IMPLEMENTATION OF ECONOMIC ENVIRONMENT ON BUSINESS - 15 Minutes Seminar Notes

IMPLEMENTATION OF ECONOMIC ENVIRONMENT ON  BUSINESS - 15 Minutes Seminar Notes

• The Economic Environment consists of external factors in a business market and the broader economy that can influence a business. You can divide the economic environment into the microeconomic environment, which affects business decision making - such as individual actions of firms and consumers - and the macroeconomic environment, which affects an entire economy and all of its participants. Many economic factors act as external constraints on your business, which means that you have little, if any, control over them.
  
• The Economy includes all activities in a country concerned with the manufacturing, distribution and the use of goods and services. The economic climate has a big impact on businesses. The level of consumer spending affects prices, investment decisions and the number of workers that businesses employ.
  

The Economic Environment that affects business are :

INFLATION:

• Inflation is an important economic indicator of an economy. Inflation refers to an increase in prices without a corresponding increase in wages, resulting in lower purchasing power of consumers. An economy should try to achieve low rate of inflation. The best way to achieve a low rate of inflation is to ensure that products and services are efficiently.When cost of production of products and services are low, they will be sold atlower prices and hence inflation will be low. An artificial way to reduce inflation is by restricting supply of money in the economy by raising the interest rates at which consumers and businesses can borrow money.
  

RECISSION

• Recession is a period of economic activity when income, production and employment tend to fall. Demand for products and services are reduced. Specific activities cause recession. 
• The slowdown in the high-tech sector, rising fuel prices, excessive consumer credit and terror attacks resulted in recession. Companies should improve existing products and introduce new ones. 
• The idea is to reduce production hours, waste and the cost of materials so that companies can offer products at lower prices. Recession increases the demand for products and services that offer good value at lower prices. 
• Business buyers buy products that are economical and efficient, offer value, help them to streamline practices and procedures, and improve their services to their customers. 
• The idea should be to prompt consumers and business customers to buy more. The most potent way to end a recession cycle is to make it attractive for customers to buy more.
  

INTEREST RATE:

• If interest rate in an economy is high, businesses will borrow capital at a higher rate and they will set up new businesses only when they are convinced that they can earn at a rate higher than the interest rate they are paying on the capital.Therefore if the interest rates are high, new businesses will not come. Even among existing businesses, operating costs would go up as their working capital requirements will attract higher interest rates. Therefore, companies will be able to produce products and services at higher costs and will perforce sell them at higher prices.
  
• Therefore, there will be inflationary tendencies if interest rates are higher for long periods. Further, consumers will have strong tendencies to save because of the prospect of earning higher interest rates from their deposits. High interest rates have detrimental effects on the economy.
  

DEMAND AND SUPPLY

• There are two great economic factors affecting business models work – demand and supply. Demand is how willing and able a consumer is to purchasing what a business offers and supply is how able the business is to make available what the consumer needs. For example, when a mobile phone infused with the latest technology is introduced to the market, it fetches a higher price due to the high demand in markets, and the prices remain high if the demand is more than the supply.
  

DEFLATION

• Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.
• Deflation causes the nominal costs of capital, labor, goods, and services to fall, though their relative prices may be unchanged. Deflation has been a popular concern among economists for decades. 
• On its face, deflation benefits consumers because they can purchase more goods and services with the same nominal income over time.
  

Presented By,

Nirupamma

Banking Student 

Magme School Of Banking