BUSS4 - Economic Environment Notes

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Macroeconomics ­ the study of the whole economy
"Making the most efficient use of an economy's resources"
Primarily concerned with:
Demand and Supply
Rate of Interest and Inflation
Exchange Rate
Circular Flow of Income ­ illustrates the interrelationship between the main parts of
the macro economy.
Firms receive in
exchange for good and
The revenue is
used to pay workers and
factors of production.
Income of
households is either
spent or saved.
The Business Cycle ­
The regular pattern of
ups and downs in
demand and output within an economy; boom, recession, slump recovery.
The extent to which firms are affected to changes depends on the YED for the firms
products. Constructive industry ­ sensitive. Stable foods ­ not really affected.
Possible Causes
Changes in Business Confidence
Irregular patterns in expenditure
Confidence in the banking sector
Boom ­ High levels of demand/confidence
- High profits and investment
- Rising costs and prices
Recession ­ Falling levels of demand
Little investment
Spare capacity; unemployment
Slump ­ Very low levels of demand
Increase in the number of failing businesses

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High unemployment
Recovery ­ Slow rising levels of demand
Increasing confidence
Increased employment
Economic Growth
"An increase in the level of economic activity ­ real gdp"
Real GDP is a better measure of whether a country is getting wealthier than GDP,
measured in pure monetary value.…read more

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The value of the currency falls, Exports cheap, imports dear.
If the Interest Rate increased, the opposite effects would occur.
Business Strategies
Strategies depend on whether the interest rate is falling or rising and the nature of
that product (PED).
Exchange Rates
"The price of one country's currency in terms of another"
Floating ­ Exchange rate is influenced by demand and supply
Fixed ­ Exchange rate is fixed against another currency ­ ERM2.…read more

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Effects of inflation
Encourages borrowing ­ if interest rates are less than the rate of inflation
Higher prices mean lower sales ­ PED
Workers are more concerned about their wages
Forecasts will be difficult to make
Efficient firms survive and inefficient firms disappear
Business Strategies
It is important to consider the nature of the business and the products it offers.
Luxury products where price isn't a major factor may able to maintain to its high
prices.…read more

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The pace, scope and scale of globalisation has accelerated dramatically due to modern
communication. Western manufacturing industry has suffered greatly due to this rapid
International Competitiveness
"The ability of firms to sell their products successfully both abroad in export markets
and at home in competition against imports"
Based on price and non- price competition, they seek to improve competitiveness in
order to secure a larger market share.…read more

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Government Intervention in the Economy
"Governments seek to have some control over the business environment in order to
achieve a range of economic objectives" ­ more predictable and fair
Laissez-faire approach ­ Policy based on the belief that the free market will maximise
business efficiency and consumer satisfaction.…read more

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Advantages Disadvantages
Easier to trade Cannot use protectionist policies
Large market opportunities for economies EU legislation
of scale
Increased efficiency and innovation Impose tariffs against outsiders
Greater mobility of labour Increases competition
Invest anywhere within the EU Labour and capital attracted to other EU
Free movement of factors of production
Single Currency
No exchange rate transaction costs ­ Price transparency
No uncertainty ­ encourages trade, financial forecast more accurate
Benefit from economies of scale
The EU is a free trade area, which encourages…read more

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Health and Safety Legislation
Health and Safety at Work Act ­ Ensure the health, safety and welfare at
work of all staff
This can influence the reputation and motivation of employees.
Demographic Issues
Demographics ­ Characteristics of human population including age, gender, religion and
sex. This can influence employees, markets and customers, perceived as an opportunity
or a threat.…read more

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PR campaigns
Change the way in which firms operate
Persuade people to change ­ consumption, disposal and pollution
Ethical Environment
"Morals that should underpin decision making, actions and decisions that are morally
Decisions made on ethical grounds might reject the most profitable solution to greater
benefit society.…read more

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Ethics vs. Public Relations
Public relations ­ "activities to boost the public profiles of an organisation"
Obtaining favourable publicity, however the firms have no control over its content.
Good PR is the main reason for ethical behaviour, to enhance the image and generate
more goodwill.…read more


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