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  1. 1. Constraints on business Strategies: 1. External economic influencesIntroductionConstraint on business activity is a factor that limits the decisions that thebusiness can make. There were lots of business constraints come from thenature and state (who gives law to economy which the business operates). Someof constraints examples are: 1. Prevented from importing essential machines because country has insufficient money to pay. 2. Plans to expand small tourist guest house into a luxury hotel are cancelled because large rise in unemployment rate 3. Double the rate of tax that the government gave.We can see that the business decisions were greatly influenced by lots of factors.Factors like country’s economy itself can influence the country growth, rate ofprice and also unemployment rate.Economic Objectives of GovernmentsAll governments set targets for the whole economy in a country, sometimes thisreferred to macro-economic. This includes: - Annual percentage of GDP increase in a coun2try - Target rate of price inflation - Lower unemployment rate - Stability in the rate of exchangeThe government may find conflict from one objective with another. This willmake the government taking the negative impacts from other objectives whilegaining the advantages from other objectives.Economic Growth-Definition and why it is DesirableEconomic growth in the economy occurs when GDP of a country has increased.Every company is striving to achieve economic growth. Economic growth need tobe measured annually, and need to be precise. For example: GDP has increased
  2. 2. annually in both Malaysia and Ireland by 7% since 1990. Why does it consideredso desirable by countries and governments? These are several reasons: 1. Higher GDP increases the quantity of goods and services available 2. Higher level of output will lead to increased employment, which will increase consumer incomes 3. Poverty can be decreased 4. Higher GDP makes government gain more income from taxes and decreased burden for social expenditure.Factors that lead to economic growth: 1. Increases in output resulting from productivity, improved training for staff. 2. Increase in demand for the products.Business CycleThere are several problems when economic growth results from demandincrease, this will result inflation, especially when the economy is nearing fullcapacity. When demand continues to rise, then serious problems for theeconomy can result in government action to reduce the demand. As growthcontinues, and the economy approaches full capacity, number of other problemsmay occurs such as: - Demand-pull inflation will accelerate, reducing industrial competition - Labour shortage - Country will spend more foreign currency than the earning of the foreign currency.RecessionA period of time when the GDP falls. Government tax revenue will also fall as lessincome tax will be received. But recession isn’t all bad idea, it’s also theopportunities where well-manage company can take advantage such as: - Price of product can be relatively cheap - Demand for inferior goods will increase - Make one business became learner and fitter, and able to take advantage even though they need to starts again.
  3. 3. Type of producer Period of Economic Periods of recession GrowthLuxury goods (cars) 1. Increase range of 1. Not reducing goods prices 2. Raise price 2. Offer promotions 3. Promote 3. Widen product exclusivity range, with lower priceNormal goods 1. Better product 1. Lower prices 2. Promotions 3. Do nothing (sales doesn’t affect)Low Goods 1. Move product 1. Free consumer became up- tests market 2. Promote good 2. Higher quality value with low 3. Increase prices pricesInflation: Increase in the average price of goods and services. (One dollar canbuy one clothes last year but can’t buy one cloth this year)High price of products can be triggered because business are forced to increasebecause their cost are rising, or businesses take advantages of high consumerdemand. Can also be considered as: 1. Cost-push causes of inflation: Raise selling prices to maintain profit due to higher costs of production. Higher costs of production can cause: lower exchange rate, world demand for materials, higher wage demanded from workers. 2. Demand-pull causes of inflation: Consumer demand is rising, company will realize that existing stocks can be sold at higher prices, to increase more profit.Impact of Inflation: 1. Price increase 2. Price of fixed assets (land, buildings) will eventually increase
  4. 4. 3. Increased price of stocks 4. Staff/employee will concerned with their incomes, higher wage demanded. 5. Uncertainty about future (Will prices continue to rise? Will the government be forced to take strong action?) 6. When inflation is higher in one country than others, competitions in overseas markets will decreasedDecisions from businesses during inflation: 1. Cut profit margins, lower price 2. Reduce labor costs 3. Reduce borrowing/loansDeflation: Fall in the average price of goods and services. (One dollar can buy 2cloth this year, but can’t last year). There are some benefits because of thedeflation.Benefits: - Lower prices - Increase demand (can be decreased as well)Disadvantages: - Decrease demand, because customers will hope that the price will fall further - Discourage borrowing to invest. - Output will decline because lots of products is held by company.Unemployment-Definition and causesUnemployment exist when members of population are willing and able to workbut are unable to find work field. There are three causes or categories ofunemployment:Cyclical unemployment: Occurs when economy is in recession. Need fewerworkers because they need only few goods to be produced. Government policy: 1. Control the economy so that it isn’t in recession 2. Keep inflation low
  5. 5. 3. Maintain competitive rate of exchangeStructural Unemployment: Unemployment decreases because there werestructural changes in the economy, which will decrease the demand for labour,(Changes in consumer tastes, Changes in the structure of industry,Improvements in technology). Government policy: 1. Provide education and training programmesFrictional Unemployment: Unemployment people who is finding for jobs.Cost of unemploymentTo Country: 1. Costs of supporting unemployed workers and their families will be substantial and paid from the taxation 2. Social problems (crimes)To businesses: 1. Reduces demand for goods by reducing the income of unemployed. 2. Tax charge will fall on businessesTo the unemployed and their families 1. Loss of income and lower living standards 2. Loss self-respect 3. Longer period of unemployment, the more difficult. Because skills become increasingly out of dateBalance of paymentsWhen a country has no balance on their payments, then serious economicproblem will occur such as: 1. Fall in the value of currency’s exchange rate 2. Decline country’s reserves foreign currency 3. Foreign investors unwilling to put moneyMuch worse if: 1. Exchange rate problems make importing and exporting too risky 2. Government takes action by limiting foreign exchange transactions and put substantial barrier.
  6. 6. Exchange Rates: Price of one currency with other, determined by the forces ofsupply and demand.Appreciations:Demand for a currency exceeds supply its value will raise. Those who gainappreciations are: 1. Importers of foreign raw materials and components 2. Importer who are able to import product cheaper.Lower import prices will reduce the rate of inflation. Those who lose fromappreciation are: 1. Exporters of goods and services to foreign market 2. Businesses that sell goods and services to domestic market and have foreign competitorsDepreciationOne unit of it buys fewer units of other currencies. Those who gain fromdepreciation are: 1. Home-based exporters. Who can reduce their prices in overseas markets 2. Businesses that sell in the domestic market will gain less price competition.Those who lose from depreciation are: 1. Manufactures who depend heavily on imported materials, component, or energy 2. Retailers that purchase foreign suppliesMacro-economic Policies- IntroductionPolicies designed to impact on the whole economy. Operate by influencing thelevel of total demand.Fiscal PolicyConcerned with decisions about government expenditure, tax rates andgovernment loans.
  7. 7. Monetary PolicyConcerned with decisions about the rate of interest and supply of money in theeconomy.Exchange rate PolicyGovernment think, should they allow the exchange rate to “float” or to “fix”. Thisneed to be concerned because exchange rate fluctuations can have serious effectson domestic industry.More Economic ConstraintsBusiness is also concerned on the factors of market. The most significant factormarket are labour market, changes in the way the labour market operates willhave a substantial influence on many business decisions.Labour MarketIt’s similar to the supply and demand of product, even labour got their ownsupply and demand which will determine the price of labour. Some people mightthink why their wage rate are different with other labour, the answer is becauseof the conditions of supply and demand that exist.Factors that determine the demand for Labour 1. Demand for the finished product 2. Price and efficiency of labour-saving alternatives, such as machinery 3. Readiness when producers increase their capital intensityFactors that determine the supply of labour 1. Size of the population 2. Proportion of working age 3. Rate of wage 4. Availability of suitable labour
  8. 8. Skill shortages and surplusesWorkers who have skills are the workers that will be demanded. If they don’thave the skills, they will be unemployed or they will performing jobs that do notuse the skills they possesses.Skills shortage rise when the demand from industry for particular type of workeris not matched by the supply of suitably qualified staffSolutions: 1. Offer higher wages to attract more skilled staff to the firm (quick, new staff bring new ideas and experiences) 2. Train own staff (No induction raining, no higher wages)Government also intervene in the labour market usually to prevent exploitationof workers by unmoral employers. Some government intervention are: 1. Minimum wage legislation 2. Working time directiveMarket FailureSituations when markets fail to achieve the most efficient allocation of resourcesand there is under or over production of certain goods or services.Market failure 1: external costsAre the costs that are not paid for by the producer but by the rest of society(pollution, waste, noise pollutions)Market failure 2: labour trainingFirms need to pay for the training of the staff, the company will gain moreprofessional staff which have been “packed” with lots of experience from thetrainingMarket failure 3: monopoly producersWhen monopoly exist.