Economics And Their Impact On Business Economics Essay

This paper provides an understanding the cardinal rules of economic sciences and their impact on concern.

The scenario followed in this paper is that I am working in a medium sized fabrication company. I have produced a study for a group my co-workers explicating them the cardinal rules of economic sciences and their impact on our concern. The subjects addressed to the audience are as follows:

How economic sciences, as a subject relates to other scientific disciplines and to concern activity?

The relevancy of micro and macro-economics to concern

How markets operate in a market economic system and how this may impact on concern?

The relationship between cost, supply and production

The nature and determiners of national income and the relevancy of this for concern

Tendencies and Fluctuations in the UK economic system

The possible impact of the international environment on concern


Undertaking 1: Principles of Economicss and their Impact on Business

1.1. Basic Principles of Economicss

Activities conducted with the purpose of bring forthing income are termed as economic activities, due to which there was a generation and development of Economics as a scientific discipline. Economicss originated as a societal scientific discipline in 1776 with Adam Smith ‘s book “ An Inquiry into the Nature and Causes of Wealth of Nations ” .

Economicss has been defined otherwise in different times by assorted schools of ideas and has been termed as scientific discipline of 1 ) wealth, 2 ) public assistance, 3 ) pick and 4 ) growing.

Different Definitions of Economicss:

Harmonizing to Lionel Robbins ( 1932 ) , “ economic sciences is a scientific discipline that surveies human behavior as a relationship between terminals and scarce agencies which have alternate utilizations ( Hoyt and McGoldrick, 2012 ) ” .

Modern growing oriented definition of economic sciences by Professor Paul A Samuelson is that “ economic sciences is the survey of how work forces and society choose, with or without the usage of money, to use scarce productive resources which could hold alternate utilizations, to bring forth assorted trade goods over clip and administer them for ingestion now and in the hereafter among assorted people and groups of society ” ( Hoyt and McGoldrick, 2012 ) .

There are two subdivisions of economic sciences – Micro-economics and Macro-economics:

Micro-economics: It is the survey of picks and determination doing behaviors of single participants in the market including single family, houses, workers, enterprisers, etc. Micro-economics lone trades with single units and its theories may non keep true for the whole economic system. It examines assorted sorts of market constructions including Perfect Competition, Monopoly, Oligopoly, Duopoly, Monopolistic Competition, etc ( Mankiw, 2012 ) .

Macro-economics: It surveies the economic system as a whole dealing with sums including national income and end product, entire ingestion, investings, nest eggs, money supply, entire employment, rising prices, deflation, etc. It besides surveies the impact of authorities policies including pecuniary and financial policy ( Cohn, 2007 ) .

1.2. Impact of Market Economy on Business

Market Economy Characteristics: Market economic system refers to an economic system where market forces ( demand and supply ) govern the economic determinations and the pricing of goods and services, and there is limited authorities intercession. In a market economic system, the resources are owned by persons or houses, who use the resources to bring forth goods and services that are sold to the consumers ( Kates, 2011 ) . In add-on, the manufacturers own the production unit, and any net income or loss made in the procedure goes to the persons or the companies. However, market allocates the resources to the manufacturers, as the market monetary values find what to bring forth, how to bring forth, and how much to bring forth.

Impact on concern: In a market economic system, market monetary values determine the allotment of resources to the administrations, and therefore the consumers have a wider pick. The concerns are driven by net income motivations and work hard in a competitory environment to hold on a bigger portion of clients. This encourages efficiency as higher productiveness would ensue in lower costs and increased net incomes. With higher competition, the monetary values of the goods and services remain low, as all the manufacturers want to keep a lower monetary value to pull more clients. The labor is besides really efficient since there are attempts to improvize the accomplishments of the labor in order to better the productiveness. The major impact of the market economic system on the concern is the formation of monopolies in such a competitory environment which consequence in higher monetary values and higher rising prices taking to more stiffening competition ( Kates, 2011 ) .

1.3. Tendencies and Fluctuations in Economy

Every state goes through tendencies and fluctuations which are frequently termed as concern rhythms of an economic system. Business rhythms refer to the economy-wide fluctuations in the growing of production, income and disbursement over a period of clip. As the construction of the economic system develops over the clip, the length and volatility of concern rhythms tend to alter ( Hirschey, 2009 ) .

Two theoretical accounts of concern cycles- Endogeneousand Exogeneous:

Endogeneous theoretical accounts refer to the cyclical fluctuations that happen due to factors within the economic system including alterations in the aggregative demand or alterations in stock rhythm that could take to fluctuation in income, ingestion and disbursement.

On the other manus Exogeneous theoretical accounts refer to the fluctuations in the external environment of the economic system including demand-side or supply-side dazes ( Knoop, 2010 ) .

Following are the assorted possible phases of the concern rhythm and their impact on the economic system ( Forgang and Einolf, 2007 ) :

Economic Boom: It is witnessed when the existent GDP grows at a faster rate than the tendency growing rate. It has the undermentioned impact on the economic system:

Aggregate Demand: At this phase, the aggregative demand ( AD ) is high easing higher degree of production and employment by the houses. The concerns can besides increase their net income borders by increasing monetary values. The addition in aggregative demand is due to increased consumer disbursement.

Labour Market: An economic roar consequences in higher growing in employment and the existent income of the workers. However, in the instance of labor deficits, there is a hazard of addition in pay rising prices. The Phillips Curve explains the tradeoff between rising prices and unemployment. It depicts that if authorities wants to cut down the unemployment, it will hold to accept higher rising prices as a tradeoff.


Imports and Trade Deficit: The economic roar consequences in high demand for imports due to increased fringy leaning to devour therefore taking to widening trade shortage.

Impact on authorities fundss: The roar consequences in financial dividend as the economic system earns high revenue enhancement grosss ; in add-on to decrease in public assistance payments.

Increased net incomes, investings and productiveness: The houses experience growing in net incomes, addition in investing and increased labour productiveness.

Hazard of High rising prices

Economic Slowdown: This is a phase where GDP continues to increase but at a slow gait.

Economic Recession: This is the consequence of autumn in existent GDP of the economic system ensuing in decrease of employment, incomes and net incomes. In other words, recession happens when the spread between an economic system ‘s existent GDP and possible GDP continues to widen. The impact on the economic system is a entire contrast of the impact of Boom in an economic system ensuing in:

Decrease in Aggregate Demand

Decrease in Employment Rate

Reduced imports and exports

Increased authorities disbursement and lower revenue enhancement gross

Decreased net incomes, investings and labour productiveness at house degree

1.4. Impact of International Environment on Business

Globalization comprise of two types – globalisation of market and globalisation of production. Globalization of market refers to an economic system where national market interacts freely with the planetary markets, while Globalization of production refers to an single company ‘s spread production procedure across the Earth to take cost and quality advantages of locations ( Conklin, 2011 ) . The impact of globalisation and an international environment can be summarized as follows:

Buyer ‘s market/ Increased market potency: With globalisation, the concern can spread out their markets to planetary location, and non merely sell merchandises in the local market. For illustration, car makers across the Earth have expanded their markets in assorted locations.

Relatively low-cost resources: Due to bilateral trade understandings, the concerns can avail cheaper resources from different locations. For illustration, states like India and China have lower labor cost, and therefore many European and American companies outsource their work to these locations.

Increased competition: Due to globalisation and liberalisation, the local concerns get tough competition from their transnational opposite numbers.

Multi-national and multi-cultural direction: It is hard for concerns to pull off a complex transnational environment, since it deals with pull offing employees from assorted locations, linguistic communications, civilizations, faiths across the universe. Thus, doing it comparatively complex for concerns to manage the kineticss ( Czinkota, 2008 ) .

In a fabrication concern, the concern determinations are based on the cognition of micro economic indexs including demand and supply of goods and services, and macroeconomic sums including aggregative demand, national income, entire ingestion, etc. We use these indexs for the intent of prediction and concern planning.

Any concern, particularly fabrication is besides prone to tendencies and fluctuations and has been through assorted phases of concern rhythms over the old ages. It is of import for concerns to analyse the sums of the planetary market and the several industry to set harmonizing to the altering environment.

Exposure of the concern to the international environment have opened new markets for our concern in footings of rivals, but have besides increased the competition both in the local and international market.

Undertaking 2: Relevance of Micro and Macro Economics and its Impact on Business

2.1. Relevance of Micro and Macro Economics

Micro-economics trades with the behavior of single families and houses in doing determinations on the allotment of limited resources. It surveies how these determinations impact the demand and supply of goods and services, finding the monetary value and how monetary values determine the demand and supply of goods and services ( Mankiw, 2012 ) . The relevancy and importance of micro-economics for both the economic system and the single concerns is as follows:

Principles of micro-economics aid in understanding the construct of market economic system and how economic determinations are made in instance of free market economic systems.

Micro-economics theories suggest how the economic system should use the scarce resources expeditiously

Ithelp in understanding the constructs of international trade including additions from internal or external trade, foreign exchange, finding of exchange rate, balance of payments, etc.

Price theory indicates the conditions of efficiency and forms a footing for public assistance economic sciences. This is an of import index to measure the criterion of life of the population

It explains how infliction of different types of direct and indirect revenue enhancements lead to attainment of societal public assistance

It explains the province of efficiency in production and ingestion, which farther helps the authorities to border economic policies including pricing and revenue enhancement policies

Macroeconomicss trades with determiners impacting the economic system as a whole including sums like national end product, investings, nest eggs, employment, rising prices, trade, etc. The importance or relevancy of macro-economics is indicated in the undermentioned points ( Cohn, 2007 ) :

Itdrives the preparation and executing of authorities policies sing monetary value degrees, trade, authorities intercession, national nest eggs, national end product, etc.

Macroeconomicss helps understand the working of the economic system as it gives a bird ‘s oculus position of the economic universe. The variables studied under macroeconomics like sum end product, national income, gross nest eggs and end product, national outgo are of import factors to understand the working of the economic system.

Macroeconomicss help in commanding economic fluctuations: Tendencies and fluctuations like concern rhythm, rising prices, etc. are studied to understand the impact and extent of these fluctuations on the economic system.

National income calculated under macroeconomics helps in understanding the aggregative construct of the end product from assorted factors of production in the economic system. It can besides be used as an index to compare the public presentation of assorted economic systems.

Businesss study macroeconomic tendencies in order to utilize the consequences of the survey as a lead towards explicating companies ‘ concern policies. For illustration, an addition in the ingestion of goods could be an indicant of increased consumer assurance, which may act upon the determination of a company to increase production or to cut down the rate of production until the ingestion rates increase.

2.2. Production, Costss and Supply, and their impact on concern

Land, labor, capital and endeavor are the four factors of production, i.e. the inputs required to bring forth a peculiar merchandise. Any net income maximizing house, combines all four factors in order to maximise the output/ minimise the cost of bring forthing any given end product.

Output/ Production can be expressed in the undermentioned ways:

Entire Product ( TP ) : Entire sum of end product a house produces within a given period of clip.

Average Product ( AP ) : This is measured in relation to a peculiar factor of production – labor or capital

Fringy Product ( MP ) : It refers to the alteration in entire merchandise when an extra unit of factor is used.

Law of Variable Proportions: In a short clip period, where at least one factor of production is fixed ( capital ) – as the extra units of variable factor ( labor ) are increased, the proportion in which they combinewith fixed factors will alter ( Mankiw, 2012 ) .

Increasing returns to the variable factor: Before making the optimal ratio of variable to fixed factor, extra units of variable factor are extremely productive therefore ensuing in increased end product more than in proportion to the excess input of variable factor. This is called increasing returns.

Decreasing returns to variable factor: After the optimal proportion of variable to fixed factor is achieved, the extra units of variable factor will be consecutively less productive. This is called decreasing returns.

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Costss of Production: Short-run

The production Torahs discussed above are instrumental in finding the cost, particularly in the short-run when the jurisprudence of variable proportion is into drama. In the short-term, costs could be characterized as ( Taylor and Weerapana, 2011 ) :

Indirect/ Fixed Cost: This sort of cost does non alter with the alteration in end product – the company has to incur such costs even at zero end product. For illustration, rent of the premises, depreciation, insurance charges, etc.

Entire, Average and Fringy Costss:

Entire Cost ( TC ) = Entire Fixed cost + Total Average Cost

Average Cost ( AC ) = Entire Cost ( TC ) / Entire Output ( TQ )

OR, Average Fixed Cost ( AFC ) + Average Variable Cost ( AVC )

Fringy Cost ( MC ) = i??Total Cost ( TC ) / i??Quantity ( Q ) , where i??Q = 1aˆ¦ therefore, the Marginal cost = Change in Total Variable Cost

Direct/ Variable Cost: These are straight related to the end product. The more the end product, the more is the variable cost. For illustration, costs of natural stuffs, rewards f labour, etc.

Relationship between Production and Costs in Short-Run ( Griffiths and Wall, 2005 )

TFCcurve remains changeless consecutive line across all degrees of end product.

TVC curve is a “ S ” shaped line bespeaking that when there are increasing returns to the variable factors, the variable cost rise slow with the addition in end product, while when the diminishing returns set in so TVC addition at a rapid rate with each unit of end product. And, therefore TC curve besides follows the same form as TVC.

Average fixed cost lessenings with the addition in end product.

Average variable costs decreases with the increasing mean returns to the variable factor, but begins to increase when the diminishing mean returns set in.

Fringy cost lessenings with increasing end product till the being of increasing fringy returns to the variable factor, and starts to increase one time there are decreasing returns to the variable factor.

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Cost of production in the long-run: In the long tally, there are no fixed factors and all the factors of production can be varied. The houses can increase all its factors of production and addition in scale – the addition in size would let the house to unite the factors of production ensuing in decrease of long tally norm cost and economic systems of graduated table. Long-run Average Curve ( LRAC ) is an envelope to a aggregation of short-term mean curves.

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Impact of cost, production and supply on concern:

The houses continually need to analyze the costs and production curves in order to take concern determinations. The houses are obliged to incur its fixed costs like rent of the premises, depreciation, involvements, etc. , even with nothing production, while the house stops incurring variable costs with no farther end product. Therefore, it is of import for houses to make up one’s mind whether to go on bring forthing after incurring its fixed cost – which is determined by the relationship between cost and gross incurred over the period of clip ( Griffiths and Wall, 2005 ) .

Short-run: In the short tally, if the entire gross is merely able to cover the entire variable costs, so the house is at a break-even point, neither better off nor worse off in bring forthing farther. However, if the gross is greater than the entire variable cost, the house can take a determination to bring forth farther. In add-on, if the entire gross is less than the entire variable costs, the house is better-off closing its production ( Griffiths and Wall, 2005 ) .

Long-run: In the long-run, when monetary values ( mean gross ) equal the mean entire cost, the house is at a break-even. The house must go on to bring forth until entire gross covers its entire cost including both variable and fixed costs.

Manufacturing concern continually requires analysis of production, supply and costs in order to do production determinations for the given time-period. The production and cost curves can be evaluated in visible radiation of increasing and decreasing returns of factors of production in the short-run to get at the optimal sum of production and cost parametric quantities, where it is possible to do grosss over and above the fixed costs in the short-run, and the entire grosss are able to cover our entire costs in the long tally.

Undertaking 3: Importance of National Income and its Impact on Business

3.1. Importance of National Income

National Income is defined as the value of the end product of the goods and services produced by an economic system, normally one twelvemonth. It besides refers to the value of income received within the economic system minus the income collectible by the citizens of the economic system ( Cohn, 2007 ) . National income is used for assorted intents, because of which it holds a great importance in an economic system:

Determines the degree of economic public assistance: National income helps gauging the per-capita income in an economic system which defines the criterion of life of the population of the economic system, therefore assisting in finding the degree of economic public assistance.

Economic Growth: A growing in a state ‘s national income is an index of the growing of an economic system. Similarly, an improved per capita income indicates the growing of the in the criterion of life of the people bespeaking the economic growing.

Distribution of Income: National income computation determines how the income is distributed amongst assorted factors of the economic system in the signifier of rewards, net incomes, rents, and involvement.

Guide to Economic Policies: National income estimations provide information on nest eggs, ingestion and investing in the economic system – which provides footing for an economic system to develop programs and define authorities intercession.

Budgeting: National income estimations sing nest eggs, ingestion, and investing provide information for the contrivers to make budgets and controls.

Helps organisations in calculating future demand for their merchandises.

3.2. Measurement of National Income

There are three methods to mensurate national income including ( Griffiths and Wall, 2005 ) :

Output Method: This method is based on the entire end product produced in an economic system during a twelvemonth. The add-on of entire value of end product of goods and services produced by all activities during a twelvemonth peers to the GDP of the economic system. It is of import to avoid dual numbering while utilizing this method. The production units are divided into three sectors – primary, secondary and third, and the goods and services produced in each of these sectors is estimated. The sum of merchandises and services produced in these sectors is the Entire Output of the Economy which is so converted into value in footings of money to get at National Income.

Income Method: Under this method, National Income is calculated by adding all the incomes earned by assorted factors of production in the economic system. These incomes from assorted factors include – rewards and wages, income of freelance, net incomes earned by concerns, involvement income, rents, and excess of authorities organisations and net flow of income from abroad.

Outgo Method: Under this method, national income is calculated by adding all the outgos incurred for goods and services. The money spent on production and ingestion by both authorities and private persons is added together to get at the national income of the economic system.

3.3. Round Flow of Income

Round flow of income refers to the economic theoretical account that describes the mutual circulation of income between the manufacturers ( houses ) and the consumers ( families ) ( Mastrianna, 2010 ) . Round flow of income with backdowns ( any income received by either manufacturer or the consumer but is non passed on to the other ) and injections ( any income received by either manufacturer or the consumer but does non come from the other ) – this theoretical account takes into consideration the authorities outgo, nest eggs, investings, and international trade. The undermentioned diagram describes the round flow of income, where ( – ) mark indicates backdowns and ( + ) mark indicates injections:

( + ) Government

( – ) Savingss

( + ) Government

( – ) Savingss

( – ) Tax



( + ) Exports

( + ) Exports

( – ) Imports

( – ) Imports



( – ) Tax

( + ) Investing

3.4. National Income Multiplier

Whenever there is an injection ( or backdown ) of demand into the round flow, the alteration in national income is larger ( by some multiple ) than the initial alteration. This is called a multiplier consequence. The ground for its happening is that an injection of new income increases the disbursement, which farther creates more income – therefore multiplying the consequence of the initial alteration ( Griffiths and Wall, 2005 ) . Examples of multiplier consequence can be seen in assorted state of affairss. For illustration, if a authorities builds a new main road, when there is an addition in exports in an economic system, or decrease in revenue enhancement rates, etc.

In order to explicate the computation of multiplier, allow ‘s take an illustration where authorities injects new demand by ?30 m for a new freeway undertaking. The initial equilibrium where backdowns equals the injections is Y1 = ? 100 m and Injections, J = ?30 m

W = -20 + 0.5 Yttrium

J = 30

W=J in equilibrium

-20+0.5Y = 30

Y = ?100 m in equilibrium

Let ‘s assume authorities is sing shooting higher demand of ?50 m, alternatively of ?30 m. The new equation becomes:

W= -20 + 0.5 Yttrium

J= 50

W=J in equilibrium

-20+0.5Y = 50

Y= ?140 m in equilibrium

National income multiplier would be:

K = i?? Y/ i?? J = ( 140-100 ) / ( 50-30 ) = 2

Therefore, the value of the multiplier is 2.

3.5. Importance of National Income for Businesss

The constituents and figures of National income, as indicated in the round flow of income including nest eggs, ingestion, investing, authorities outgo, exports and imports, are of import tools for single houses to do concern determinations. The concern uses the informations on national income chiefly for the undermentioned intents ( Ajami, 2006 ) :

Forecasting and Current Business Analysis: Businesss uses National Income informations to analyse the long term tendencies in their industry, or in the private or public sector, or in the primary/ secondary or third sector

Wage Negotiations: National Income data provides information on part by assorted factors of production in the economic system including rewards and wages as one of the income beginning. This information is used by concern to negociate with the labors based on the tendencies indicated by national income informations.

Measuring the position of an administration or an industry: National income informations helps the houses to understand the parts made by their industry and in bend by their administration in the overall national end product – therefore assisting them benchmark their position with the opposite numbers.

In add-on, houses use province income informations in selling surveies, to mensurate gross revenues possible and attempts.

The information on national income, round flow of income, and multiplier of national income is critical for the concern – as they help toanalyze the long term tendencies in the industry and economic system as a whole. It helps toforecastthe future demand based on the informations received on national income. In add-on, it forms the base for pay dialogues and corporate net income determination on the informations received through the national income histories.