You are on page 1of 2

Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

The term economics comes from the Ancient Greek (oikonomia, "management of a household, administration") from (oikos, "house") + (nomos, "custom" or "law"), hence "rules of the house(hold)".[1]

The field of economics is broken down into two distinct areas of study: microeconomics and macroeconomics. Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. People who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (e.g. coffee industry). Macroeconomics, on the other hand, looks at the big picture (hence "macro"). It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world. For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not necessarily a bad thing. Thus, for an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels.

business performance of most firm depends on the three macroeconomic factors: economic growth, inflation, and interest rate. First is economic growth, as we know the changing of economic growth for some country can changes in the general level of economic activity. For the example, when the change of general level of economic condition is higher that normal, the total income level of all U.S workers is relatively high, and then there will be higher volume of spending on products and service, and finally the firms that sell products and services should get high revenue. The condition will be different if the general level of economic activity is negative or lower than the normal. Next is inflation, it can increase the general level of prices over spesific of time. It can affect on companys operating expenses and companys revenues. Last is interest rate. It represent the cost of borrowing money that can make the firm get a high profitable. For the example is firm may postpone expansion and other projects when interest rates are too high. Beside that interest rate can also influence the firms revenue .

Understanding the influence of Macroeconomic factors helps the firms to determine the current market conditions and how beneficial will they be for the success of their business. Various macroeconomic factors that influence the business are: a. Economic Growth. Economic activities refer to the level of buying and selling activities happening in an economy over a time period. It is a highly complex activity and keeping accurate track of it is beyond comprehension. Economic activity is not constant and can change rapidly, thereby affecting the business. Economic activity changes could happen due to the following reasons:

Changes in income levels Future prospects of individuals. Future of the economy The level of economic activity in the world as a whole Political activities around the world Natural disasters - like hurricanes, earthquakes, or flood etc Changes in prices of raw materials - oil, metals, fuel, energy and so on Changes in world stock markets

The level of economic activity is usually measured by GDP (Gross Domestic product). It refers to the total amount of goods and services a country produces. Businesses are greatly influenced by the economic activities. When GDP rate falls or slows down, there will be a fall in demand for good or services offered by businesses. As a result, businesses will witness a fall in revenues and profit margins. To curb this business will have to reduce their prices to increase the sales. This could further lead to increase in unemployment. On the other hand when there is an increase in GDP, the demand for products will automatically increase and hence the prices will go up. To cope with the increase in demand business will need to employ new people resulting in reduction in Unemployment rates. b. Inflation: With the increase in Inflation there will be an increase in the level of prices of products and services over a specific period of time. As a result the firms will have to incur higher costs of operations. This will be also due to the increase in wages of the employees. c. Interest Rates: Interest rates are the charges levied by the banks for lending a loan. Increase in Interest rates will directly influence the business as businesses borrow money from the banks from time to time. Increase in interest rates will lead to higher interest expense: Businesses will have to incur higher costs to repay the loan. Interest rate changes also affect customers who in turn will affect the business. In case of increase in interest rates the amount that individuals need to pay to borrow the money will increase thereby, reducing the demand for large products in the market. Further, if the interest rates decrease then the charges on a loan to buy larger items like cars, electrical equipment are likely to fall. As a result, a large number of people might be willing to buy such items. There will be a sudden increase in the demand for the products offered by such businesses.

You might also like