GDP to fall
Supply-side policies
Both the fiscal and monetary policies directly affect demand, but the policies that influence supply are very different. It can include:
- Privatisation: selling government organizations to private individuals- will increase efficiency and productivity that increase supply as well encourage competitors to enter and further increase supply.
- Improve training and education: governments can spend more on schools, colleges and training centres so that people in the economy can become better skilled and knowledgeable, helping increasing productivity.
- Increased competition: by acting against monopolies (firms that restrict competitors to enter that industry/having full dominance in the market- and reducing government rules and regulations (often termed ‘deregulation’), the competitive environment can be improved and thus become more productive.
Social responsibility is when a business decision benefits stakeholders other than shareholders i.e. workers, community, suppliers, banks etc.
When a business decision benefits stakeholders other than shareholders i.e. workers, community, suppliers, banks etc.
Very important when coming to environmental issues. Businesses can pollute the air by releasing smoke and poisonous gases, pollute water bodies around it by releasing waste and chemicals into them, and damage the natural beauty of a place and so on.
WHY BUSINESSES WANT TO BE ENVIRONMENT- FRIENDLY
- Sense of social responsibility, as their activities are contributing to global warming and pollution
- Using up scarce non-renewable resources (rainforest wood and coal) will raise their prices in the future, so businesses won’t use them now
- Consumers are becoming socially-aware and are willing to buy only environment friendly products.
- Governments, environmental organisations, even the community could take action against the business if they do serious damage to the environment
WHY BUSINESSES DO NOT WANT TO BE ENVIRONMENT-FRIENDLY
- It is expensive to reduce and recycle waste for the business. Expensive machinery and skilled labour will be required by the business – reducing profits.
- Firms will have to increase prices to compensate for the expensive environment-friendly methods used in production- higher prices mean lower demand.
- High prices can make firms less competitive in the market and they could lose sales
- Businesses claim that it is the government’s duty to clean up pollution
Private Costs
- Costs paid for by the business for an activity.
- Examples: costs of building the factory, hiring extra employees, purchasing new machinery, running a production unit etc.
Private Benefits
- Gains for the business resulting from an activity.
- Example: the extra money made from the sale of the produced goods etc.
External Costs
- Costs paid for by the rest of the society (other than the business) as a result of the business’ activity.
- Examples: machinery noise, air pollution that leads to health problems among near residents, loss of land (it could have been a farm land before) etc.
External Benefits
- Gains enjoyed by the rest of the society as a result of a business activity.
- Example: new jobs created for residents, government will get more tax from the business, other firms may move into the area to support the firm-helping develop the region, new roads might be built that can be enjoyed by residents etc.
Social Costs
Social costs = Private Costs + External Costs
