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