Business and the Economic Environment Essay

Introduction In this assignment I will be talking about Marks and Spencer and how the economic environment could have an effect on them. The economic environment is basically all the economic factors brought together. By saying economic factors, I mean aspects such as; employment, inflation, interest rates, productivity and wealth. All of these elements mentioned above have an influence on the buying behaviour of consumers and organisations. P1 In terms of economic variations for marks and spencer, the best way to explain the effect it would have on them is by using the business cycle. The business cycle is basically the periodic but irregular up and down movement in economic activity, measures by fluctuations in real GDP and other macro- economic variables such as inflation, interest rates and unemployment to mention a few. In simple terms it is the ups and downs of a nation’s economy. The business cycle mainly has four cycles; recession, recovery, growth and slump which repeat themselves over time. Recession is a period of reduced economic activity (economic growth slowing down) in which levels of buying, selling, production and employment go down. This means that during recession, Marks and Spencer would be affected because there will be a change on the buying behaviour of consumers. This will then lead to a sales revenue and profit decline for them. Due to low profits, they will cut their spending essentially cut back on hiring new employees and cut jobs for other by making them redundant in an effort to keep their business on track. They will also cut back on productions costs because consumers will cut back on spending as well which means they will not be buying as much. Recovery is the turning point from depression to expansion. During the period of recovery, there are expansions and rise in economic activities. For Marks and spencer there will be a steady rise in output, income, employment, prices and profits. During recovery for Marks and spencer will mean higher demand for products and services. There will be more hiring, because Marks and spencer will resume investments due to an increase in profits because customers are willing to spend more. They will steadily start opening other stores nationwide due to consumer demand hence more people to recruit. As more people will return to work, spending will increase, which will the demand for more goods and services hence they will start making a profit. Slump/trough during the slump period output slows down due to a reduction in demand. A slump can lead to recession (two negative quarters of economic growth). This can put Marks and Spencer under pressure because they will be forced to reduce costs, which will lead to increased unemployment as they make people redundant The rate of high unemployment will then mean that people will have less money to spend thus contributing to a downturn in the economy. During a slump output and income will fall leading to fall in consumption so basically Marks and Spencer will see a fall in sales because customers will not be spending and they will cut down on production costs as well so that they can save money. Growth: When the economy is at boom or peak, it is an increase in the capacity of an economy to produce goods and services. This is the stage where by Marks and Spencer will hire more people and there will be low unemployment. Customers will also be willing to spend more money therefore boosting sales for Marks and Spencer. Demand for goods and services will be high which means that production will be high so Marks and Spencer will be having high imports to stock up their shelves for consumers. There will be high investment levels for them; they can therefore use that money to pay off their suppliers or debtors. Inflation is the measurement of the annual percentage rise in average price level. A reduction is purchasing power an increase in the cost of living. With the rise in price levels Marks and Spencer will buy fewer goods because consumers will not spend as much money. As a result the purchasing power of money will be reduced with inflation. High inflation will distort consumer behaviour for Marks and Spencer. Consumers will spend less or buy their requirements in advance as inflation may destabilize markets and create unnecessary shortages. Employees in Marks and Spencer may demand higher wages in time of high inflation. If the claims are accepted it may make the inflation get worse. During high inflation, wide variations in inflation rates may make it difficult for Marks and Spencer to predict the future and calculate their sales returns. This can therefore challenge their confidence to predict their financial reports In the future. Inflation is measured by RPI (Retail Price Index) this is when government inspectors go round the shops every month and take samples of what consumers buy and add up the prices and compare them with the previous month’s prices. RPI normally includes mortgages. In 2012 it was measured at 2.9% Also CPI (Consumer Price Index) this is a measure of price in consumer goods and services e.g. food, clothing, etc. The CPI does not include mortgages. It was measured at 2.5% in 2012. Unemployment Marks and Spencer will be affected in a variety of ways when there is high unemployment. They will observe low consumer spending. When more people are out of work they do not have money to spend hence Marks and Spencer will be affected because there will be fewer people buying from their stores. People will then target inferior goods basically Marks and Spencer branded goods that are cheaper than brands and also may be of less quality to satisfy their needs. Employees working for Marks and Spencer may work for long hours and Marks and Spencer may not be able to give them a pay rise due to the low demand of goods. Managers will be less motivated because their business will be going down due to low profits. However, Marks and Spencer will benefit in the sense that if they wanted to employ anyone they will have the advantage to pick and choose due to the high number of applicants for one job role. P2 Government spending is also known as public spending and in UK it takes up to 45%of GDP. Government spending is classified in three areas; Transfer payments; this are payments made available through social security system. They include JSA, child benefit, Housing benefit, Income support etc. its main aim is to provide a basic income for unemployed people or a minimum standard of living for people with low income. Current government spending; this is basically spending on goods provided by the government e.g. salaries paid to people working in NHS and resources for education and defence etc. Capital spending; this is spending for infrastructure e.g. motorways and roads, schools, hospitals etc. Government policies on the other hand, are a set of policies produced by the government that are used and developed to influence the UK economy. They are divided in to different areas that influence the way that a business operates. Economic Policy, economic policies are actions taken by the government to influence its economy. Economic growth will be essential for government and Marks and Spencer as well. This will mean that the living standards will increase so it means that people will have more money to spend in Marks and Spencer and other retail shops. There will also be high demand for Marks and Spencer therefore they will be making profit. However if the government decide to increase tax rates, Marks and Spencer will grieve because it means that they have to increase the prices of their goods and services which means customers will be reluctant to spend money. Industrial Policy this relates to the government increasing industrial activity in the UK. This mostly focuses more on jobs and skills. For example if Marks and Spencer opens new industries to manufacture goods, they will create more jobs and find skilled labour to satisfy their customers. This policy is mainly used to raise people’s income, new technologies and demographic changes. Competition Policy this is a government policy to prevent and reduce abuse of monopoly power. Abuse of monopoly power can lead to market failure and be against the public. Therefore that’s why government steps in to protect the interests of consumers. To ensure that competition takes place in UK Competition Act 1998 is used to stop forcing rivals out of business, selling goods and services at different prices for different customers and limiting supplies to make sure prices go up among others. Fiscal Policy this covers the spending and taxation decisions of the government. The main aim of fiscal policy is to influence aggregate demand (total demand in the economy) by increasing government spending or reducing taxes. The effect of fiscal policy on Marks and Spencer is that when the Bank of England increases tax, they will have less money for hiring and investing and this may affect consumers because prices may increase. However if they decreased tax rates, this will stimulate investment spending and more job opportunities. Environmental Policy this regards to the environment. Basically for Marks and Spencer they need to make sure that they are protecting the environment by recycling and reducing carbon foot print. The Climate Change Act states that climate change risk management must be completed every five years. Businesses like Marks and Spencer must show how they are reducing carbon foot print and how they are protecting the environment. Monetary Policy comprises of changes in the rate of interest to influence the growth of aggregate demand, money supply and inflation, this works by changing the rate of growth of demand for money. If the Bank of England sets high interest rates prices will start falling and Marks and Spencer will see the changes in spending from consumers. This is mainly used to control inflation. However if it was vice versa, low interest rates will lead to more spending hence Marks and Spencer receiving more sales therefore more to pay dividends to shareholders or invest. The diagram below shows the increase in interest rates which lowers demands so prices fall from P to P1 and demand falls from AD1 to AD. M1 The government produces set of policies that it uses and develops to influence the economy. Â  Fiscal Policy is the use if taxes and government expenditure to control the total demand of the economy. Increase in taxes will decrease the demand. Government expenditure on the other hand, encourages people to purchase by reducing the price. Taxes and expenditure both use law of demand in order to control aggregate demand. The advantages of using fiscal policy for Marks and Spencer will be that if the government increases demand e.g. by cutting income tax or indirect tax, it means that people would be willing to spend more because prices will go down hence they can get more with their money. Marks and Spencer will benefit because the demand will be high and hence they get more profit at hand. With this profit they will be able to invest more in to the business and also pay their corporation tax. The corporation tax will then be taken by the government again and this will help the society and people in need e.g. NHS and Education. A disadvantage of fiscal policy is that another problem can arise when solving the other. For instance stimulating demand in the economy to decrease unemployment may worsen inflation because a right shift in aggregated demand will cause a rise in price levels. Therefore when prices rise go up, as much as there is more demand, some people may be hit by inflation and may have to pay more for their goods in Marks and Spencer than normal. Below I have illustrated what I have just explained. On the contrary decreasing demand to control inflation will cause short demand therefore unemployment arises. In the diagram it shows that increase in government expenditure, will increase inflation basically prices will shift from P to P1. Also there will be more demand so it will shift from AD to AD1.This will benefit Marks and Spencer because the more the demand the more they pay corporation tax therefore helping the society i.e. education, NHS etc. In the diagram it shows that increase in government expenditure, will increase inflation basically prices will shift from P to P1. Also there will be more demand so it will shift from AD to AD1.This will benefit Marks and Spencer because the more the demand the more they pay corporation tax therefore helping the society i.e. education, NHS etc.