INTRODUCTION TO BUSINESS
Yavuz Karazeybek
Resource: Jeff Madura-Introduction to Business (2006)
PART 1
Business Environment
Economic conditions can affect the revenue or expenses of a business and therefore can affect the value of that business.
CHAPTER 3 Assessing Economic Conditions
Economic growth is the change in the general level of economic activity.
Sometimes economic growth is strong, and other times it is relatively weak
1- Impact of Economic Growth on Business Performance
CHAPTER 3 Assessing Economic Conditions
Impact of Economic Growth on Business Performance
Strong Economic Growth
When U.S. economic growth is stronger than normal, the total income level of all U.S. workers is relatively high, so there is a higher volume of spending on products and services. Since the demand for products and services is high, firms that sell products and services should generate higher revenue.
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Strong Economic Growth
How the Impact of a Strong Economy Spreads across Firms
Once consumers begin to increase their spending;
Impact of Economic Growth on Business Performance
CHAPTER 3 Assessing Economic Conditions�
Strong Economic Growth
How the Impact of a Strong Economy Spreads across Firms
Impact of Economic Growth on Business Performance
CHAPTER 3 Assessing Economic Conditions
Weak Economic Growth
Slow economic growth results in low demand for products and services, which can reduce a firm’s revenue. Even firms that provide basic products or services are adversely affected by a weak economy because customers tend to reduce their demand.
Starbucks- not necessity
Bottled water- water is necessity but still have tap water
When economic growth is negative for two consecutive quarters, the period is referred to as a recession
Impact of Economic Growth on Business Performance
Impact of Economic Growth on Business Performance
Weak Economic Growth
Businesses tend to impose layoffs when economic conditions weaken, because they no longer need all of their employees once the demand for their products or services is reduced.
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Impact of Economic Growth on Business Performance
Weak Economic Growth
How the Impact of a Weak Economy Spreads across Firms
For example;
When the demand for new cars sold by automakers declines,
CHAPTER 3 Assessing Economic Conditions
Impact of Economic Growth on Business Performance
Weak Economic Growth
How the Impact of a Weak Economy Spreads across Firms
For example;
5) when the automakers reduce their production, their need for materials such as steel declines. Thus, the firms that produce steel may experience a decline in demand and may need to lay off workers.
and so on….
Some businesses are affected more than others: selling bread or diamond rings?
Aggregate expenditures
CHAPTER 3 Assessing Economic Conditions
Impact of Economic Growth on Business Performance
Indicators of Economic Growth
The total amount of expenditures in the economy
The total production level and total aggregate expenditures are closely related, because a high level of consumer spending reflects a large demand for products and services. The total production level is dependent on the total demand for products and services.
Impact of Economic Growth on Business Performance
Gross domestic product (GDP)
The total market value of all final products and services produced.
The GDP is reported quarterly
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Indicators of Economic Growth
An alternative indicator of economic growth is the unemployment level. Businesses may monitor various unemployment indicators because they can indicate whether economic conditions are improving. The four different types of unemployment are as follows
CHAPTER 3 Assessing Economic Conditions
Indicators of Economic Growth
1- Frictional (natural) unemployment
represents people who are between jobs. That is, their unemployment status is temporary, as they are likely to find employment soon.
For example, a person with marketable job skills might quit her job before finding a new one because she believes she will find a new job before long.
CHAPTER 3 Assessing Economic Conditions
Indicators of Economic Growth
2- Seasonal unemployment
represents people whose services are not needed during some seasons.
For example, ski instructors may be unemployed in the summer.
Impact of Economic Growth on Business Performance
CHAPTER 3 Assessing Economic Conditions
Indicators of Economic Growth
3- Cyclical unemployment
represents people who are unemployed because of poor economic conditions.
When the level of economic activity declines, the demand for products and services declines, which reduces the need for workers.
For example, a firm may lay off factory workers if the demand for its product declines.
Indicators of Economic Growth
CHAPTER 3 Assessing Economic Conditions
Impact of Economic Growth on Business Performance
4- Structural unemployment
represents people who are unemployed because they do not have adequate skills.
For example, people who have limited education may be structurally unemployed.
Indicators of Economic Growth
CHAPTER 3 Assessing Economic Conditions
Variation in the Sensitivity to Economic Growth
Some firms are more sensitive than others to economic conditions because the demand for their product is more sensitive to such conditions.
Food vs. Automobile
Impact of Economic Growth on Business Performance
Indicators of Economic Growth
CHAPTER 3 Assessing Economic Conditions
Reading (p.77) Responding to Economic Growth
Inflation is the increase in the general level of prices of products and services over a specified period of time.
The inflation rate can be estimated by measuring the percentage change in the consumer price index, which indicates the prices on a wide variety of consumer products such as grocery products, housing, gasoline, medical services, and electricity.
CHAPTER 3 Assessing Economic Conditions
2- Impact of Inflation
CHAPTER 3 Assessing Economic Conditions
2- Impact of Inflation
Types of Inflation
Cost-push inflation
the situation when higher prices charged by firms are caused by higher costs
Steel prices: Automobile
Cotton prices: Textile
Gasoline prices: Transportation
Pay higher prices – less money to spend – reduce spendings (or borrowing Money?) / demand will decrease – lower revenue for firms
Demand-pull inflation
the situation when prices of products and services are pulled up because of strong consumer demand
Strong economic conditions – strong demand for products - shortages in production – increase in prices
Capacity increase – more employees – higher wages – increase in costs – increase in prices
CHAPTER 3 Assessing Economic Conditions
2- Impact of Inflation
Variation in the Sensitivity to Inflation
Some firms are much more exposed to inflation than others because of the types of expenses they incur in their production process.
For example,
Delivery service firms such as FedEx and UPS are very exposed to the cost of oil because they need to purchase so much gasoline for their delivery trucks every day.
But service firms may not affected by changes in oil prices.
CHAPTER 3 Assessing Economic Conditions
2- Impact of Inflation
Reading (p.80) Responding to a Change in Inflation
Interest rates determine the cost of borrowing money.
They can affect a firm’s performance by having an impact on its expenses or on its revenue.
3- Impact of Interest Rates
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
3- Impact of Interest Rates
Changes in market interest rates can influence a firm’s interest expense because the loan rates that commercial banks and other creditors charge on loans to firms are based on market interest rates.
Even when a firm obtains a loan from a commercial bank over several years, the loan rate is typically adjusted periodically (every six months or year) based on the prevailing market interest rate at that time.
High interest rates = no expansion, reduced investments
CHAPTER 3 Assessing Economic Conditions
3- Impact of Interest Rates
CHAPTER 3 Assessing Economic Conditions
3- Impact of Interest Rates
Impact on a Firm’s Revenue
When interest rates rise, it affects the monthly payment on car loans and may reduce the demand by consumers for new cars.
Houses
Construction firms
Variation in the Sensitivity to Interest Rates
Some firms are more sensitive to changes in interest rates than others.
For example,
Firms that have very little debt may be somewhat insulated from changes in interest rates because their interest expenses will not change very much.
3- Impact of Interest Rates
CHAPTER 3 Assessing Economic Conditions
Reading (p.83)
Responding to a Change in Interest Rates