Macroeconomic Factors and Business Profitability

This assignment explores the impact of various macroeconomic factors on the profitability of a hypothetical company named XYZ. It examines concepts such as Aggregate Demand (AD) and Aggregate Supply (AS), government policies (monetary and fiscal), and currency exchange rates. The analysis demonstrates how understanding these macroeconomic forces can help businesses like XYZ develop effective pricing, production, and marketing strategies for both short-term and long-term success.

Running head: ECONOMIC FOR BUSINESS
Economics for Business
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction:....................................................................................................................................2
Microeconomic Indicators:..............................................................................................................2
Elasticity of demand:...................................................................................................................2
Consumers’ Preference:...............................................................................................................3
Cost of production:......................................................................................................................4
Supply and Demand dynamics:...................................................................................................6
Macroeconomic Indicators:.............................................................................................................6
Aggregate Demand and Aggregate Supply:................................................................................6
Monetary and Fiscal Policies:......................................................................................................8
Currency Exchange Rate:............................................................................................................8
Conclusion:......................................................................................................................................8
References......................................................................................................................................10

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Introduction:
Economic parameters play significant roles in influencing the market dynamics of any
country and the world as a whole and therefore, they also have significant implications on the
activities and outcomes of the commercial organizations of an economy. Therefore, it is of
utmost importance for the commercial enterprises, to take into the different microeconomic and
macroeconomic factors, which can have effects on their overall success, while forming their
business policies and market strategies (Baumol & Blinder, 2015). The report takes into account
the role of the economic indicators like elasticity, cost of production, consumer’s preference,
aggregate supply and demand dynamics and other micro and macroeconomic factors on the
performance of the concerned enterprise, XYZ Company.
Microeconomic Indicators:
Various microeconomic factors are there which can affect the overall performance and
profitability of the organization, depending upon the nature of good or service the company is
offering to the consumers. A few of these factors are elaborated as follows:
Elasticity of demand:
The term elasticity, in economics, refers to the degree to which the demand for a
commodity or service is responsive to the change in price of the same. Generally, the
commodities which are necessary in nature and do not have many substitutes, experience less
elasticity as their demand does not change significantly with changes in the price. On the other
hand, those commodities, which have close substitutes and are not required for basic sustenance

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per se are highly elastic as their demand significantly changes with price alterations (Rios,
McConnell & Brue, 2013).
Figure 1: Types of demand elasticity
(Source: As created by the author)
As can be seen from the above diagram, in case of elastic demand, the decrease in price,
increases the demand from Q0’ to Q1’, whereas the same price decrease leads to a relatively
smaller increase in demand (Q0 to Q1) in case of inelastic demand.
Implication- The Company should take into account the elasticity of demand for its product for
designing its pricing structure.

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Consumers’ Preference:
The demand for a product also depends on the taste and preference of the targeted
customers. If the consumers are highly loyal to the product sold by the company and do not tend
to opt for substitutes, due to reliability issues, then the company can bank upon their loyalty and
a small price hike can actually help the enterprise to earn more revenue (Gillespie, 2014).
Implication- While forming the pricing strategies and marketing policies, XYZ Company should
take into account the brand loyalty of the customers to the product it is selling.
Cost of production:
A lot of the success of a company depends on the short term as well as the long term cost
structures the company experiences in its production activities. Two types of costs are incurred
by a firm in its production activities, the fixed cost and the variable cost, the former independent
of the amount of production and the latter depending on it. Therefore, in the cases where there is
a high initial fixed cost, if the firm in the later stages start experiencing economies of scale, with
the average cost with higher production, then it will be beneficial for the firm in the long run.
The firm will gain much of the market due to its efficiency in production and will be able to rule
out competitors, thereby enjoying a natural monopoly.

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Figure 2: Economies of scale and natural monopoly
(Source: As created by the author)
As can be seen from the above diagram, the advent of economies of scale the average
cost decreases significantly, thereby increasing the profit levels of the concerned firms (Petsko,
2012).
Implications- It is necessary for the concerned enterprise to know about the cost structure for
their production activities. It is important for the firm to achieve cost efficiency and economies
of scale in their production in order to stay ahead of their competitors and earn market share as
well as increased revenue.

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Supply and Demand dynamics:
The numbers of buyers and sellers in the market also determine the profitability of a
particular firm indirectly. If the market has many buyers and lesser number of sellers, then
automatically the demand for the product of the concerned firm becomes high as not many
options are not available to the buyers. On the other hand, if the number of suppliers is high, then
the profitability of the firm is adversely affected as it enjoys a lesser market share (Mankiw,
2014).
Implications- If there are many competitors of the XYZ Company in the market, then the
company needs to design its pricing policy such that the price levels are not too high. The
company also needs to resort to advertisement and promotion in order to differentiate their
product in the eyes of the customers.
Macroeconomic Indicators:
Apart from the microeconomic factors, there are several macroeconomic variables too, which
cumulatively affects the market as a whole and therefore are also expected to affect the success
of the company in particular. The key macroeconomic factors and their role in this aspect are
explained as follows:
Aggregate Demand and Aggregate Supply:
The profitability of a firm in a market depends hugely on the aggregate supply demand
conditions prevailing in the economy as a whole:

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Figure 3: Fluctuations in AD-AS in the economy
(Source: As created by the author)
A higher than normal price can lead to a fall in the aggregate demand and an increase in
the aggregate supply as more suppliers enter in the market, thereby leading to an excess supply
in the economy. Again, a fall in price leads to an excess demand in the economy. In both the
case, the prices need to be adjusted and the companies are affected in terms of revenue
generation (Mankiw, 2014).
Implication- The XYZ Company needs to take into account the aggregate demand and supply
condition and the overall prices prevailing in the economy as a whole in order to frame a robust
strategy, which will benefit them in terms of profitability.

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Monetary and Fiscal Policies:
The policies of the government have implications on the consumption and production
behavior in the economy. An expansionary monetary policy, for example, increases the money in
hand of people, thereby increasing the aggregate demand, which can be profitable for the firms
as they can enjoy both high level of prices, and demand (Bianchi & Ilut, 2017).
Implications- Knowledge about the current and future economic policies of the government
needs to be present with the XYZ Company and they should design their method of operations
accordingly.
Currency Exchange Rate:
The exchange rate prevailing in an economy determines the exports and imports of the
economy and thereby affects the production activities of the commercial enterprises, as they
import various factors of production and aim to export their final production to other parts of the
world. Currency devaluation, for instance, can increase the import cost of the firms and facilitate
their exports at the same time (Salvatore, 2012).
Implications- The concerned organizations should design their production activities taking into
account the feasibility of imports of factors of production, depending upon the exchange rate
prevailing in the economy. Their export decisions need to be based on this factor also.
Conclusion:
From the above discussion, it is evident that the profitability of the XYZ company in
short run as well as long run and therefore it is important for the enterprise to take into account

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the role of the economic factors, both microeconomic as well as macroeconomic ones and their
implications on the profitability of the company in the market. As discussed above, the company
needs consider these factors and their implications in designing their pricing, production and
marketing strategies, in order to gain long term competence and success.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Bianchi, F., & Ilut, C. (2017). Monetary/fiscal policy mix and agents' beliefs. Review of
Economic Dynamics, 26, 113-139.
Gillespie, A. (2014). Foundations of economics. Oxford University Press, USA.
Mankiw, N. G. (2014). Essentials of economics. Cengage learning.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Petsko, G. A. (2012). Economies of scale. Genome biology, 13(4), 154.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and
policies. McGraw-Hill.
Salvatore, D. (2012). Introduction to international economics. Wiley.