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All businesses, whether domestic or international, are affected by the dynamic economic environment conditions prevalent in the market. Among many economic factors affecting business some are; interest rates, demand and supply, recession, inflation, etc. Let us take a look at such economic factors.
All businesses want to maximize on their profits. All this can be achieved by analysis of demands of consumers, provision of appropriate supplies to them and the maintenance of high quality of goods and services. As simple as this operation is, many factors affect it. The sales, production and procurement processes of a business are greatly impacted by these economic elements. Below is a list of economic factors that affects businesses. Consider, all of them are interconnected.
I recommend you to read Pestle Analysis.
Economic Factors Affecting Business Environment
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.
Here is another example. Bad weather in 2000 messed the sugar crop in Brazil, arguably the largest producer of sugar in the world. Because of this, there was a decrease in the supply of sugar globally, and so the prices of sugar rose steeply. This led to other suppliers capitalising in opportunity and increasing the supplies which brought the cost down.
Marginal and Total Utility
The amount of satisfaction that is derived by consumers from the amount of goods they have is referred to Utility. After continuous and successive consumption of units of same goods, the fulfilment that is experienced by the consumer starts depreciating. This results in short-term or long-term fall in sales of the business. Most Organization prepare for the launch of a different brand before the collapse in utility and sales is experienced. The hurl of a new brand ensures that the revenue trend of business does not drop down. The fall down of utility is one of the economic factors affecting businesses.
Such is, when we purchase a pizza, the first few pieces give us great satisfaction. Nonetheless, there is a down fall in the satisfaction levels when we continue eating the rest of the pizza. Suppose, the marginal utility derived on consuming the first slice was 90%. Nonetheless, due to the dwindling of utility, the second piece had the score of 80% and the third piece had 70%. The satisfaction derived on consumption will be in a deteriorating order.
Money and Banking
Banking facilitates monetary and fiscal policies that affect business and the economic environment also the consumers of business. Money in circulation dictates the demand of the consumers. On the contrary, banking facility dictates the borrowing capacity of individuals as well as the business. Banking polices play a crucial role in affecting the prices of goods and interest rates together with assets prices and investments. The economic environment activities and inflation are influenced by the monetary policies of a particular country. This whole dynamic situation is also known as monetary policy transmission mechanism.
Economic Growth and Development
The amount of money that is being invested into channels of long-term upgradation and the finances of the people living in the society at large in a particular country is decreed by the economic growth of a country. Among all the economic factors that are affecting business, development is the upmost important one. As a business needs to cater for the demands of an economic environment potent society.eg, The luxury brands perform hearty during an economic upswing, much more than the organizations which their outcome is essential offerings.
Income and Employment
Another crucial aspects of the economy that affects a business operation, are the rate of income and employment varsity in a particular country. The density of employment determines the rate of demand in a company and even the country including the purchasing power of individuals.
During an economic upswing, opportunities for work are available to enable people to generate income and have a stronger purchasing power. Nonetheless, the purchasing power of most people goes down, as employment density and the rate of income goes up during the recession period in a given economic environment.
General Price Level
General price levels of commodities is also a key economic factor affecting businesses and plays a huge part in its growth. You could talk about the cost of raw materials for the production of commodities in any economic environment, the paying power of potential clients, the cost of production and transportation rates as some of the most important elements that end up contributing to the retail price, thereby lowering the profits generated by a business.
In most economic environments, when prices go up, the total revenue generated has a high chance to go down because there might be a decrease in demand. Assuming consumers have bought sixteen pizzas for the price of $4. But because of increase in price of the pizzas, the consumers may only be able to afford 8 pizzas for a higher cost of $6.
This too plays an integral part in the fluctuation of cost of goods and services sold by a business. The cycles include but are not limited to; depression, recession, recovery, prosperity. These are all phases that make up a business cycle that dictates the demand and supply of all goods and services and general prices of all commodities, whether essential or non-essential.
Inflation usually occurs when the supply of money is too much in the economic environment market while not equally supported by a similar availably of goods and services. Now, there is a lot floating around in this situation. The prices of goods have to increase one way or the other, in order to sustain the businesses. And so there is an increase in the cost of raw materials needed for production. This upsurge in the cost of raw materials obviously translates to the retail price.
Let’s break this down. The buying power of consumers decreases, their incomes remain constant, but the prices of products and services shoots up. This will definitely affect the businesses in that, the demand for the goods is directly dependent on its availability and its price.
In 2008, the worst case of inflation affected the central African nation, Zimbabwe. This proved very disastrous for its economy leading to the country adopting a foreign currency as a way of solving the crises.
Companies usually make great losses and face dips in sales and profits during recession. And in order to reduce their costs most of them usually resort to staff cuts, retrenchment and firing, reducing capital expenditure, advertising budgets, research and development activities, and so on. Of course this affects companies and organizations of all sizes regardless of the economic environments they are in.