1. Economic Opportunities and Constraints

2. Content Market and competition: Macro-economic issues: Economic growth
Types of market
Capacity utilisation
Fair and unfair competition
Macro-economic issues:
Business cycle
Interest rates
Exchange rates
Inflation
Unemployment
Economic growth
International competitiveness EU

3. 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 including:
Market size
Degree of competition within the market
Type of market

4. Types of Market
Markets can be categorised by the degree of competition and the number of firms
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

5. 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

6. 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

7. 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

8. Fair and Unfair Competition
UK markets are regulated to ensure free and fair competition
Unfair competition includes cartels
UK government and EU deem unfair competition as illegal

9. Business Cycle Stages

10. GDP
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

11. 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 spending more (CONSUMER CONFIDENCE)
Firms begin to invest more in FIXED ASSETS and increase their capacity
Increased capacity involves more workers being employed

12. 2. Boom Follows the recovery stage
In this stage production levels are high so employment is also high
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

13. 3. Recession
The UK Government increases interest rates to curb inflation
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

14. 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 demand

15. 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

16. 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

17. What is an Exchange Rate?
The value of a nation’s currency in terms of another currency
i.e. £1=$2
An exchange rate is set by demand and supply of a currency

18. 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 rates
Changes to exchange rates can affect prices and sales overseas
Competitors can respond in unexpected ways to exchange rate changes

19. 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 etc.
If interest rates fall the value of the pound will fall so the pound will now buy less US dollars, Japanese Yen, Euros etc

20. 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 savings.
This will increase the DEMAND for Sterling which will appreciate in value

21. 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

22. Inflation
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.

23. 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 figures

24. The causes of inflation
Inflation results when the macro economy has too much demand for available production.
Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to purchase more output than the economy is capable of producing.
Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to increases in production cost

25. Inflation and Businesses
Inflation may lead to a decrease in sales for businesses
When there is high inflation it is hard for business to remain competitive especially with overseas firms

26. 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

27. Inflation 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

28. Unemployment 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

29. Unemployment Cyclical unemployment is caused by the business cycle
Frictional unemployment is caused when people are temporarily out of work as they are moving jobs

30. 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 markets
Structural unemployment can affect businesses in the local area

31. 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 labour
Invest in training schemes to develop employees skills

32. 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 growth
In the shorter term countries can experience slumps / decline in the size of their economy

33. 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
Disadvantages
Regional disparities
Can lead to resource shortages especially for labour
Increases pressure on individuals and businesses

34. Economic Growth
Growth can be spurred on in the short term by decreases in interest rates and taxes, or by increasing Government spending
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

35. 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

36. Globalisation & Growth
Many businesses have welcomed the concept of globalisation as a chance to attract a wider audience
Other businesses have failed in markets of increased competition

37. EU The EU has 31 member states and over 450 million people
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

38. 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

39. The Euro In January 1999 the Euro was introduced into 12 countries
By January 2002 Euro notes and coins were available
The Euro influences markets by:
Having cheaper transaction costs
Stable exchange rates
Transparent price differences

40. Summary Businesses are influenced by the market they operate in
Perfect competition exists where there are many firms all producing similar products charging similar prices
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 periods
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