Business Economics

Rob Dransfield

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134657797
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

The Eurozone crisis and the age of austerity, as well as challenges to the environment as a result of economic growth have highlighted the need for a greater understanding of those facets of economics that are of most use to businesses and their decision makers.

This book introduces all of the relevant theoretical aspects of the subject and applies them to real-life examples of economics that are of particular interest to students today, including: the impact of globalization; the way in which 'green' perspectives can be built into decision making and how the financial crisis has challenged economists, politicians and business people to rethink their existing ideas.

Replete with illuminating case studies, and benefitting from features such as activities, review questions and further reading, Business Economics introduces the theory and practice of economics for non-specialist students new to the topic.

1	Introduction to economics for business

Chapter Outline

1.1 Introduction

1.2 What is ‘the economy’?

1.3 How the economy impacts on business

1.4 The management of risk

1.5 How changes in consumer incomes and spending affect business

1.6 The impact of changes in interest rates on business

1.7 Some key economic concepts that appear in this book

1.8 Summary

Chapter Objectives

After carefully reading and engaging with the tasks and activities outlined in this chapter you should have a better understanding of:

• The micro- and macro-economy
• The nature of risk and how the economy affects business risk
• How changes in the economy affect individual businesses
• The types of economic variables that impact upon business
• How changes in specific economic indicators including consumer spending and interest rates impact on businesses and the decisions that they make

1.1 Introduction

This book has been written for business students rather than economics students. Its focus is on describing and explaining those aspects of economics and the economy that impact on business decision making. Businesses operate in a constantly changing environment. There are a number of influences operating in this environment that impact on business including political, legal, social and technological changes. Each of these is highly important. However, it is economic changes that can have the most dramatic and sustained consequences for business.

Businesses have to take risks in order to make a profit. For example, producing one type of good rather than another involves a risk. Many of the significant risks that a business takes stem from economic changes. Examples of these are illustrated at the end of this chapter. The purpose of this opening chapter is to introduce the concept of the economy. By way of illustration it sets out some examples of the ways in which changes in the economy affect business in significant ways

1.2 What is ‘the economy’?

The following example illustrates the relationship between business and the economy at a local level. On 5 October 2010 the headline in the Nottingham Evening Post read:

New blow to city as Boots cuts 750 jobs. Move sparks fears for the economy.

The article stated that:

There were renewed fears for the Nottingham economy today after Boots announced 750 jobs will go at its Beeston site. About 7,500 are employed at the former head office of the health and beauty retailer. … Nottingham City Council deputy leader Councillor Graham Chapman feared for the impact on the local economy of the loss of 750 salaries. ‘You can’t reduce the spending power of 750 people out of the Greater Nottingham economy without further impact on other people’s jobs’, he said.

The article shows that large companies are part of the economy, and the decisions that they make affect the economy. Boots is one of the most important companies in Nottingham. The decision that it made to cut back on jobs had a knock-on effect for the wider economy of Nottingham.

Case Study Alliance Boots

Jessie Boot set up his first chemist shop in Nottingham in 1877. He charged prices that were lower than rival stores and he called his shop ‘The People’s Store’. The formula was a success and by 1896 he had 66 stores operating in 28 different towns and cities in Britain. Today Alliance Boots is an international health and beauty business. As an international company Boots operates in highly competitive markets, and its fortunes are determined by what is happening in the economies in which it operates. Decisions made by Boots are influenced by changes in the wider world economy (including growing competition from emerging economies, and the impact of global recession).

• In what ways is Boots part of a global economic system?
• How can changes in the global economic system affect Boots?

Key Term

The market – a situation (or system) through which buyers and sellers come into contact to trade goods, services, commodities or financial instruments. The market doesn’t have to be a physical location. In the modern world many trades are carried out virtually through computer and telecommunications links.

So what exactly is the economy? The economy is a system (or more accurately a set of interlocking systems) in which decisions are made about:

• What goods to produce, for example whether to use more land for agricultural production, for recreational activities, or urban development;
• How goods and services will be produced, for example whether to produce them manually or using modern technology systems such as factory robots;
• Who will receive the goods and services, for example whether they will be allocated to those with the highest incomes or whether they will be more evenly shared among the population; and
• Who will receive the rewards for making and selling them, for example, will the profits go to a small number of shareholders or be more evenly shared out among the community.

You can see that these are complex and potentially controversial decisions. As we shall see in later chapters, the economy plays one of the most significant roles in making these decisions, although some aspects of these decisions are additionally shaped by political, legal and social frameworks.

This economic system exists at a number of levels:

• The local level. Jessie Boot competing and operating in Nottingham.
• The national level. Boots competing and operating in 66 stores in 28 towns and cities.
• The international level. Alliance Boots competing and operating across the globe.

Many of the parts of the economic system are created by individuals and groups (like Boots and other companies) building relationships and making agreements with each other about trading, and prices that will be charged for trades. Other parts of the system are more centrally controlled (by governments) – for example the Bank of England produces the notes and coins that are used for cash transactions in England and Wales, and the Companies Act of 2006 is a piece of central government legislation setting out detailed rules about setting up and running companies.

Businesses are a major part of the economic system. They buy resources, transform these resources through production processes, and sell finished goods.

Case Study Cargill at the heart of the international economy

Cargill is an American company that plays a significant role in the provision of food, agricultural and industrial products (as well as financial services). However, it is not a household name. The company employs over 130,000 people in 66 countries. It produces and distributes grain, oilseed, meat and poultry, as well as salt, starch, steel and many other products. Cargill therefore supplies products, that it acquires from raw material producers, to bakeries, food manufacturers, construction companies and many other businesses.

Companies like Cargill play a particularly important role today in a world of increasing shortages of raw materials. For example, in 2010 the Russian grain harvest was severely affected by soaring temperatures during the summer so that there wasn’t enough grain produced in the country to meet domestic demand. The Russian government put a ban on the export of grain. The impact of this was to create a shortage of grain in many markets leading to rising grain prices. Cargill therefore had to pay higher prices to farmers to obtain grain, and then pass on these higher prices to its own customers.

• What sorts of economic decisions does Cargill make?
• Are these decisions at local, national or international level?

The Cargill example shows how a major company plays a key part in the economy, buying raw materials and foodstuffs and then supplying them to the market. It also helps to set market prices. At the same time Cargill is affected by changes in the market resulting from the actions of governments, and other buyers and sellers.

Cargill	→	supplies to the market and helps to set market prices
The market	→	influences the prices that Cargill can set

The macro- and micro-economy

The main decision makers in the economy are governments, sup...