Megan Catrin Lewis Business Economics 28th November 2014
Explain the Effects, of Changes in the
Economic Environment on a Selected Business
The economy is very important as it determines the success and
profit for everyone as a whole, for example: if there is a high rate of
unemployment this means that there are more people out of work
and relying on money from the Government via benefits, this would
affect the quality of life as working people may have to work longer
hours for less pay because of the shortage of workers.
The economy focuses on the spending of others, which is very
important to the growth of the economy, as one person’s spending is
another person’s income.
There are many aspects of what affects the economy, some of these
are: the inflation and deflation of products, the changes in gross
domestic product (GDP), rates of employment/unemployment, the
trade deficit/surplus and ripple affects. The Government measures
all of these aspects, and broadcast the results through the news.
In this assignment I will be basing my work on Tesco and explaining
how certain changes in the economy can impact the way Tesco plans
and expands. Tesco is a good example to use for this assignment as
it’s a PLC with many shareholders and is involved with the media,
this makes it easy to access profits and dividends that Tesco have
achieved. Tesco is a global supermarket that was founded and
started in 1919 by Jack Cohen. Tesco was built up from market stalls
to a small business by jack Cohen, and was further developed after
his death.
What is an economic environment?
Each country has its own economic environment, meaning that other
countries could have a better economy whilst other countries have
bad economies; an example of this is that the UK’s economy is
growing by 1% whilst other countries are not growing as fast.
The economy has certain indicators such as: GDP (Gross Domestic
Product), unemployment, rates of inflation and deflation, trade
surplus’s/trade deficits and balance of payments are all indicators.
The business cycle
The business cycle is a diagram that explains the current state of the
economy; the business cycle shows the growth and decline of the
economy, and shows the: booms, slow down, recessions, and
recoveries.
Kathryn Dunstan 1
,Megan Catrin Lewis Business Economics 28th November 2014
What is a boom?
A boom is when the economy is increasing and growing, this means
that there is a high demand for goods and services; the employment
rates are also increasing due to the demand for employees in
supermarkets and factories. When there is a boom in the economy
people can make more money from putting their savings in banks as
the interest rates increase, this allows people to make money from
their savings and invest more in their local community.
Tesco can thrive and grow when there is a boom; this is because
there is more demand for their products and services, meaning that
customers can spend more at Tesco. However, it can be difficult for
Tesco when there is a boom as people have more money, and as a
result can afford to shop at luxury stores, such as: Marks & Spencer.
What is slow down (trough)?
A slowdown means that the economy is decreasing, this means that
the demand for products and services are decreasing and people are
not spending as much as they used to. Tesco can be affected
positively and negatively, for example: when Tesco customers
cannot afford the high quality products, Tesco can offer them
standard products that are priced reasonably, however because of
this Tesco will lose their sales on their highly priced products.
What is a recession?
This is when people start to save their money instead of spending
this means less buying resulting in companies receiving less profit,
which leads to employees becoming redundant, as companies
cannot afford pay the employee.
When the economy is going through a recession Tesco value
products increase in demand, this means that Tesco become more
popular for their value brand instead of their standard products that
they sell. However, as a result of the economy being in a recession
Tesco may struggle to keep their customers, as stores such as:
Pound Land and Home Bargains offer more value for money.
What is a recovery?
A recovery is when the economy is increasing and growing after a
slow down or a recession. When the economy is recovering Tesco are
benefiting from increased sales in their value products, a
disadvantage for Tesco is that they will face competition from
discount stores such as: Home Bargains and Pound Land, this may
mean that Tesco has to lower prices to attract more customers.
Kathryn Dunstan 2
, Megan Catrin Lewis Business Economics 28th November 2014
Changes in GDP (gross domestic product)
GDP is used to measure how much is being made in the UK.
Currently GDP is rising by 1%, this means that the UK’s economy is
increasing by 1%, the UK currently has the highest growth rate of
GDP.
When GDP is increasing, Tesco can make more profit as people are
receiving higher wages and more income, this means a profit
increase for Tesco and a higher stock demand of their standard
products.
However, if GDP is growing negatively Tesco’s profit will decrease,
and they will see an increase of sales for their value products.
Negative GDP also has a bad affect on the stock market, meaning
less demand for products.
The rise in GDP reflects a boom in the economy, just as a decrease
reflects a slow down or a recession.
Changes in the rates of inflation and deflation
When the economy is inflating the price of goods are increasing, this
means that the cost of living is also increasing, however when the
economy is deflating the cost of products decrease and the price of
living also decreases.
Inflation is measured by the consumer price index (CPI), which looks
at the prices in the economy as a whole by using standard
measurements, which have been agreed across Europe, deflation is
also measured in the same way.
UK inflation fell to the lowest in 5 years of 1.2% from September
since the rate of inflation was 1.5%.
When the economy is inflating customers cannot purchase the
products or services they normally do as the price has increased,
because of this customers are forced to buy less or buy cheaper
products and services, companies such as Tesco have to also cut
their costs, resulting in their employees becoming redundant.
When the economy is deflating customers are able to purchase extra
items while on their weekly shop as the price of living is decreasing,
this benefits Tesco as luxury items are bought such as IPod’s and
mobile phones.
When inflation increases Tesco may have to pay their suppliers more
for their goods and services, this could result in Tesco losing money,
as inflation is rising and customers do not have enough money to
buy expensive products.
When deflation increases Tesco do not have to pay more towards
their suppliers, resulting in Tesco making more profit and allowing
Tesco to come across as offering customers the best value for
money.
Kathryn Dunstan 3
