Economic conditions & markets 3.10


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Economic conditions & markets 3.10

  1. 1. Unit:1 Understanding the Business Environment Analysing economic and market conditions
  2. 2. 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.
  3. 3. Recap on Business Plans
  4. 4. The 3 main areas you need to look into are: 1. Economic Indicators. 2. Changes in the competitive structure. 3. Unpredictable external influences.
  5. 5. Economic Indicators: • Inflation • Unemployment • Exchange Rates • Interest Rates • Economic Growth
  6. 6. Inflation Defined: a general rise in the price level over a 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)
  7. 7. Unemployment Defined: the number of people in the workforce in a country who are looking for a job, but cannot find 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.
  8. 8. 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.
  9. 9. 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 £.
  10. 10. 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.
  11. 11. Interest Rates • 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:
  12. 12. Interest Rates – affects on business • 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.
  13. 13. Economic Growth Measured by Gross Domestic Product (GDP) – the value of output of goods and services in the economy 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
  14. 14. Economic Growth – effects on business • 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.
  15. 15. Economic Growth – The Business Cycle Potential Growth Output Boom Growth Actual Growth Slowdown Excess capacity – Recession Time
  16. 16. Changes in the Competitive Structure: • 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
  17. 17. 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
  18. 18. 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?
  19. 19. Duopoly • two large producers or sellers • exactly two equally dominant firms seldom found • tend to compete or collude
  20. 20. Example of Duopoly • global aircraft market • two dominant firms are Airbus and Boeing • how do they compete with each other?
  21. 21. 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
  22. 22. Example of Oligopoly • the personal and domestic care product markets • dominated by: – Unilever – Procter and Gamble – Colgate-Palmolive
  23. 23. 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.
  24. 24. 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