III.

Assessing Economic Conditions

Presented by :Dr. Devani Laksmi Indyastuti

Impact of Economic Growth
on Business Performance

• Economic growth represents the change in the general level of

economic
activity. Sometimes economic growth is strong, and other times it
is relatively weak.
How the Impact of a Strong Economy
Spreads across Firms

Stronger economy - consumers begin to increase their spending-

firms experience a stronger demand for their
products - hire more employees to accommodate that increased
demand.
They may also need to expand their operations- hire more workers
to accommodate the increased demand.
Weak Economic Growth

• slow economic growth - low demand for products and services

-reduce a firm’s revenue.
• Weak economy- weak demand- closing production-lay off
worker-weak economy
• When economic growth is negative for two consecutive quarters,
the period is referred to as a recession.
Indicators of Economic Growth

• aggregate expenditures
the total amount of expenditures in the economy

• gross domestic product (GDP)

the total market value of all final products and services produced
in a country
• the unemployment level.
The four different types of unemployment are as
follows:

• Frictional unemployment (also referred to as natural unemployment)

represents people who are between jobs. That is, their unemployment status is
temporary, as they are likely to find employment soon.
• Seasonal unemployment represents people whose services are not needed during
some seasons.
• Cyclical unemployment represents people who are unemployed because of poor
economic conditions. When the level of economic activity declines, the demand for
products and services declines, which reduces the need for workers.
• Structural unemployment represents people who are unemployed because they do
not have adequate skills. For example, people who have limited education may be
structurally unemployed.
 Impact of Inflation

• Inflation is the increase in the general level of prices of products and services over a
specified period of time. The inflation rate can be estimated by measuring the
percentage change in the consumer price index, which indicates the prices on a wide
variety of consumer products

• Types of Inflation
- cost-push inflation the situation when higher prices charged by firms are caused by
higher costs
When consumers pay higher prices for products as a result of inflation, they have less
money available to buy other products.

- demand-pull inflation
the situation when prices of products and services are pulled up because of strong
consumer demand
• In periods of strong economic growth, strong consumer demand can cause
shortages in the production of some products. Firms that anticipate
shortages may raise prices because they are confident they can sell the
products anyway.
Strong economic growth may place pressure on wages as well as prices.
Strong economic growth may mean fewer unemployed people, so workers
may negotiate for higher wages. Firms may be more willing to pay
higher wages to retain their workers when no other qualified workers are
available. As firms pay higher wages, production costs rise, and firms may
attempt to increase their prices to recover the higher expenses.
• Variation in the Sensitivity to Inflation Some firms are much
more exposed to inflation than others because of the types of
expenses they incur in their production process.
Impact of Interest Rates

• Interest rates determine the cost of borrowing money.

They can affect a firm’s performance by having an
impact on its expenses or on its revenue
Variation in the Sensitivity to Interest Rates Some firms are more
sensitive to changes in interest rates than others. For example, firms that
have very little debt may be somewhat insulated from changes in interest
rates because their interest expenses will not change very much. In
addition, firms that sell products or services that are paid for with cash
should not experience major shifts in the demand for their products when
interest rates change.
How Market Prices Are Determined

• demand schedule
a schedule that indicates the quantity of a product that would
be demanded at each possible price
• supply schedule
a schedule that indicates the quantity of a product that would
be supplied (produced) by firms at each possible price
Interaction of Demand and Supply

• surplus
the situation when the quantity supplied by firms exceeds the
quantity demanded by customers
• shortage
the situation when the quantity supplied by firms is less than the
quantity demanded by customers
• equilibrium price
the price at which the quantity of a product supplied by firms equals
the quantity of the product demanded by customers
Factors That Influence Market Prices

• Consumer Income

• Consumer Preferences
Government Influence on Economic Conditions

government can influence the performance of businesses by

imposing regulations

• Monetary Policy
-money supply
demand deposits (checking accounts), currency held by the public, and
traveler’s checks
-interest rate
• Fiscal Policy
involves decisions on how the government should set tax rates and spend money