How do the economy affect businesses

Global Economic Systems Businesses and other organizations operate according to the economic systems of their home countries.

The major differentiator among economic systems is whether the government or individuals decide: How to allocate limited resources—the factors of production—to individuals and organizations to best satisfy unlimited societal needs What goods and services to produce and in what quantities How and by whom these goods and services are produced How to distribute goods and services to consumers Managers must understand and adapt to the economic system or systems in which they operate.

Government owns all or most enterprises. Basic industries such as railroads and utilities are owned by government.

Very high taxation as government redistributes income from successful private businesses and entrepreneurs. Private ownership of land and businesses but government control of some enterprises. The private sector is typically large Control of Markets Complete freedom of trade. No or little government control. Complete government control of markets. Some markets are controlled, and some are free. Significant central-government planning.

State enterprises are managed by bureaucrats. These enterprises are rarely profitable. Some markets, such as nuclear energy and the post office, are controlled or highly regulated. Worker Incentives Strong incentive to work and innovate because profits are retained by owners.

No incentive to work hard or produce quality products. Private-sector incentives are the same as capitalism, and public-sector incentives are the same as in a planned economy. Private-sector incentives are the same as capitalism. Limited incentives in the public sector. Management of Enterprises Each enterprise is managed by owners or professional managers with little government interference.

Centralized management by the government bureaucracy. Little or no flexibility in decision-making at the factory level. Significant government planning and regulation.

Bureaucrats run government enterprises. Private-sector management similar to capitalism. Public sector similar to socialism. Forecast for Continued steady growth. No growth and perhaps disappearance. Stable with probable slight growth. Continued growth. Since joining the World Trade Organization in , China has continued to embrace tenets of capitalism and grow its economy. This McCafe is an example of changing Western products to suit Chinese tastes. This is an example of changing Western products to suit Chinese tastes.

Communism The complete opposite of capitalism is communism. Socialism Socialism is an economic system in which the basic industries are owned by the government or by the private sector under strong government control. Mixed Economic Systems Pure capitalism and communism are extremes; real-world economies fall somewhere between the two.

Macroeconomics and Microeconomics The state of the economy affects both people and businesses. Economics as a Circular Flow Another way to see how the sectors of the economy interact is to examine the circular flow of inputs and outputs among households, businesses, and governments as shown in Figure.

Economics as a Circular Flow. The level of consumer spending affects prices, investment decisions and the number of workers that businesses employ. The economic climate affects businesses in four main ways:. Unemployment refers to people who are actively seeking employment but are unable to find work. If somebody does not have a job, this does not necessarily mean they are unemployed. Some people choose not to work, either because they are financially stable or because they have family to look after.

Others may not be able to work because they are ill. Unemployment means that an economy is not making full use of the workers that are available. The economy will not grow as quickly as it could, and it may start to slow down. This downturn in economic activity will directly affect businesses. Regardless of what the economy is doing, your biggest focus needs to be on making your business profitable. As a general rule, during seasons of economic growth, consumer confidence is high, people have greater disposable income, and unemployment rates are low.

All of this leads to more people choosing to buy from businesses like yours. During an economic downturn, jobs are cut, people are more likely to save, and businesses can feel the pressure.

If your business is focused on being profitable, it means you are able to weather the drier times, and save cash during times of growth.

Profitability not only provides peace of mind for any season, but it also gives you the freedom to avoid making rash, hasty cuts that you might regret later.

But lean seasons can be a different kind of opportunity. Using an economic upturn to hire more talent allows you to better serve existing customers and have the capacity to acquire new ones. Purchasing a larger space gives you room to grow and offer new services. The reason for this is that the state of the economy can decide many of the important details that come up in an operating company, including topics such as consumer demand, taxes and asset value.

Interest rates — Interest rates might appear in a range of different places, imposed by a range of different people. Exchange rates — Exchange rates are a complicated topic, but they clearly have to apply to those who deal with export or import. Changing exchange rates might affect how much a company has to pay to its international supplier to satisfy them, which can affect profit margins, as well as take a lot of resources to stay on top of.

Recession — An economic recession of whatever scale has the potential to change the purchasing attitude of customers, which might force companies to drop their prices or clear smaller volumes.