Consequences of Drop in Demand for the Economy - Assignment Example

 Economy Table of Contents Part 1: Consequences of drop in demand for the economy 2 Consequences of drop in demand for Fitnesse 4 Response of the government and its effects on Fitnesse 5 Part 2: Consequences for visitors to the squash tournament from Europe due to weakening of Pound against Euro 6 References 8 Part 1: Consequences of drop in demand for the economy The global financial crisis and the debt crisis in Europe had severe impacts on the economy of Europe that melted down into other economies all over the world. The main bloodstream of Europe is the interbank credit system that enables the banks in Europe to avail credits from other banks of the European Union. A debt crisis in Europe had a ripple effect that impacted the entire banking system in Europe and the whole economy. The liquidity crunch was the effect of fall in production due to the global financial crisis. Due to the debt crisis, there was shortage of liquidity for which the employment level was affected for which the income level of the people was reduced (Allen, 1999, p.35). Due to fall in the income level and availability of funds, the spending of the people was also lowered. A lower level of spending gave rise to fall in demand in the economy and the sale of products and services also shattered for the companies. The decrease in sale of products and services led to increase in inventory and the revenue earned by the companies and their profitability were lowered. This forced the businesses to reduce their total productive capacities as a result of which the total goods and services in Europe was lowered. Thus the gross domestic product of the European Union was lowered with the European national producing goods and services at a much lesser volume. The reduction in the GDP of the European economy again fuelled the lowering of income levels, subsequent spending and further production in the economy. This could be explained from the circular flow of income as given below. The output produced by the firms determines the productivity level in the economy. This output is determined by the expenditures or the level of spending of the households. The level of spending of the household again depends on the income levels. This income level is determined according to the payments of wages by the firms to their employees who are the household earners. The payment is done for receipt of services required for production of goods. Thus all the above activities in the economy are linked by a circular flow of income. The flow of money in the economy is also contributed by the net government spending. The net government spending is the difference between actual amount spent by the government and the amount earned by the government through levy of taxes. Due to fall in demand of the economy, the government spending also reduced in order to maintain a balance with the tax income. The tax income is lowered as there is a fall in the income level of the population. The governments of European Union designed appropriate monetary and fiscal policies to rescue the economy from the staged of recession (Mishkin, 2007, p.25). The interest rates were revised and subsidies were received to boost the income level and production of the economy. Due to the fall in demand in the economy, the net exports also suffered due to reduction in productive capacities which affected the balance of payments and the foreign exchange earnings. This created an impact on the currency conversion rates of Euro. Consequences of drop in demand for Fitnesse Due to the drop in demand in the economy and reduction in spending of the people, the business and profitability of Fitnesse have shown signs of vulnerability. Fitnesse is a centre for recreation and sporting activities that provides excellent infrastructural facilities to its members and also organises tournaments on squash and lifestyle sessions. The centre provides personal fitness training facilities, swimming pool, gymnasiums, body massage and maintenance facilities, restaurants and bars for health and recreation. These facilities are dedicated to the members only for which member ship fees are taken. The revenue earned for the sporting tournaments is through the sale of tickets to a large base of population from Europe including UK. Due to the debt crisis and drop in demand in the economy of Europe, the spending of the European population has been lowered and subsequently spending on activities of recreation, health, fitness, sports, lifestyle events, bar and restaurants were also reduced (Berend and Berend, 2012, p.37). The expenses for food and lodging and basic livelihood are considered as primary. The expenses for recreation, sports and entertainment are considered as secondary needs of life. Although it has been found that the demand elasticity for the activities of Fitnesse is relatively inelastic, the reduction of spending level poses a future threat to Fitnesse in terms of fall in sale of tickets for the squash tournaments and lifestyle session arranged by recreation club. This would give rise to fall in revenue earnings for Fitnesse that would lead to reduction in earnings of the entity. The shortage of funds would create limitations in the maintenance of the infrastructural facilities of Fitnesse. A deterioration of infrastructural facilities in Fitnesse would repel customers and as a result the popularity of Fitnesse would also be affected. Thus the consequences of drop in demand would create two way losses for Fitnesse in terms of loss of revenue and well as a loss of customer base thereby forming a cyclic adverse effect. The activities of Fitnesse would also decrease in terms of organising lifestyle shows as payment to celebrities could not be made consequently at high cost. The restaurant business which avails a credit of 30 days is also likely to hamper in the long run due to loss of credibility to the creditors. Response of the government and its effects on Fitnesse In order to counter the situation of debt crisis, liquidity crunch and subsequent demand, the government would respond with appropriate monetary policies. Interest rate would be lowered in order to increase the amount of liquidity in the economy. The reduction in interest rate would result in decrease in interest income of Fitnesse. This would result in depletion of current assets for the entity. The reduction on current assets would create shortage in funds for short term functioning. A reduced asset base would also lower the amount of credit from the creditors. Overall, the activities of Fitnesse would be limited as result of the response of the government due to decrease in demand in economy (Mankiw, 2011, p.27). Part 2: Consequences for visitors to the squash tournament from Europe due to weakening of Pound against Euro Due to the decrease in demand in the economy in the face of debt crisis in Europe, Fitnesse foresees a reduction in the business and overall popularity due to lowering of response from the visitors in Europe. The expected reduction in earnings of the club is anticipated due to the decrease in spending level of the visitors from Europe. An analysis of the consequences of decrease in demand for the visitors to the squash tournament from Europe would provide a clear picture. Looking at the decrease in spending in Europe, the Fitnesse is focussing more on the visitors to the squash tournament from UK. In a situation of weakening of Pound Sterling against the Euro is likely to improve the business scenario for Fitnesse (Paul, 2006, p.29). The tickets that need to be purchased by the supporters would cost less in Euro for the same amount of ticket prices in Pound Sterling. Thus the supporters from Europe would be able to view the squash tournaments with a lesser amount of money by purchasing the same ticket by a lesser cost than earlier. Due higher exchange rate for currency conversion in favour of Euro, the total expenditure for the supporters which includes purchase of tickets, travelling expenses, accommodation, food, drinks and recreation would decrease considerably. Thus the consumption level of the supporters would invariably increase as they opt for purchasing the ticket of the squash tournament. The increase in spending would increase the sale of products and services like recreation, food and drinks that are related to the squash tournaments. Moreover, a weakening of Pound against Euro would trigger interest among a large number of supporters for which the flow of supporters would increase. Large number of supporters from Europe would opt for visiting the squash tournaments in the scenario of availability of liquid funds due to weakening of Pound Sterling against Euro. The supporter from Europe visiting the squash tournament would be able to enjoy more freely by spending more on their trip to the tournament in UK. An increased spending of the visitors from Europe would result in injection of additional liquidity in the local economy for which the productivity level of the economy would rise for the specified time periods of the squash tournament (Marshall, 2006, p.49). The visitors would have the liberty to shop more in UK and bring home the items of their choice. Thus the consequences for the visitors from Europe would be favourable in case of weakening of Pound against Euro. This would also create favourable circumstances for Fitnesse as they would be able to revive their business in the face of increased flow of visitors to the squash tournaments. The increase in the visitors would result in enhanced sale of tickets and revenue generation. Thus increase in revenue earnings would provide increased earnings for Fitnesse. This would also provide funds to Fitnesse for development of infrastructure. He visitors going to the squash tournaments would carry these experiences back to Europe thereby planning for future visits to squash tournaments. References Allen, R. E. 1999. Financial Crises and Recession in the Global Economy. Edward Elgar Publishing; Great Britain. Berend, I. T. and Berend, T. I. 2012. Europe in Crisis: Bolt from the Blue?. Routledge; UK. Mankiw, G. 2011. Principles of Economics. Cengage Learning; Stamford. Marshall, A. 2006. Principles of Economics. Osprey Learning; Washington. Mishkin, F. S. 2007. Monetary Policy Strategy. MIT Press; USA. Paul, J. 2006. Business Environment. Tata McGraw-Hill Education; New Delhi. Read More