1. BUSINESS AND MANAGEMENT
MODULE 1
BUSINESS ORGANIZATIONS & ENVIRONMENT

2. Economic Opportunities & Threats
Refers to large scale economic factors affecting the economy as a whole
Government policies
Attitudes and actions in foreign countries
Business and consumer confidence

3. Macroeconomic Objectives
Governments tend to have four objectives:
Control inflation
Economic growth
Reduce unemployment
Acceptable international trade balance

4. Controlled Rate of Inflation
A continual rise in the general prices of the economy
Most countries regard a low or sustainable inflation rate as a necessity for achieving the other economic objectives
There are two main causes of inflation

5. Demand Pull Inflation
Caused by excessive aggregate demand in the economy
Any factor that causes a rise in consumption, investment, government spending or trade will lead to an increase in aggregate demand
If consumer confidence is high, this encourages people to spend money, and firms to spend money on production

6. Cost Push Inflation
Caused by higher production costs leading to a rise in prices (assuming firms want to maintain their profit margins)
Union wage increases
Material costs
Affects of climate on crops

7. Controlling Inflation
By limiting demand-pull and cost-push factors
Domestic government might raise taxes to control the amount of consumption in the economy
It could subsidize local businesses to reduce costs of production
Could pursue “supply-side policies” that improve the productive capacity of the economy (investment in health care/education etc)
Exercise 10 – Zimbabwe’s Inflation Problems

8. Unemployment
Measures the proportion of a country’s workforce not in employment
Influenced by aggregate demand – as production is high, unemployment will be low
Economic costs of unemployment affect both the government and society

9. Types of Unemployment
Frictional – time lapse between leaving one and finding another
Seasonal – caused by seasonal change
Technological – losing a job to automation
Regional – analysis of different areas (urban vs rural)
Structural – a particular industry suffers
Cyclical – recessionary unemployment; affecting everyone

10. Unemployment Solutions
Demand-side policies
Directly target increasing the level of aggregate demand
Reducing taxes or increasing government spending
Reducing interest rates
Supply-side policies
Increase the level of aggregate supply
Tend to be more permanent policies

11. Economic Growth
Refers to an increase in a country’s economic activity over time
Measured by the change in total output known as the GDP
Changes in the economic pattern are typically known as cycles
There are several key phases

12. The Business Cycle GDP ($) Trend line Peak Recession Economic Activity
Recovery
Slump
Time

13. Trading Cycle Peak – economic activity is at its highest level
Consumer spending and investment is high; low unemployment; good cash flow
Recession – dip in level of economic activity for two successive quarters
Declining aggregate demand; falling exports and lower investment
Slump – bottom of a recession (last decline stage)
High unemployment and low levels of consumer spending; poor cash flow and high bankruptcy rates
Recovery – level of GDP starts to rise again
Consumption, spending and investment begin to rise

14. Mini Case Study
Case Study – ASOS Source: Jones, Hall, Raffo, Business Studies 3rd Edition, Unit 3, page 37

15. Coping with a Recession
Cost reduction
Efforts to cut utility bills; cheaper warehousing; staff reductions
Price reduction
Influence consumer spending
Non-pricing strategies
Repackaging, special offers, after-sales care
Branding
Consumers maintain loyalty to a brand even during recessionary times; price elasticity
Outsourcing
Lower production costs overseas can help maintain a businesses profit level

16. Barriers to Economic Growth
Lack of infrastructure
Basic electricity, roads, hospitals etc
Lack of technical knowledge
Rapid population growth
High net birth results in too many mouths to feed, which may hinder economic development
High foreign debt repayments
Countries are obliged to meet interest and debt repayments first leaving little for domestic growth

17. Balance of Payments
A record of a country’s money inflows and outflows (over a specific time)
Made up of a capital account and current account
Current
Export and import earnings and expenditures
Capital
Government services, foreign currency etc

18. Current Account Visible trade balance Invisible trade balance
International trade in tangible goods (oil, steel cars etc)
Invisible trade balance
Intangible goods such as banking, distribution and insurance

19. Exchange Rates
Measures the value of one currency in terms of another foreign currency
A higher rate (appreciation of currency) means that export prices will be relatively higher, thereby reducing competitiveness
A lower rate (depreciation of currency) means that domestic firms that import raw materials will suffer from having to pay higher prices
Governments try to protect the balance of payments by adjusting exchange rates (through interest rate changes)

20. Protecting Against Currency Fluctuations
Large fluctuations in exchange rates can create difficulties for businesses
Cannot accurately forecast import requirements (costs)
International deals may be postponed until currency fluctuations are minimized
Protectionism
Government policy used to safeguard domestic business
Involves tariffs or quotas for example

21. Examples of Protectionism
Tariffs
Form of tax placed on imported products; gives domestic goods a slight advantage
Quotas
Quantitative limits that prevent too many foreign products entering a country
Subsidies
Payments made by government to a domestic business as a form of aid
Embargos
Physical bans on international trade with certain countries
Standards
Imposition on strict standards (health and safety) on certain imported products