Impact of Economic Factors on Business Decision Making

This essay evaluates the impact of change in economy on the business decision making and the behavior of the firms. It also includes analysis of market operation and the influence of market structure on the firm’s production and decisions.

Business Economics

TABLE OF CONTENTS
REFERENCES...........................................................................................................................7

Economics is a study of human behaviour with regards to their needs and desire. It
looks at the demand for goods and services and what happens when the demand for the same
changes. It focusses on how business supply goods and services along with facing the
challenges they come across. Across the world, people are living in different economic
environments where some countries are quite reach with high standard of living and on the
opposite people can only image such luxuries. The government worldwide also have a great
to impact on the economy in relation to making laws, taxation, controlling the flow of money
in the market. In this essay, the impact of change in economy on the business decision
making and the behaviour of the firms is evaluated. It also includes analysis of market
operation and the influence of market structure on eh firm’s production and decisions.
The problem occurs when economy becomes unstable, when there is shortage of
supply of goods and services or the prices tends to be high and people are not able to afford
it. For instance, a rise in unemployment may infer that production has decreased and wages
have been reduced and taxes paid to government is less (Abdixhiku and et.al, 2017). Thus, an
unstable economy has these impact. The business firms are required to make many decisions
with respect to change in economic environment which includes what to produce, how to
produce and for whom to produce. First in respect to what services or product to be produced
needs to take into account various factors such as cost of raw materials, improvements and
upgrades in the technology, competition in the market, customer loyalty etc. Second, for how
to produce, business is required to look at resources it has like capital, premises, equipment,
labour etc. At last, for whom to produce, business firms are required to consider both the
present and the future potential of the customers. It can be for either consumers or businesses
(Ross and et.al, 2018). But the business decision is greatly affected by the economy in which
it operates and the changing economic conditions can cause inadequate amount of raw
material, inflation, increase in interest rate and unemployment, may cause government
restrictions and may put competitive pressure.
If there is a change in the economy, there are various other areas where business and
firms need to take account of, which are as follows.
Inflation levels: Inflation is basically known as rise in prices. For example, 10 years
ago, from supermarket bought 10 which would have cost £3 and nowadays if we bought the
same thing it may cost nearly £5, this is because of inflation which arises because of number
of factors such as increase in cost of production. In 2006, inflation was 5% which increased
to 7% in 2007, a rise by 12% in these two years (Sieroń, 2019). During the recession,
inflation usually slowdown and in very tough situation the prices may decrease causing
deflation. From the business point of view, both the increase in inflation and slowdown of the
same is required to be studied thoroughly and based on which decisions needed to be taken.
Areas where businesses should account for are- first cost, means changing the price of the
products, labels, catalogues etc. Second, customers, in case of customers with fixed incomes
makes it harder for them to afford that product (Van, 2019). Third is international trading,
which turns out to be very difficult in the times of inflation as the UK costs are higher in
comparison to the cost of other countries.
Availability and cost of credit: Businesses have the necessity to borrow money for
financing its business. For the business firms who are low on money and facing the difficult
time, it could be to tide them over or to upgrade the utensils. It does not matter who borrows

the money, at the end, businesses keep on paying interest charges (Devalkar and Krishnan,
2019). When the country is in the growth cycle, people tend to spend more which causes
inflation and creates the need for increasing the interest rates which in turn makes the good
costly and in case of recession, to give economy a boost, interest rate is reduced. Therefore,
during growth phase, businesses finds it difficult to get enough credit because of higher
interest rate. This makes further development and modernization harder. But at the time of
recession, businesses need to be cautious while borrowing as it becomes hard to sell out their
products and services.
Labour: The vital decision that the business is required to take is in respect to the
quality and quantity of labour. During the growth time, businesses will invest heavily on
training its workers which will make productivity and sales to increase (Millard, Nicolae and
Nower, 2019). To ensure that employees stay with the company businesses can offer
incentives and perks. In this period, businesses compete for getting more experienced and
skilled workers. At the time of recession, the amount of people lost their jobs as the
businesses goes bankrupt. It may result into not giving any benefits and perks to the labours
and limiting the spending on the training of the employees.
Government policy changes: Government implements various laws and regulations
which are required to be followed by the businesses. It can be in relation to change in legal
policy, monetary policy and fiscal policy (Abbas and Park, 2018). For example, the change
in law which can bring complex criteria which makes it difficult for the business firms to
acquire credit. Another example is that the government has control over tax and an increase
in the same will make the products more costly and less affordable by the people. Also,
competition laws like monopoly which is illegal can stop the firms from expanding the
business and decreases the price of the product.
Thus, all these changes in the economy has a huge impact on the working of the
business with respect to the decisions as the change in the economy has an influence over the
businesses and firms. So, all these factors are required to be considered.
Market operation or also known as open market operation is an activity undertaken by
the central bank to give or take liquidity in its currency to or from banks (Rocheteau, Wright,
and Xiao, 2018). In this, the central bank can buy or sell the government bonds or can also
enter into the repo or secured lending transaction with the other banks. Open market
operation is used as a primary means of implementing monetary policy.
In economics, market structure refers to the area where buyer and the seller enters into
a contract with each other for exchanging goods and services. A market structure has all the
characteristics of the market. The market structure represents the number of firms present in
the market that produce identical goods and services and this has a huge influence over the
behaviour of the firms to a great extent. There are four types of market structure which are
discussed below.
Perfect competition: In this market conditions, there are many buyers and sellers in
the market. There are very little barriers to entry in the market. This makes it very easy to
venture into a certain industry. A good example for this is hotel industry (Market Structure &
Pricing Decisions. 2020). In this structure, every participant is the price taker, that is, the firm
will accept the price which is offered in the market. An individual does not have anu power to

influence the market price. From the business point of view, all the firms in the market
provide identical products and cannot make changes in the price of the product. The business
can reduce the price but will lead to lower profits and in case of increase in price will lead to
loss of customers. This is how a firm’s production and strategic decision is influenced. In
such market, businesses have no control over price and has to follow which is decided in the
market and as a result limits the profits of the business and business strategies are also
according the market flow.
Monopolistic competition: In this, the large number of firms are providing product
and services that are slightly differentiated as per customer’s point of view. In this, the
products of the competitive firms might be close but not the perfect substitute because they
are not considered as identical. For example, Lux, Liril, Dove etc. This situation arises when
the same commodity is sold under different brand names. Each firm is the sole producer of
the product but since the brands are close substitute it creates competition with one another
(Zeder, 2016). Mostly firms incur lots of expenditure on the advertisements and marketing
for promoting tehri products. Also, the firms cannot make any major changes in the price of
the product as it can affect its market share and decrease the customer base. Businesses
mostly focusses on short term profits. In such market structure, the market share of the
business is insignificant and are more or less same. The product differentiation is the only
factor that makes it different from others.
Monopoly competition: This type of situation exists when there is only sole producer
of the product or service in the market. There are very high barriers to enter the market and
there is no rivals in the market. In this, the firm is the price maker, therefore, increases the
chances of customer exploitation and may discourage firms for implementing innovation in
the business as it does not have any threat of competition (Ryvkin and Serra, 2017). For
example, Jabatan Bekalan Air Malaysia, is the only industry that provides water supply
service in the whole country. It has the power to determine the price of water. There is no
direct factor that can affect the business decision making or strategies. But it into account the
economy and consumer while determining the price and whatever demand and supply exist in
the market.
Oligopoly market competition: In this, there are small number of firms competing in
the market for the particular product. There is a high barrier to entry in the market. Because
of this reason there are less firms in the industry. The firms in such market situations are the
price makers as there are few firms only. The best example of this is the airline industry as
they are small in number. But there is a high level of competition in the market in this market
structure as compared to monopoly (Azar and Vives, 2018). In airline industry, each
company has the power to set the price however, the firms cannot just set the price to
whatever levels they want. In this, every firm in the market has the potential to affect or
influence the market by the strategic business decisions by anyone organization. This can
sometimes also cause price wars in which each organization cuts their prices in order to
attract more customers. This process sometimes leads to unhealthy competition which has a
direct impact over the profitability of the business. For example, in 2009, British airways
entered into price war in which it was forced to cut down its prices by 36% which negatively
impacted its profits with the objective of exploiting the individual market share.

From, the above it can be summarized that economic factors have a huge impact on
the business functioning. The different aspects and eth different market conditions makes it
difficult for the business to take strategic decisions. Businesses and firms are required to
regularly analyse the changing market condition based on which proper planning and
strategic decisions can be taken. Inflation, change in government policies, labour is all the
factor that are to be considered while taking decisions. Along with the economic factors,
there is a great influence of market structure and operations on the business. There are
different types of market structure based on the number of firms existing in it. The major
impact that has over the business is the oligopoly market where there are few firms
competing with one another and has a negative impact on the business in terms of
profitability.

REFERENCES
Books and Journal
Abbas, A. and Park, G., 2018. Tariffs and Taxes versus Labor Regulation: Analyzing Which
Government Policies Help and Hurt Domestic Economies.
Abdixhiku, L. and et.al, 2017. Firm-level determinants of tax evasion in transition
economies. Economic Systems. 41(3). pp.354-366.
Azar, J. and Vives, X., 2018. Oligopoly, macroeconomic performance, and competition
policy. Available at SSRN 3177079.
Devalkar, S. K. and Krishnan, H., 2019. The impact of working capital financing costs on the
efficiency of trade credit. Production and Operations Management. 28(4). pp.878-889.
Millard, S., Nicolae, A. and Nower, M., 2019. International trade, non-trading firms and their
impact on labour productivity.
Rocheteau, G., Wright, R. and Xiao, S. X., 2018. Open market operations. Journal of
Monetary Economics. 98. pp.114-128.
Ross, A. G. and et.al, 2018. Highlighting the need for policy coordination: the economic
impacts of UK trade-enhancing industrial policies and their spillover effects on the
energy system. Fraser of Allander Economic Commentary. 42(3).
Ryvkin, D. and Serra, D., 2017. The industrial organization of corruption: Monopoly,
competition and collusion. Competition and Collusion (February 10, 2017).
Sieroń, A., 2019. Money, Inflation and Business Cycles: The Cantillon Effect and the
Economy. Routledge.
Van, D. D., 2019. Money supply and inflation impact on economic growth. Journal of
Financial Economic Policy.
Online
Market Structure & Pricing Decisions. 2020. [Online]. Available Through:<
https://www.tutorialspoint.com/managerial_economics/market_structure_pricing_decisi
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Zeder, R., 2016. The Four Types of Market Structures. [Online]. Available Through:<
https://quickonomics.com/market-structures/>.