The Economic Context

- Demand and supply- The impact of Interest rates- The impact of exchange rates

- The Impact of the business cycle- Business decisions and stakeholders

Commodity Markets

• Examples include steel, copper, oil and coffee beans

• The price of commodity products will depend on

two factors: DEMAND and SUPPLY

A commodity market is a product that is sold on the basis of price rather than brand qualities. In other words, there is almost no difference in the product irrespective of where you buy it.

Demand and Supply

Supply • This shows the quantity of a

product a business is prepared to make and sell at a given price

Demand• Shows how consumers will

react to changes in price

Quantity demanded

Pric

e

Pric

e

Quantity Supplied

Equilibrium point

Manufacturers can sell at the price where the two lines cross

• When demand for a product increases but supply remains the same, the price of

the product will rise • When demand for a product decreases

but supply stays the same, the price of the

product will fall

Interest Rates • The rate of interest is effectively “THE

PRICE OF BORROWING MONEY”

If the Bank of England puts interest rates up, a typical person will either:

So reduce their spending in shops

Will have less money to spend in shops (disposable income)

Borrow less money since it now costs more

Have to pay more money back on their mortgage

The effect of interest rates on

businessesReduce or cancel

planned investment, e.g. the purchase of

new machinery

Reduce borrowing which may mean cutting costs, e.g.

labor

Reduce production, since they expect to sell less if consumers

have less money

If interest rates increase then a business may:

Who controls interest rates

• Since money is a commodity, a currencies value is determined by demand and supply

• Changes in exchange rates can have HUGE effects of businesses

The exchange rate is “the price of one currency expressed in terms of another currency”

How Exchange Rates Affects Businesses

Increase in the value of the pound

Decrease in the value of the pound

Affects on imports into the UK

Become cheaper so will increase

Become more expensive so will fall

Affects on exports out of the UK

Become more expensive so will fall

Become cheaper so will increase

The Business CycleThe economic stages that the UK goes through can be referred to as the Business Cycle, or sometimes the Trade Cycle

Stage of business cycle

Key features Likely reactions by businesses

Recovery/ expansion - Increasing consumer spending- Investment increases- production rises

- Opportunity to increase prices- new business start

boom - Inflation increases- some firms unable to satisfy demand- Interest rates rise

- Prices likely to rise- wage rise- demand fall

recession -demand is low-Investment falls- profits fall

- Firms look for new markets- Workers are laid off- many firms close

slump - Increasing no. of bankruptcies- High unemployment- low levels of spending

-Firms lower prices-Factories are closed- Redundancies occur

Stakeholders• Stake holders are people or groups who have

an interest – or stake – in the activities of a business

• Stakeholders may be able to influence what a business does

• Some stakeholders have more influence than others

Who are the stakeholders?

• Shareholders• Managers• Suppliers• Workers • Governments• Financiers• Local community• Pressure group

• Owners• Suppliers• Workers• Government• Financiers• Local community

Stakeholders of a small businessStakeholders of a large business

Types of Stakeholders

Internal Stakeholders• These are the people who

work for the business and are involved daily

External Stakeholders• These are people who do

not work for the business are not involved on a day-to-day basis. As such they are outside the business

Primary Stakeholders Secondary Stakeholders

• These are the people who can help a business succeed and are usually internal:- Owners- employees- Customers

• These are the people who see themselves as stakeholders even if the business doesn’t:- local residents- local government- pressure groups

What do stakeholders want?

• Stakeholders are affected by the decisions a business makes

Owners will want more

profits Workers will want to work in a pleasant environmentSuppliers will

want a business to buy more from

them

External factors and stakeholders

• All businesses will be affected by the things that happen outside the business that they cannot control

• These are called external factors• Pest analysis: