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Economics and the business environment
1.1 Economic activity and economics
1.2 Business environment
1.3 Absolute and relative data
CASE
The economic conditions under which the management of an airline have to operate are crucially important. Knowing these conditions can be the key to success. The top management level may have to find answers to the following questions: if there is an economic slump, what is the effect on tourist spending likely to be? What will happen to the oil prices? Will the prices of American competitors’ tickets drop dramatically if the exchange rate of the dollar drops? Can we still afford our pilots’ wages, or will we have to buy bigger planes instead? Should we invest in new machines if the interest rate rises and lending becomes more expensive? The top management needs to make sure there is sufficient expertise in these fields to understand those symptoms and developments that have a direct bearing on the company’s achievements. They will need to ask themselves whether there are ways and means of avoiding negative effects.
We have started this chapter with the above situational sketch as a way of introducing the following issues:
What is economic activity and what academic discipline studies it?
What is the relationship between the business environment and economics?
Economic phenomena are regarded as belonging to the so-called business environment. This chapter will address the following key question: what role does economics play in the business environment?
People always have needs of one kind or another, and they fulfil these needs with the available resources. This is termed economic activity. Economic activity is the subject of many branches of economic research, and is dealt with in Section 1.1.
Section 1.2 deals with the objectives of economics within the framework of the business environment. It delineates that business environment with these objectives in mind. The main issue is what external factors determine business results. Political developments in market areas, technical innovations, major shifts in customer demand and changes in work ethics all have a major effect on companies. The contribution that economics could make to analysing these aspects is illustrated in a diagram.
Section 1.3 treats the relationship between absolute and relative changes in variables. The importance of the absolute change in economic variables will always be manifestly evident (for example, the employment figures over a number of years). However, the relative changes to these variables are often just as significant (for instance, the percentage of employment growth during a specific year).
1.1 Economic activity and economics
Human beings need things like food, warmth, shelter, safety and self development. These needs can be partly fulfilled by the supply of goods and services. The ready availability of goods and services to fulfil needs is termed prosperity. Human needs are virtually unlimited, while production is limited by the availability of resources like land labour, and capital. The excess of human needs over what can be produced is termed scarcity. Resources such as raw materials, machines and labour, which are used in the production of goods and services can be used for a variety of purposes. Labour can, for example, be used for the production of food, consumer electronics, education or safety (the judiciary and police). Raw materials and machines can also be put to a variety of uses. Since they can be put to a variety of purposes, they can be described as scarce or in short supply.
Economic activity occurs when people (consumers, managers) make choices to maximise their prosperity using scarce resources. Economic activity occurs everywhere in society: consumers obtain an income by going out to work; a company buys products, uses them to make other products and sells them; a bank employee buys shares on behalf of a customer; a town planner makes plans for a new city suburb for the city council; a sales employee of a company obtains a big international order.
Economic activity takes place within and between various organisations. In the examples mentioned, there is an interaction between consumers and companies, government institutions and companies and companies interacting with companies in other countries.
The science of economics is concerned with the study of economic activity.
The field is so complex that it has had to be divided up into several sub-disciplines. These can be roughly divided into two groups: those that study the internal process within companies (such as financial accounting, management accounting) and those that study the relationship with the environment or the environment itself (such as marketing and macroeconomics).
Company employees are rarely able to resolve the problems they encounter merely by having a knowledge of one of these fields alone. A problem often has both internal and external causes. This is illustrated in Example 1.1.
■ Example 1.1
A sales employee has noticed that the sales of a product are increasing at a lesser rate than was anticipated. There may be a number of reasons for this. Perhaps competitors have brought a similar product but with a better price-quality ratio onto the market. Maybe the costs have become too high because of inefficient production methods (which may then constitute an economic, a business management or even a technical problem). Perhaps competitors have increased their advertising or improved their distributing organisation (aspects that are investigated in marketing). Perhaps the product is sensitive to cyclical trends and the economic growth in the sales area is suffering a setback. Sometimes customers abruptly change their spending pattern, which will affect sales. A product may have suddenly become too expensive for buyers in certain countries because of changes in the exchange rate. These are all aspects of the problems that fall under economics.
All these factors could play a role and may even exert a simultaneous influence on sales. The sales employee would like to take measures to turn the tide.
To do that he will first have to find out what the causes of declining sales are.
Test 1.1
What measures could the company in Example 1.1 take to reduce costs that are the result of a wage rise?
Economic activity in a country can be studied on various levels. One way of doing it is to study the options open to all the companies and households within a country. Another is to analyse the economic activities of a group of companies or households who make or buy a similar type of product. The relationship with other countries is also important for the economic processes within a country.
All these topics belong to the field of economics. A distinction needs to be made between the following:
- Industry analysis
- Macroeconomics
- Monetary economics
- Intern...
