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Economic Factors That Effect Businesses

Demand and Supply
The demand and supply are two principal factors that affect the working of any business model. The demand is the will and ability of consumers to purchase a particular commodity, while supply is the ability of the business to provide for the demand of consumers. Suppose, a mobile phone infused with latest technology is introduced in the market, it will have a higher price because of its demand in the market. Its prices will continue to increase if the supply does not meet the demand.

For instance, in the year 2000, weather played mess with the sugar crops of ra!il, which is the largest sugar producer in the world. This led to a decrease in the supply of sugar, which in turn resulted in a steep rise in the sugar prices. "owever, after the initial price rise, the market forces came into play and the demand for sugar became e#ual to the supplied sugar.

Marginal and Total Utility

$tility is the amount of satisfaction that is derived by consumers from the consumption of goods. It so happens that after continuous and succeeding consumption of units of the same goods, the satisfaction that is e%perienced by a consumer starts decreasing. This often results in short&term or long&term fall in sales. Some organi!ations prepare for the launch of another brand, before the fall in utility and sales is e%perienced. The launch of new brand ensures that the revenue trend of the business does not fall. 'iminishing utility is among the e%ternal factors affecting business.

For e%ample, when we buy a pi!!a, the first few slices give us immense satisfaction. "owever, there is a fall in the satisfaction levels, when we are eating the rest. (et)s assume, the marginal utility derived on the consumption of the first slice was *0. "owever, due to diminishing utility, the second slice had the score of +0 and the third slice was ,ust -0. The satisfaction derived on consumption will be in a decreasing order.

Money and Ban ing

anking facilitates monetary and fiscal policies that affect business and also the customers of the business. .oney in circulation dictates the purchasing power or rather the demand of the consumers. /n the other hand, the banking facility dictates the borrowing capacity of

individuals as well as the business. The banking policies play a decisive role in affecting the prices of goods and interest rates along with investment and asset prices. The monetary policies of countries also influence the economic activities and inflation. This whole dynamic process is also known as monetary policy transmission mechanism.

Economic !ro"th and De#elopment

0conomic growth orders the amount of finances that the society at large is earning and development indicates the volume of money that is being invested into channels of long& term up gradation. 1mong all the economic factors, development is the most important one, as a business has to cater to the demands of an economically dynamic society. For e%ample, the lu%ury brands perform well during an economic upturn, much more than the companies which produce essential offerings.

$ncome and Employment

/ther important aspects of the economy that affects a business operation are the employment bulk and rate of income. The per capital income and thickness of employment determines the rate of demand, density of demand, and also the purchasing power of the people. For e%ample, during an economic improvement, there are employment opportunities which generate income that enables people to possess a stronger purchasing power. /n the contrary, as the employment density and income rate go down during recession period, the purchasing power of the people also diminishes.

!eneral %rice &e#el

1nother very important aspect of the economy that plays a part in the growth of business is the general price levels of commodities. 2osts of raw materials, paying power of people, cost of production, and cost of transportation are some of the most important components that determine the general price levels and in turn, lower the profit margin of a business.

For e%ample, an increase in the price will reduce the total revenue generated as there might be a dip in the demand. (et us assume that we have bought 34 pi!!as for the price of 56. "owever, after an increase in the price of pi!!as, we may get to buy only + pi!!as even after shelling out 54.

Trade Cycles
1 trade cycle plays a part in changing the costs of goods and commodities in an economy. 7rosperity, recession, depression, and recovery are the phases of a business cycle that affect the demand and supply of all goods. 1lso, trade cycles often affect the general price levels of essential and non&essential commodities.

$nflation
Inflation is a wonder that occurs when there is too much supply of money in the economy that is not supported by the output of goods and services. 1s there is a lot of money floating around, the prices of goods also increase in order to sustain the businesses, resulting in the increase of costs of raw materials which are needed for production. 1 hike in the prices of raw materials, thus, also increases the cost of a product.

In simple words, the buying capacity of people decreases, when their incomes remain constant but the prices of products and services increase. This affects the demand for the goods. For e%ample, in 200+, 8imbabwe faced the worst case of inflation, which proved disastrous for its economy and led to the abandonment of its currency.

'ecession
'uring recession, companies face a decrease in sales revenues and profits. To curtail cost, they resort to cutting back on hiring new employees, making capital e%penditure, marketing and advertising e%penditures, research and development activities, etc. This not only affects large organi!ations, but also the small ones which act as vendors to these big companies.

Smaller organi!ations may find it difficult to survive in recession due to lack of financial funds or availability of loans. 1lso, people may shift their preferences to slightly affordable products during recession or may not spend on lu%ury items at all. This will also have a negative impact on the demand for these products. Factors like falling stocks, lack of dividends, below par #uality, employee lay&offs, bankruptcy, etc. during recession may also affect the business adversely. For e%ample, in 200-, when the banking industry was unable to face the meltdown of the mortgage market, it inadvertently led to a free fall of the stock market and a decrease in consumer spending. It also set into motion a chain of events that resulted into a global recession within a year.

E(change 'ate
9hen a company buys certain goods from a $S&based organi!ation, it will have to convert its currency into $S dollars for making the payment. If the currency of the buyer is stronger than the $S dollar, it will be beneficial for the company. "owever, if it is weak, the company will have to shell out more money. This was an e%ample of an e%port business. 1 similar logic will also be applicable to the import business. .oreover, price competition in the international market often leads to fluctuating prices. This is because a foreign company in the $S market may increase or decrease its prices depending on the changes in the e%change rate. Suppose some time ago, 3 pound was 3.: $S5. "owever, today, it may decrease to 3.; $S5 if the value of dollar appreciates. This will cause the imported goods from $< to become cheaper for the consumers in the $S. "owever, this will not be a good news for $S e%porters as $< consumers will find that they are getting lesser returns for a pound)s worth.

'ate of $nterest
The rate of interest has a direct impact on the loans that business takes to bear or boost their growth. The higher the interest rates, businesses find it difficult to bind to pro,ects that re#uire investment. /n the different, lower rates make it easier for people to borrow money in order to buy cars and houses. (ow loan rates also provide an opportunity to people to spend more on other things, thus creating a demand for various goods and services, and thereby spurring the growth of economy.

!o#ernment 'egulations
There are several government agencies that regulate businesses for the safety of humans, animals, and environment. Some industries are heavily regulated and introduction of new laws discourage uncontrolled growth of factories and plants. For e%ample, a coal&powered power plant may be asked to be shut down because of an environmental threat it poses. This may affect a business drastically. 0very changing factors in an economy affect the working of businesses. "ence, companies need to have a foolproof strategy and contingency revenue reserves to cope with such dynamic changes. It is best to take calculated risks and e%pand a business when the rates of interest are low and the demand is high.

'eferences
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