1. Constraints on business Strategies:
1. External economic influences
Introduction
Constraint on business activity is a factor that limits the decisions that the
business can make. There were lots of business constraints come from the
nature and state (who gives law to economy which the business operates). Some
of 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 of
price and also unemployment rate.
Economic Objectives of Governments
All governments set targets for the whole economy in a country, sometimes this
referred 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 exchange
The government may find conflict from one objective with another. This will
make the government taking the negative impacts from other objectives while
gaining the advantages from other objectives.
Economic Growth-Definition and why it is Desirable
Economic growth in the economy occurs when GDP of a country has increased.
Every company is striving to achieve economic growth. Economic growth need to
be measured annually, and need to be precise. For example: GDP has increased

2. annually in both Malaysia and Ireland by 7% since 1990. Why does it considered
so 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 Cycle
There are several problems when economic growth results from demand
increase, this will result inflation, especially when the economy is nearing full
capacity. When demand continues to rise, then serious problems for the
economy can result in government action to reduce the demand. As growth
continues, and the economy approaches full capacity, number of other problems
may 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.
Recession
A period of time when the GDP falls. Government tax revenue will also fall as less
income tax will be received. But recession isn’t all bad idea, it’s also the
opportunities 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. Type of producer Period of Economic Periods of recession
Growth
Luxury 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
price
Normal 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 prices
Inflation: Increase in the average price of goods and services. (One dollar can
buy one clothes last year but can’t buy one cloth this year)
High price of products can be triggered because business are forced to increase
because their cost are rising, or businesses take advantages of high consumer
demand. 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. 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 decreased
Decisions from businesses during inflation:
1. Cut profit margins, lower price
2. Reduce labor costs
3. Reduce borrowing/loans
Deflation: Fall in the average price of goods and services. (One dollar can buy 2
cloth this year, but can’t last year). There are some benefits because of the
deflation.
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 causes
Unemployment exist when members of population are willing and able to work
but are unable to find work field. There are three causes or categories of
unemployment:
Cyclical unemployment: Occurs when economy is in recession. Need fewer
workers 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. 3. Maintain competitive rate of exchange
Structural Unemployment: Unemployment decreases because there were
structural 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 programmes
Frictional Unemployment: Unemployment people who is finding for jobs.
Cost of unemployment
To 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 businesses
To 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 date
Balance of payments
When a country has no balance on their payments, then serious economic
problem 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 money
Much 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. Exchange Rates: Price of one currency with other, determined by the forces of
supply and demand.
Appreciations:
Demand for a currency exceeds supply its value will raise. Those who gain
appreciations 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 from
appreciation are:
1. Exporters of goods and services to foreign market
2. Businesses that sell goods and services to domestic market and have
foreign competitors
Depreciation
One unit of it buys fewer units of other currencies. Those who gain from
depreciation 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 supplies
Macro-economic Policies- Introduction
Policies designed to impact on the whole economy. Operate by influencing the
level of total demand.
Fiscal Policy
Concerned with decisions about government expenditure, tax rates and
government loans.

7. Monetary Policy
Concerned with decisions about the rate of interest and supply of money in the
economy.
Exchange rate Policy
Government think, should they allow the exchange rate to “float” or to “fix”. This
need to be concerned because exchange rate fluctuations can have serious effects
on domestic industry.
More Economic Constraints
Business is also concerned on the factors of market. The most significant factor
market are labour market, changes in the way the labour market operates will
have a substantial influence on many business decisions.
Labour Market
It’s similar to the supply and demand of product, even labour got their own
supply and demand which will determine the price of labour. Some people might
think why their wage rate are different with other labour, the answer is because
of 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 intensity
Factors 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. Skill shortages and surpluses
Workers who have skills are the workers that will be demanded. If they don’t
have the skills, they will be unemployed or they will performing jobs that do not
use the skills they possesses.
Skills shortage rise when the demand from industry for particular type of worker
is not matched by the supply of suitably qualified staff
Solutions:
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 exploitation
of workers by unmoral employers. Some government intervention are:
1. Minimum wage legislation
2. Working time directive
Market Failure
Situations when markets fail to achieve the most efficient allocation of resources
and there is under or over production of certain goods or services.
Market failure 1: external costs
Are the costs that are not paid for by the producer but by the rest of society
(pollution, waste, noise pollutions)
Market failure 2: labour training
Firms need to pay for the training of the staff, the company will gain more
professional staff which have been “packed” with lots of experience from the
training
Market failure 3: monopoly producers
When monopoly exist.