Economic Factors

economis factors

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what are they

Economic factors are the set of fundamental information that affects a business or an investment's value. A variety of economic factors must to be taken into account when determining the current and expected future value of a firm or investment portfolio.

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  • costing
  • competitors
  • interest rates
  • recession
  • inflation
  • exchange rates
  • international- export/ import
  • taxation
  • government spending
  • unemployment
  • min wages
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Interest Rates

Interest rate is an economic factor the fluctuation in these have an impact on the consumer purchasing the product or service. When rates are high, consumers may be less inclined to borrow money to buy a new home or car. People who have adjustable-rate home mortgages can face financial hardship or even lose their homes when interest rates spike. Retires who live largely off investment income may need to lower their standard of living when interest rates decline.

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There are different types of demand. Negative demand is where a major part of the market dislikes the product and may even pay a price to avoid it. No demand is where target consumers may be uninterested in the product. Latent demand is when many consumers may share a strong need that cannot be satisfied by any existing products. Declining demand is when there is a substantial drop in the demand for products. Irregular demand is where organizations face demand that varies on a seasonal, daily or even hourly basis, causing problems of idle capacity or overcrowded capacity. Full demand is when organisations are pleased with there volume of business. Overfull demand is when the organisation faces a demand level that is higher then they can or want to handle. Unwholesome demand relates to unwholesome products that will attract organized effort to discourage their consumption for example cigarettes. Effective demand is the combination for a product or service with the ability and readiness to pay. Demand can be affected by various factors such as the state of the economy, the bran reputation, current rends, alternatives by competitors and advertising.

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Economic growth

It is important as it is the process of an area earning more and making better progress than before. It can result in new discoveries, reasonable prices, and richer lifestyles. Governments manage the economy by aiming for the following objectives; stable exchange rates to ensure the country remains competitive, economic growth should be stable, unemployment should be kept as low as possibly and inflation should be kept low and stable.

It can impact on a business in both positive and negative ways. The advantages for businesses are that there is less risk of failure, less unemployment therefore higher spending rate as there is high demand which leads to higher sales due to more customers, also low inflation whilst increased profit means better wages also the government are more willing to assist businesses and there is more chance of acquiring funds from the bank.

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It is a major economic factor, it is the total number of able men and women of working age seeking paid work, and therefore it is a waste of resources as labour is unused. The more people who are out of work, the less money that is circulated into the economy through the purchase of goods and services. Even the threat of unemployment has an impact, as workers who fear losing their jobs are less inclined to spend or invest their money. Cyclical is a type of unemployment caused by the operation of the business cycle rising in slumps and falling in booms. Fictional exists because people may be temporarily out of work between leaving 1 job and starting another. Structural occurs due to fundamental changes in the economy whereby some industries reach the end of their lives. Unemployment can impact on a business in different ways. Cyclical unemployment can lead to a fall in sales and possibly force businesses to go overseas. Structural unemployment can impact on associated businesses. Luxury products suffer more than essential. Businesses may need to reduce output; rationalisation and redundancy can follow so factories and offices close. Many research and developing plans would be abounded or postponed as firms seeks to reduce costs to match the reduced revenue. A predicted fall in level of demand may encourage firm to diversify. However there are advantages such as lower wage costs, also employees can be stricter with employers. There are more highly skilled workers available and as mentioned before due to desperation will work for less. The firm would have more choice when recruiting. However redundancy costs are a lot for businesses and the workforce could be less efficient.  A final advantage is that there are more chances of getting a grant.

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Inflation is when the prices for goods and services constantly increase, things become much more expensive. Inflation occurs due to a higher disposable income, businesses need to make a profit and resources plus supplies for a business increases along with production costs. CPI is consumer prices index, it measures the rate of inflation based on the changes in prices of a basket of goods or services. RPI is retail price index it is identical to CPI just doesn’t include housing and council tax costs. During inflation businesses may experience effects such as wage negotiation costs, menu costs, ‘’shoe leather’ costs, reduced purchasing power as there is lower demand, unemployment and uncertainty this can affect investment decisions and international competitiveness may decrease.

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Exchange Rates

Exchange rates is the act of converting one currency to another it is the value of the currency in the international market. When either the pound increase in value the affects on imports to U.K will become cheaper so increase the same effect is for when the pound decreases in value when it is exported out of the U.K. When the pound increases in value the effect it will have on exports out of the U.K is that will be more expensive so will fall. When the pound decrease in value the effect it will have on imports into the U.K is that will be more expensive so will fall.

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Gov Spending

Government spending can create demand but as government has no money of their own any spending must be financed by either borrowing or higher taxes, which can in turn cause problems for a business. Government spending reduces labour-force participation by creating disincentives to work. 

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