Economic Opportunities and Constraints

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Transcript Economic Opportunities and Constraints

Economic Opportunities and
• Market and competition:
– Types of market
– Capacity utilisation
– Fair and unfair competition
• Macro-economic issues:
Business cycle
Interest rates
Exchange rates
• Economic growth
• International competitiveness
• EU
The Market And Competition
• A market is a place where buyers and sellers meet
to exchange goods and services
• Markets have a number of influences on businesses
– Market size
– Degree of competition within the market
– Type of market
Types of Market
Markets can be categorised by the degree of
competition and the number of firms
1. Perfect competition – this is a market with lots of
small firms who produce similar products at
similar prices
No barriers to entry / exit
Potential profits are low
Types of Market - Oligopoly
2. Few firms in the market who are interdependent in
their actions
– Firms consider competitors reactions when changing
prices / introducing new products
– There is a high degree of competition
– Businesses try and avoid price competition preferring
non price competition
– Can be many take-overs
– Collusion may occur leading to cartels being formed
Types of Market - Monopoly
3. Monopoly – a single producer in the market
One producer is able to charge relatively high prices
New products are rarely introduced
Resources are not used efficiently
UK based monopolies are open to competition from
overseas rivals
Capacity Utilisation
• The extent to which a firm uses the productive capacity
available to it
• Markets can experience shortages of capacity meaning
consumer needs are not met leading to:
– An increase in market price for products
– New producers being attracted to the market
– Consumers purchasing products overseas
• This is common where tastes and fashions change quickly
or if there is a time lag between increases in demand and
the firms ability to produce products
Fair and Unfair Competition
• UK markets are regulated to ensure free and fair
• Unfair competition includes cartels
• UK government and EU deem unfair competition as
Business Cycle Stages
• Gross Domestic Product or GDP measures the value of a nation’s
output over a period of time
• A nation’s business cycle will display regular fluctuations in
economic activity (levels of spending, production and employment)
and GDP
1. Recovery / Upswing
• The economy is recovering from a slump and production and
employment is beginning to rise
• Customers are feeling more secure in their employment and are
• Firms begin to invest more in FIXED ASSETS and increase their
• Increased capacity involves more workers being employed
2. Boom
• Follows the recovery stage
• In this stage production levels are high so employment is also
• Expenditure from businesses, consumers and the
Govt.increase as confidence grows
• The economy approaches maximum capacity and shortages /
bottlenecks occur as raw materials run low
• Skilled workers become scarce and businesses try to attract
workers with higher pay
• High wages and scarcity of resources lead to INFLATION
3. Recession
• The UK Government increases interest rates to curb
• Rising prices of labour and materials mean that
businesses costs of production rise significantly and eat
into business profits
• Increases in interest rates prevent firms from borrowing
and investing money
• Production begins to fall so workers laid off
4. Slump
Often follows a recession
Production is low and unemployment is high
Demand is low
Governments begin to take action by increasing their own
spending to try to create jobs or lowering interest rates to boost
Interest rates
• Bank of England is responsible for setting interest rates
• Interest rates – price paid for borrowed money
• Consumer spending depends of interest rates as:
– When interest rates are high consumers are more likely to save
– Increasing in interest rates make borrowing more expensive
reducing consumers disposable income
– Increasing interest rates increase mortgage payments
– Pensions and investments are dependent on interest rates
Interest Rates and Businesses
• Consequences of an increase in interest rates:
Business overheads often increase
Business may try to decrease borrowing
Businesses try and save more
Investment decisions are postponed
Businesses try and reduce stock levels
• Some types of business are more effected e.g. those
producing luxury items, those with high credit sales and
those with high levels of overseas trade
• Businesses have a tendency to have a long term view on
interest rates
What is an Exchange Rate?
• The value of a nation’s currency in terms of another
• i.e. £1=$2
• An exchange rate is set by demand and supply of a
Exchange Rates
• Exchange rates create uncertainty because:
– If a deal is agreed in foreign currency firms may receive
more or less than expected due to changes in exchange
– Changes to exchange rates can affect prices and sales
– Competitors can respond in unexpected ways to
exchange rate changes
Interest and Exchange Rates
• Changes in the UK’s interest rates will lead to changes in
the exchange value of the pound.
• If interest rates rise the value of the pound will rise so the
pound will now buy more US dollars, Japanese Yen, Euros
• If interest rates fall the value of the pound will fall so the
pound will now buy less US dollars, Japanese Yen, Euros
Interest and Exchange Rates
• If interest rates are higher than rates in other countries the
UK will become more of an investment opportunity.
• Investors will exchange their currency into sterling to invest
it in UK banks to earn high rates of interest on their
• This will increase the DEMAND for Sterling which will
appreciate in value
Interest and Exchange Rates
• If interest rates are lower than rates in other countries the
UK will become less of an investment opportunity.
• Investors will exchange their currency from sterling to
invest it in Foreign banks.
• They will withdraw £ in the UK to buy foreign currency.
• This means an increased supply of sterling will be available
in the world’s currency market causing the £ to depreciate
• Inflation- A persistent increase in the level of consumer prices or a
persistent decline in the purchasing power of money caused by an
increase in available currency and credit beyond the proportion of
available goods and services.
• Over the long term, inflation erodes the purchasing power of your
income and wealth. That means that even as you save and invest,
your accumulated wealth buys less and less.
How to measure inflation
• Every month the Government surveys prices and
generates the current consumer price index (CPI)
• This allows you to compare current figures with past
The causes of inflation
Inflation results when the macro economy has too
much demand for available production.
1. Demand-Pull Inflation: This inflation occurs when
the government / consumers / business try to
purchase more output than the economy is
capable of producing.
2. Cost-Push Inflation: Cost-push inflation is inflation
due to decreases in supply, primarily due to
increases in production cost
Inflation and Businesses
• Inflation may lead to a decrease in sales for
• When there is high inflation it is hard for business to
remain competitive especially with overseas firms
Inflation and Governmental Policy
• Governments try and control inflation using the
following tools:
– An increase in interest rates
– Legislation reducing trade union power
– Reduced expectations of inflation allowing businesses
more confidence when setting prices
• In recent years inflation has been low, this means:
– Cost are easier to control
– Pricing strategies are easier to establish
– If UK inflation is lower than other countries gives UK
firms a competitive advantage
– Sales forecasts will be more accurate
• There are a number of types of unemployment:
– Structural unemployment
– Cyclical unemployment
– Frictional unemployment
• Structural unemployment occurs when the economy
changes and industries die out
• Training is needed to give the unemployed workers
new skills
• Cyclical unemployment is caused by the business
• Frictional unemployment is caused when people are
temporarily out of work as they are moving jobs
Unemployment and Businesses
• Increasing levels of unemployment can cause
problems for firms
• Cyclical unemployment can lead to a decrease in
sales meaning businesses need to look for new
• Structural unemployment can affect businesses in
the local area
Falling Unemployment
• Businesses can also incur problems due to falls in
the level of unemployment as there may be skills
and labour shortages
• If this is the case businesses can:
– Switch to capital intensive manufacturing systems
– Relocate overseas to exploit cheaper and more plentiful
– Invest in training schemes to develop employees skills
Economic Growth
• This is an increase in the value of goods and
services produced by the economy as a whole
• Long term most countries experience economic
• In the shorter term countries can experience slumps
/ decline in the size of their economy
Advantages and Disadvantages of
Economic growth
• It increases levels of
taxation which the
government can spend on
public services
• Increases opportunities for
all businesses / individuals
• Businesses experience
higher sales and profits
• Regional disparities
• Can lead to resource
shortages especially for
• Increases pressure on
individuals and businesses
Economic Growth
• Growth can be spurred on in the short term by decreases in
interest rates and taxes, or by increasing Government
• These measures create fluctuations in GDP
• For the longer term the Government needs to increase
employment (full employment), increase capacity,
improving education and skills and promoting competition
in markets
International Competitiveness
• With the growth of free trade businesses now are having to
compete internationally
• This may be in order to increase profits and market share,
or simply to wider their customer base to survive
• In order to be COMPETITIVE businesses must keep price
affordable but keep the quality and features
Globalisation & Growth
• Many businesses have welcomed the concept of
globalisation as a chance to attract a wider
• Other businesses have failed in markets of
increased competition
• The EU has 31 member states and over 450 million
• The EU offers more consumers and therefore sales
to UK based firms
• By locating in cheaper countries e.g. Eastern
Europe businesses are able to reduce costs
• Can also lead to increased competition
Institutions of the EU
European commission – policy and legislation
Council of ministers – unions decision making body
European parliament
European court of justice
European central bank
The Euro
• In January 1999 the Euro was introduced into 12
• By January 2002 Euro notes and coins were
• The Euro influences markets by:
– Having cheaper transaction costs
– Stable exchange rates
– Transparent price differences
Businesses are influenced by the market they operate in
Perfect competition exists where there are many firms all producing similar products charging similar
Oligopolies exist where there are few firms who have a high degree of interdependence
Monopolies exist where there is one firm in the market
Capacity utilisation refers to how well businesses are using the productive capacity available to them,
markets may experience shortages in capacity
The UK government tries to ensure fair competition within markets
The business cycle shows the rate of economic growth over time and includes recession and boom
Interest rates are the cost of borrowing money
Exchange rates value one currency in terms of another
Inflation is the rise in the general level of prices
Unemployment measures the total amount of people out of work and can include structural ,cyclical and
frictional types
Economic growth measures the rate at which the economy is growing in size
As markets are becoming increasingly global it is important for firms to compete on an international scale
The EU is a collection of 31 countries which have no trade barriers creating opportunities and threats for
UK businesses