Analysis of Market Situation and External Environment - Essay Example

How can an understanding of micro- and macro- economics help business deal with their market situation and their external environment? Micro- Economics Economics is the study of managing households by means of taking various decisions about it. Economics has two main branches; micro economics and macro-economics. Micro-economics is the study of markets and the interaction of firms and households in decision-making whereas Macro-economics is the study of economics at mass level with an overview of governmental policies, inflation and other similar phenomena. Both are important in helping businesses take important decisions and understand their internal and external environment in a better way (Gillespie, 2011). The paper will discuss various concepts about micro and macro economics and explain the significance of them in the context of businesses with examples. Among micro-economic theory, one of the most important concepts is supply and demand analysis that is related to analyzing the supply and demand graph to measure the shift of the graph. It is necessary to explain these concepts before describing their importance for businesses. Supply and demand analysis of a business implies looking at the two variables of supply and demand (Gillespie, 2011). Demand can be defined as a phenomenon in which consumers agree on a certain amount of goods to purchase at a particular price. Therefore, demand is determined by various factors among which price of goods are an important factor as law of demand states that high price of goods cause consumers to demand less and vice versa. However, supply is the quantity of goods that the manufacturers are agreed on selling at a certain price. According to law of supply, the high price enables manufacturers to sell more whereas low price makes them manufacture less quantity of goods. Thus the supply and demand determines the businesses operations and helps them make important decisions about their selling of products (Pirayoff, 2004). The supply and demand have a close relationship with concepts of equilibrium and elasticity. Equilibrium can be defined as the condition in which both consumers and manufacturers agree on a certain price on which goods would be sold or purchased. However, the concept of elasticity implies the responsiveness of consumers and manufactures toward the change in some variable. For instance, the change in the price of a good affects the consumers and firms to lead them to make a decision (Office of National Statistics, 2011). There are numerous factors that are related to the concept of elasticity such as price of a good, income of consumer or cross elasticity of supply and demand. Besides, the type of market also influences the nature of supply and demand. A market is a place where goods are exchanged for a price the consumer pays for getting a service or good. A market can be of many types among which the most common types of market are broad and narrow markets. A broad market is a market in which there are not much available substitutes for some goods with inelastic demand whereas a narrow market has quite a number of substitutes for products making it characteristic of elastic demand (Supply Chain, 2011). The concepts of micro-economics described above can be applied in the case of a business. Here an example of McDonald’s Corporation is given to explain the importance of understanding micro-economic theory in the context of its business. If I think of myself as a manager of McDonald’s I would have been largely influenced by the concepts of demand and supply. First of all, the price at which the things at McDonald’s are being sold are characteristic of the two important concepts of supply and demand. If a demand for some product, say Mac Zinger increases, the firm would automatically increase the price of its burger and the quantity as well to earn more money (The Economist, 2011). For instance, if consumers want to buy 3 burgers and their demand increases from 2 to 3 burgers, it shows a shift in demand curve. The shift in demand curve, it the demand increases, is represented by shifting toward right as shown in the figure below. Source: Atkinson and Miller, 1998 However, in another case in which supply of burgers increases from 2 to 3 burgers for each consumer, the price of each burger will decrease because of the surplus created by the increase in supply. The decrease in price causes the consumer to buy more quantity at reduced price. Thus when an increase in supply occurs, it makes a shift in supply curve; the shift is made toward right when supply increases and vice versa. Thus it acts as an important factor of determining the quantity of products as well as the price of the product that is determined by the change in demand curve. The forces of supply and curve not only affect the price and quantity of goods but also it enables the market to achieve equilibrium. It is attained when the market has consumers and manufacturers that agree on some price which satisfies the purposes of both. For instance, if McDonald’s sells 2 burgers at $2 price which is acceptable for both the manufacturer and consumers, it is said to be an equilibrium price; $2 is the price set in the market by the forces of supply and demand. Source: Atkinson and Miller, 1998 In addition to the supply and demand curve, the manager of McDonald’s would also look at the type of markets and concepts of elasticity to take help in the decision-making of the organization. The market in which McDonald’s operates is narrow market in which numerous substitutes are available for the consumers. They have other brands such as KFC, Subway etc to go for similar junk food if the price of burger at McDonald’s does not suit their pocket. Also this market is elastic because the increase in the price of goods by one manufacturer would cause the consumer to switch to other substitutes available in the market. Therefore, the tools of supply and demand are crucial for running a big corporation as McDonald’s that will make its important decisions after looking at the shift in demand or supply curve, nature of shift and other factors associated with it (Sloman, 2010). Macro- Economics Macro-Economics is the study of mass level phenomena that influence the decision of manufacturers and households toward services and goods by means of concepts such as governmental regulations, economic depression, inflation or related phenomena. These phenomena play an important role in creating an impact on the decision-making of businesses. For instance, a government might introduce a law that restrict the activities of a business by putting a ban on some of its features or fix a price itself to influence the business considerably. Also the role of The Bank of England is important in influencing the businesses by changing the value of a currency. Hence, there are various other economic indicators that are significant in helping a firm understand its external environment and take decisions accordingly (Bank of England, 2011). The main concepts in Macro-economics worthy to mention are unemployment, economic depression, inflation, taxes and price indices set by government. The factor of unemployment can be defined as the condition in which people do not find jobs to earn money for themselves. It occurs often when labor increases with decrease in job opportunities which is the direct impact of minimum wage law imposed by government. According to minimum law, government fixes a wage to be paid to each laborer that is the minimum and might increase depending on the skills and expertise of the laborer. It is on one hand helpful for making the economic conditions of laborers good that gets work but on the other hand makes it difficult for other laborers to get jobs because of minimum wage law (Office of National Statistics, 2011). Another concept of Macro-economics is inflation that implies an increase in the general price level of goods whereas the opposite of inflation occurs in the form of deflation; a decrease in general price level. These concepts are studied by economists to measure the great impact they create on the economy of a country. Thus, they also influence the businesses that are being run within that economy in which these phenomena are active. In order to fix the things that are in disorder in an economy, the role of government comes to place. The government introduces certain policies and laws to control the effects of inflation and deflation on markets. In such a situation, price ceiling or price floor is placed by government. A price ceiling is a situation in which the government sets the maximum price of a good to be sold whereas in price floor a minimum price for a good to be sold is set by the government. These things are undertaken by the government to avoid from economic depression in future (Sloman, 2010). In addition to the factors of Macro-economics described above, there are numerous conditions that affect the decision-making of businesses. For instance, the overall economic conditions affect the business by making it to progress or regress provided the conditions are good or bad in an economy. Also the technological advancement and other factors do affect the firm to decide on how to manage it operations. If the economy is facing from inflation, it would mean that the raw materials that the firm has to purchase would be available on high costs. Therefore, the firm would have to cut down its other costs to be able to survive in an environment. Also the nature of competition influences the business by introducing certain strategies to attain competitive advantage. Besides, the imposition of taxes by government and banning of a particular product, such as tobacco would seriously impact the businesses of tobacco companies such as British American Tobacco. In such a condition, the implementation of anti-smoking law would cause this firm to stop its business because there would be no demand for cigarettes anymore due to the government policy of banning tobacco (Pirayoff, 2004). The role of The Bank of England is important in affecting the businesses by means of its monetary policy that is based upon stability of the value of currency and consequently avoiding inflation in the given economy (Bank of England, 2011). Therefore, every business gets affected by it as it has to manage its operations keeping in view the governmental regulations and banks’ monetary policies. A type of government policy such as fixing of maximum rental prices plays great impact on housing firms that are related to giving the consumers apartments on rent (Sloman, 2010). Consider the example of airlines companies where the inflation directly affects the business by increasing it tickets thus reducing the demand of consumers to travel by plane if they have other means to travel, by sea or land etc. Also there are other types of businesses that get affected by the macro-economic concepts. Looking at the concepts of macro-economics from the eyes of a manager of McDonald’s corporation, I would not only look at the economic conditions that are affecting the economy of the country, but also would use them to understand the external environment of McDonald’s business. For instance, if there is a general increase in prices of goods; inflation, it would affect the business by making it to purchase food materials to be used for manufacturing at higher prices. It would consequently increase the price of each burger sold by McDonald’s which will reduce the demand of consumers. However, it is possible that no other substitutes would be available for consumers as inflation affect all the major businesses operating within that economy. Therefore, the consumer would be forced to purchase burger at high price for a time being but with time the consumer would learn to adjust with other type of food that does not cost much. It is important to mention that it will not be beneficial for the firm also as it would earn less revenues because the cost would be high for manufacturing its goods (Sloman, 2008). Overall, the business whatever it may be gets affected by the micro and macro-economic theoretical concepts that helps the management to understand the market conditions and external environment that would directly and indirectly affect the decision-making process of the firm. The concept of supply and demand are important micro economic concepts whereas inflation, tax, governmental policies are the macro-economic concepts that a business must take into consideration to survive in the market. References: Atkinson, B. and Miller, R. (1998) Business Economics. Harlow: Addison-Wesley. Bank of England (2011) Accessed at www.bankofengland.co.uk on October 27, 2011. Gillespie, A. (2011) Foundations of Economics. 2nd Edition. Oxford: Oxford University Press. Office of National Statistics (2011) Accessed at www.ons.gov.uk on October 30, 2011.   Pirayoff, R. (2004) Economics Micro and Macro. New Jersey: Cliffnotes. Sloman, J. (2008) Economics and the business environment. 2nd Edition. Harlow: Financial Times Prentice Hall. Sloman, J. (2010) Economics for Business. 2nd Edition. Harlow: Financial Times Prentice Hall. Supply Chain (2011) Supply Chain: The Guardian sustainable business. Accessed at http://www.guardian.co.uk/sustainable-business/supply-chain?INTCMP=SRCH on October 24, 2011. The Economist (2011) The Economist accessed at www.economist.co.uk on October 26, 2011. Read More