BUSINESS AND ITS

ENVIRONMENT
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EXTERNAL INFLUENCES ON
BUSINESS ACTIVITY
Business performance are affected by external factors. These factors are;
 Political and legal factors
 Economic factors
 Social and demographic factors
 Technological factors
 Environmental factors
 Competitors and suppliers
 International trade

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1. POLITICAL AND LEGAL
FACTORS

Political decisions can influence business environment. In most countries

governments have been selling their businesses to private sector to enhance their
operations.
The selling of a government owned business to private sector is known as
privatisation.

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ACTIVITY1.
 List 3 businesses in Kenya and UK that have been privatized.
Kenya
(i)……………………………..
(ii)…………………………….
(iii)…………………………….
UK
(i)…………………………….
(ii)……………………………
(iii)…………………………...

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BENEFITS OF PRIVATISATION
 The profit motive of private sector business will lead to much greater efficiency
 Decision making in private business is fast unlike state owned businesses where
decisions can be slow and bureaucratic
 Privatisation puts responsibility for success firmly in the hands of the managers and
staff, which can lead to strong motivation as they have direct involvement in the
work they do
 Market forces will be allowed to operate- failing business will be forced to change
or die and successful ones will expand, unconstrained by government limits on
growth hence increasing their profits.

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Sale of state owned business can be used as finance for government, which can be
spent on state projects
 Private businesses will have access to private capital markets and this will lead to
increased investment in these industries

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DISADVANTAGES OF
PRIVATISATION
o Some industries are not suited for privatization e.g. in case of a natural monopoly,
or business that are strategic to the economy e.g electricity
o There is a need to protect consumers. Some industries such as education and
healthcare are not best suited to be privatized. This is because private business may
prioritise profit at an expense of health or education of citizens.
o Short-termism. There is a risk that managers in privatized business may focus on
short term profits to satisfy shareholders over long term investment that would
provide long-term profits and viability of the business.
o Through state ownership, an industry can be made accountable to the country
o Breaking up nationalised industries will reduce the opportunities for cost savings
through economies of scale
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NATIONALISATION
Nationalisation occurs when state/government takes control of privately owned
businesses
Advantages of nationalisation
 Businesses can operate in public interest. This is because state owned
businesses will operate with an interest of citizen at heart unlike private
businesses that are profit driven.
 The treatment of employees. Privatised businesses may tend to exploit their
employees as they aim at maximizing profits. This is not the case for nationalized
industries since they are not driven by profit motive.
They will not abuse the monopoly power if they are the only firm in the industry
The firms that are nationalized are mainly key drivers of the economy and
therefore government support them to ensure their survival e.g. water and
electricity
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Disadvantages of nationalised firms
They are mainly huge organisations and therefore decision making
maybe slow thus affecting response to the market
Since these firms may lack competition, they maybe inefficient in
their production leading to low quality products
They are funded by tax revenues collected from the citizens and
this money could be used in other important sectors such as health
and education. They are said to have a high opportunity cost.

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HOW GOVERNMENT USE
LAWS TO CONTROL BUSINESS
ACTIVITY
Governments decide to introduce laws that constrain business
decisions and activities. These laws includes;
Employment practices and conditions of work.
Marketing behaviour and consumer rights.
Business competition.
Location of businesses.

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EMPLOYMENT PRACTICES AND
CONDITIONS OF WORK.
 The law and employment practices
These laws control the relationship between employers and
employees. The two main objectives are to:
Prevent exploitation of workers by powerful employers e.g.
laying down minimum levels of health and safety and minimum
wage rates.
Control excessive use of trade union collective action.

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Legal constraints usually cover the following areas of employment
practices:
■ Recruitment, employment contracts and termination of
employment.
■ Health and safety at work.
■ Minimum wages.
■ Trade union rights and responsibilities.

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Recruitment, employment contracts and termination of
employment
When a business hires a worker a contract is signed by the
employer and the employee. The contract entails;
The pay of the worker
The working hours
Disciplinary procedures
Leave days etc.

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Discrimination against people during recruitment and selection or
while at work on the grounds of race, colour, gender or religion is
illegal.
Health and safety laws
These aim to protect workers from discomfort and physical injury
at work.
Health and safety laws usually require businesses to:
■ Equip factories and offices with safety equipment
■ Provide adequate washing and toilet facilities
■ Provide protection from dangerous machinery and materials
■ Give adequate breaks and maintain certain workplace
temperatures.
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EVALUATING THE IMPACT ON
BUSINESS ON
EMPLOYMENT AND HEALTH
AND SAFETY LAWS
There are both positive and negative effects. On the one hand, these
laws are constraints that add to business costs.
These costs will include:
■ supervisory costs regarding a firm’s recruitment, selection and
promotion procedures
■ higher wage costs due to minimum wage being paid, pension
contributions, paid leave for sickness, maternity and paternity leave etc.
■ employment of more staff to avoid overlong hours for existing
workers
■ protective clothing and equipment to meet health and safety laws. 15
On the other hand, there are real benefits to be gained by businesses that meet
or even exceed the minimum standards laid down by law.
They include;
 Workers will feel more secure and more highly valued if they are offered a
clear and fair employment contract. This will lead to more satisfied and
motivated workers.
 A safe working environment will reduce risks of accidents and time off
work for ill health or injury.
 Failing to meet minimum standards may lead to expensive court cases and
heavy fines.
Businesses that make a policy of providing employment conditions and a
healthy environment beyond legal requirements will attract the best
employees.
 This will also receive good publicity that might have marketing benefits for
the business.
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MARKETING BEHAVIOUR
AND CONSUMER RIGHTS.
Consumers need protection from unfair or unscrupulous business activity
because;
• Individual consumers are relatively weak and powerless against a large
business with large marketing and promotion budgets.
•Products are becoming more scientific and technological and it is difficult for
consumers to understand how they operate and to assess the accuracy of the
claims being made for them.
•Selling techniques are becoming more pressurised and are increasingly
difficult for some consumers to resist. E.g. offers of apparently cheap loans
and consumer credit, which, can make consumers to pay off debts for many
years at high interest rates.
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 Globalisation has led to increased importation of goods. Consumers may
need protection from producers of goods that adopt different quality and
safety standards from those existing in the domestic country.
Due to competition, some firms try to take advantage of consumers by
reducing quality, service, guarantee periods and so on in order to offer an
apparently lower price and better deal.

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EVALUATING THE IMPACT
OF CONSUMER
PROTECTION LAWS ON
BUSINESS
• Business costs might have to rise to meet the requirements of consumer
protection legislation.
• Redesigning products to meet health and safety laws or redesigning
advertisements to give only clear and accurate information can be expensive.
• Improving quality-control standards and the accuracy of weights and
measures in food preparation will be essential to reduce the danger of legal
action. Treating consumers fairly and responding to complaints quickly may
also reduce the risk of court action.

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BUSINESS COMPETITION
1. Monopolies
 Monopoly is a situation in which there is only one supplier/producer in the
market
 Most monopolies are created by merger or takeovers.
 Government through its agencies prevents formation of monopolies.
 In the UK the Competition Commission is able to undertake studies of
proposed mergers and either reject or allow it.
Task: Investigate which agency is responsible to control monopoly in Kenya.

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How do monopolies develop?
Monopolies are developed by:
 invention of new products or processes that are then legally patented to
give the originator a monopoly in production
 merging or taking over other firms in the industry
 legal protection – for example, a government may choose to protect its
country’s postal service by giving it a legal monopoly for the delivery of
letters
The existence of ‘barriers to entry’ into an industry, such as advanced
technical knowledge, huge costs of building facilities or buying equipment -
these barriers will prevent, or make very difficult, the start-up of new
competitors.
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How are consumers affected by monopolies?
There can be both positive and negative effects. Possible benefits include:
■ Lower prices if large-scale production by a monopolist reduces average
costs of production
■ Increased expenditure on new products and technical advances will
increase variety of goods and highly quality products to consumers
However, the drawbacks/disadvantages include:
■ Higher prices if the monopolist has so little competition that consumers
have no option but to buy from this one firm
■ Limited choice of products
■ Less investment in new products as a result of complacency and little risk
of competition.

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2. Uncompetitive – or restrictive – practices
These practices are attempts by firms – oft en acting or colluding together – to
interfere with free market forces and so limit choice for customers or drive up
prices.
Examples of such restrictive practices include:
 Predatory pricing- when a major firm tries to block new competitors by
charging very low prices for certain goods, making it hard for the competition to
survive as they may not be able to match up the price
 Refusal to supply retailer if they do not agree to charge the prices determined
by the manufacturer
 Full-line forcing- this is when a major producer forces a retailer to stock the
whole range of products from the manufacturer, not just the popular ones. If the
retailer refuses not even those popular ones will be supplied any longer
 Market sharing agreements- this involves forming a cartel between the firms
concerned. They agree to fix prices and divide the market amongst themselves
and not to compete for new business 23
2. IMPACT OF TECHNOLOGY ON
BUSINESS ACTIVITY
 Information technology- the use of electronic technology to
gather, store and process and communicate information.
Different types of IT applications to a business include:
 Spread sheet programs
 Computer aided design CAD
 Computer aided manufacturing CAM
 Internet/intranet
 Word processing
 Databases
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Benefits of technology to business include;
 Easier, faster and more effective communication
 Better, more efficient manufacturing techniques
 Less wastage
 More efficient stock management and ordering systems
 Ability to develop new, innovative approaches
 More effective marketing and promotion
 New sales avenues

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Disadvantages of technology to business include:
o Increased dependency on technology
o Often large costs involved with using the latest technology
(especially for small businesses)
o Increased risk of job cuts
o Closure of high street stores in favour of online business
o Security risk in relation to data and fraud
o Required regular updates
o Can go down or have faults, which can stop all business
operations instantly

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Introducing technology effectively
These are the important stages a business should go through when introducing
or updating technology to reduce opposition to change:
■ Analyse the potential use of IT and the ways in which it can make the
business more effective.
■ Involve managers and other staff in assessing the potential benefits and
pitfalls of introducing IT – better ideas oft en come from those who will use
the system than from those responsible for purchasing it.
■ Evaluate the different systems and programs available – compare the cost
and the expected efficiency and productivity gains. Consider the budget
available for this system.
■ Plan for the introduction of the new system, including extensive training for
staff and demonstrations to all users.
■ Monitor the introduction and effectiveness of the system – is it giving the
expected benefits and, if not, what can be done to improve performance.
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3. SOCIAL AND DEMOGRAPHIC
INFLUENCES ON BUSINESS ACTIVITY
The structure of society is constantly evolving. The changes occurring in many
countries are:
 An ageing population with reduced birth rate and longer life expectancy, although
in some countries average age is falling due to high birth rates
The changing role of women- women are becoming more empowered and are
seeking employment than in previous years
Better provision of education facilities, which is increasing literacy and leading to
more skilled and adaptable workforce

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 Early retirement is leading to more leisure time for a growing number of wealthy
pensioners
 Rising divorce rated leads to increased number of single person households
 Job insecurity often created by globalisation forcing more employees to accept
temporary part time jobs.
Impact of population structure on the business
 Changing pattern of demand as greater number of customer change their taste.
Market research is necessary for companies who demand of their product changes
due to ageing population
 Age structure of workforce may change. The number of youthful employees may
change and therefore the business should plan for an older workforce

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SOCIAL AUDITS – CHECKING ON
CORPORATE
SOCIAL RESPONSIBILITY
A report on the impact a business has on society – this can cover pollution
levels, health and safety record, sources of supplies, customer satisfaction and
contribution to the community.
Benefits of social audits
 Identifies what social responsibilities the business is meeting – and what still
needs to be achieved.
 Sets targets for improvement in social performance by comparing these
audits with the best-performing firms in the industry
 Improves a company’s public image and this will help to
act as a useful marketing tool to increase sales

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Limitations of social audits
• If the social audit is not independently checked, stakeholders may
not take it seriously
• Time and money must be devoted to producing a detailed social
audit – is this really necessary if these audits are not legally
required?
• Many consumers may just be interested in cheap goods –not
whether the businesses they buy them from are socially
responsible or not

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EVALUATION OF
ENVIRONMENTAL AND
SOCIAL AUDITS
 Until they are made compulsory and there is general agreement about what they
should include and how the contents will be verified, some observers will not take
them seriously.
 Companies have been accused of using them as a publicity stunt or a ‘smokescreen’
to hide their true intentions and potentially damaging practices.
 They can be very time-consuming and expensive to produce and publish and this
may make them of limited value to small businesses or those with very limited
finance.

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PATTERNS OF EMPLOYMENT
 Changing patterns of employment are one of the social constrains on the activities
of business
The main features of changing patterns in most countries include:
 Labour being replaced with capital
 An increase in the number of women in employment
 An increase in part time employment and flexible employment contracts
An increase in student employment on a part time basis
Transfer of labour from old established industries such as steel to new high tech
industries such as computer game design
More women taking maternity leave then return to work

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EVALUATING EFFECTS ON BUSINESS OF
CHANGES IN THE PATTERN OF EMPLOYMENT
 Firms can adapt to these changes work to their own benefit
 Higher quality and better qualified workers should be more efficient
 Part time workers can offer the business greater flexibility
 By employing more women and removing barriers to their progress and promotion
firms can benefit from a wider choice of staff and improved motivation among
women workers

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 ENVIRONMENTAL CONSTRAINTS ON
BUSINESS ACTIVITY
Business can affect the environment it operates in. It is important for the
business to use strategies protect the environment.
Arguments for adopting an environmentally friendly business strategy
 Businesses can reduce pollution by using the latest green technology and
recyclable materials rather than scarce natural products. This can have real
marketing and promotional advantage as consumers become more
environmentally aware
 Low polluting production methods and reasonable waste disposal will
reduce the chances of the business breaking the law avoiding fines and bad
publicity

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Business that switch to a more environmentally friendly strategy often report
an improvement in the number of quality applications they receive from
potential employees
 Long term financial benefits can be incurred e.g. if firms use solar panels to
generate electricity, as opposed to fuel and gas which are becoming
increasingly expensive . Moreover the business avoids cost of paying
additional penalties if their activities are seen to cause health issues

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Arguments against adopting environmentally friendly strategies
 Profits may be reduced if expensive but low polluting equipment is used or
if waste is disposed of in a responsible way, this will limit firm’s investments
in the future
 There might be a marketing advantage from keeping costs as low as
possible, even though the environment is damaged as a result. Consumers
benefiting from low prices as a result are likely to overlook environmental
damage
 In many countries legal protection of the environment is weak and
inspection systems are inadequate, there will as a result be little risk of legal
action and heavy fines against damaging business activity
 In developing countries it is argued that economic development is more
important. Businesses can achieve more good by producing cheaply in these
countries than adopting the greenest production strategy

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EFFECTS OF OIL DRILLING ON
ENVIRONMENT IN NIGERIA
https://www.youtube.com/watch?v=zP2OJmFsvp4

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Environmental audit- assess the impact of a business activities on the
environment
Evaluation of environmental and social audits
 Until they are made compulsory there is general agreement about what they
should include and how contents will be verified some observers may not
take them seriously
 Companies have been accused of using them as a publicity stunt to hide
their true intentions and potentially damaging practices
 They can be very time consuming and expensive to produce and publish
and this may make them of limited value to small businesses

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ENVIRONMENTAL AND ETHICAL ISSUES –
THE ROLE OF PRESSURE GROUPS
 More and more businesses are accepting the need to incorporate environmental and
ethical considerations into their strategic decision-making.
 One of the main reasons concerns the growing power and influence of pressure groups
at both national and international levels.
Pressure groups are organisations created by people with common interest or aim who
put pressure on businesses and governments to change policies so that an objective is
reached.
 Perhaps the best-known international examples are:
 Greenpeace – campaigns for greater environmental protection by both businesses
adopting green strategies and governments passing tighter anti-pollution laws.
 Fairtrade Foundation – aims to achieve a better deal for agricultural producers in low-
income countries.
 WWF – aims to improve animal welfare, especially protecting and conserving the habitat
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of wild animals.
Amnesty International – rigorously opposes anti-human rights policies of
governments.
 Jubilee 2000 – campaigns for Western governments to reduce or eliminate
the debt burden on developing countries.
Pressure groups want changes to made in the following areas-
• Government to change their policies and pass laws supporting the aims of
groups
• Business to change damaging policies.
• Consumers to change their purchasing habits so that business can adopt
appropriate policies

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Methods used by pressure groups
 Publicity through media coverage- frequent press releases detailing
undesirable business activities and coverage of direct action groups will help
keep the campaign in the public eye.
 Influencing consumer behaviour- they can be successful in influencing
consumers to stop buying the business products.
 Lobbying of government- this means putting the arguments of the
pressure group to governments members because they have the power to
change the law.

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CORPORATE SOCIAL
RESPONSIBILITY (CSR)
This is a business philosophy that emphasizes that firms should behave as good
citizens.
They should not merely operate within the law but should consider the effects of
their activities on society as a whole.
Socially responsible business should therefore attempt to fulfil duties that it has
towards its employees, customers and any other interested parties ( stakeholders)

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THE IMPACT OF CORPORATE
SOCIAL RESPONSIBILITY
 Responsibility to consumers- Business has a responsibility to produce high quality
products that are well designed and that are durable at a fair price. Business should
be aware that satisfying customers creates a repeat purchase.
 Responsibility to employees- The responsibility may include; training the workers,
protecting the rights of workers even when there is no law requiring them to do so
and paying workers fair wage.
 Responsibility to local community- Firms can benefit from the goodwill of the
local community. Businesses should be encouraged to meet the needs of the
community such as; creating jobs for them, buying supplies from the community,
and not damaging the environment the local community lives in.
 Reponsibility to suppliers- Businesses can promote good relations with the
suppliers by paying promptly, placing regular orders and offering long term contracts
for supply.

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ISSUES ASSOCIATED WITH
CORPORATE SOCIAL
RESPONSIBILITY
There are a number of issues relating to CSR that managers can take into account. These issues can be used to
judge whether a business has acted socially responsible or not. Taking the positive approaches outlined below
would assist most businesses in meeting their social responsibilities.
 Engaging in sustainable production. Even though sustainable production may increase costs to the business, it
will reduce pollution and may also ensure sustainable use of resources to safeguard availability of resources for
future generations.
 Putting employees before profits. Maintaining employment even when the sales have fallen is an important
way of fulfilling CSR. Though this is only achievable short term, it shows business care for the local
community.
 Supporting local communities. This involves uplifting the local community with projects. This creates a
perception of caring and can eventually create loyalty to business products.
 Carrying out Social audits. Social audit assess the impact the business has on the community as a whole. It is
done in realization that a business cannot operate in isolation of the community. In 2019 over 90% of world’s
largest companies were engaged in some form of social audit.

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CSR AND POSITIVE AND
NEGATIVE ACTIONS
Student stick Hand out on page 258

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EXTERNAL ECONOMIC INFLUENCES
ON BUSINESS BEHAVIOUR
On completing this chapter, you will be able to:
■ Understand the economic objectives of governments.
■ Explain the nature and causes of economic growth and its impact on
business strategies.
■ Analyse the business cycle and its impact on business strategies.
■ Recognise and analyse the different causes of unemployment.
■ Analyse the different causes of inflation and deflation and assess the impact
of the changing value of money on business strategy.
■ Understand the meaning of market failure and how the state might deal
with this.
■ Analyse why governments intervene in industry.
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ECONOMIC OBJECTIVES OF GOVERNMENTS

All governments set targets for the whole economy and these are referred to
as macro- economic objectives
They include:
 Economic growth- raising GDP
 Low price inflation- the rate at which consumer prices on average increase
each year
 Low rate of unemployment
 A long term balance of payments between the value of goods imported and
the value of goods exported
 Exchange rate flexibility
 Wealth and income transfers to reduce inequalities
N/B some of these objectives will conflict with each other and not all can be 48
achieved at the same time
ECONOMIC GROWTH

Economic growth- an increase in a country’s productivity potential measured by an

increase in its real GDP
Gross domestic product- the total value of goods and services produced in a county in
one year- real GDP has been adjusted for inflation
Importance of economic growth
 Higher real GDP increases average standards of living.
 Decrease in unemployment which will increase consumer incomes.
 More resources can be devoted to desirable public sector projects without reducing
resources in other sectors.
 Absolute poverty can be reduced or even eliminated if growth is substantial enough and
the benefits are widely spread.
 Business experience a rise in demand for their products (depends on Income elasticity).
 More resources available for government through greater income taxes and decreased
burden of social expenditure e.g. reduced unemployment benefits
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Factors that lead to economic growth
 Increases in productivity.
 Increases in output resulting from technological and expansion of industrial
capacity.
 Increases in economic resources such as higher working populations or
discovery of new resources.
 Business investment- expenditure by businesses on capital equipment , new
technology and research and development.

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THE BUSINESS CYCLE
Business cycle- the regular swigs in economic activity measured by real GDP,
that occur in most economies, varying from boom conditions to recession.

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There are four key stages of business cycle:
1. Boom- a period of very fast economic growth with rising incomes and
profits thus the economy enjoys advantages of economic growth.
However boom causes;
 Inflation to rise due to very high demand for goods and serviced. High
inflation makes an economy’s goods uncompetitive and business confidence
falls as profits hit high costs.
 Shortages of key skilled workers lead to high wage increases.
NB. The government or central bank often increases interest rates to reduce
inflationary pressure

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2. Downturn or recession-This a period of 6 months or more of declining real
GDP.
 It causes falling demand for goods and services. This is due to lack
employment and loss of income.
 Real GDP growth slows and may begin to drop.
 Income and consumer demand fall and profits are much reduced
Advantages of recession:
 Capital assets such as land and property will be relatively cheap and firms can
invest then in expectation of economic recovery.
 Demand for inferior goods could increase.
 Risk of retrenchment may encourage workers to work harder increasing
efficiency.
 Business can become leaner and fitter due to closure of some offices and
branches.
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3. Slump- This is a very serious and prolonged downturn that leads to fall in
GDP substantially and also fall in house and asset prices.
4. Recovery and growth- In this stage, real GDP starts to increase.

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55
HOW BUSINESS RESPOND TO
RECESSION

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INFLATION AND DEFLATION
Inflation- an increase in the average price of goods and services- it results in a
fall in the value of money.
Deflation- a fall in the average price level of goods and services.
Cause of inflation.
 Demand-pull inflation
 Demand pull inflation results from an increase in the level of Aggregate
Demand.
 It exists when the growth in the level of AD is greater than the capacity
Aggregate Supply can meet.
 The result is excess demand for goods and services and pressure on businesses
to raise prices in order to increase their profit margins.
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Cost-push inflation
 This is a situation where inflation is caused by an increase in the costs of
production.
 Cost-push inflation occurs when firms respond to rising costs, by increasing
prices to protect their profit margins.
 There are many reasons why costs might rise e.g. rise in price of
components, rising labour costs, high indirect taxes, depreciation of the
currency etc.

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IMPACT OF INFLATION ON
BUSINESS STRATEGY
 Cost increases can be passed to consumers especially if the goods have
inelastic demand
 The real value of debt owed by the business fall. This is because the value
of money fell.
 Rising prices are likely to increase the value of company’s assets e.g.. Land,
building etc.
 Since inventories are bought in advance and then sold later, there is an
increased profit margin to the business
High rates of inflation can have serious disadvantages for the
business
Employees may demand higher wages thus increasing wage bill to the
business
Consumers may become much price sensitive and start bargaining for
lower prices
Cash problems may also affect the business since it becomes expensive
to borrow.
Business may reduce investment since consumers are unable to buy
products as they are expensive
Consumers may shift their purchase from locally produced goods to
cheap imported goods thus affecting BOP negatively
Business strategy during a period of inflation will focus on;
Cutting back on spending expenditure
Cutting profit margin to limit their own price rise in order to remain
as competitive as possible.
Reduce borrowing to a level where interest repayment is manageable
Reducing time period customers take to pay
Reduce labour costs
 UNEMPLOYMENT

 Unemployment- this exists when members of the working population are willing and
able to works but can’t find jobs.
 Working population- all those in the population of working age who are willing and
able to work.
What is unemployment rate in the following countries in 2023?
 Kenya ……………………………………….
 Tanzania…………………………………….
 UK …………………………………………..
 China…………………………………………
Costs of unemployment
 Loss of income which would have been earned on the job thereby resulting to a
decrease in living standards for the unemployed and their descendants
 Depression and psychological problems leading to stress, family break-ups etc.
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 Loss of tax revenue to the government.
 Increase in government expenditure on social security services e.g.
unemployment benefits. This will lead to a high opportunity cost since this
money could have been used to provide other public goods such as
infrastructure.
 Social costs such as an increase in the crime rate, prostitution, development
of slums etc.
 Decrease in economic growth due to a fall in demand for goods and services.

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 Unemployment reduces demand for goods and services by reducing the incomes of
those looking for work
 There will be loss of income and lower living standards
 As employees stays long without jobs their skill may become out dated making it
difficult to find work.

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CAUSES/CATEGORIES OF
UNEMPLOYMENT
1. Cyclical unemployment- unemployment resulting from low demand for
goods and services in the economy during a period of slow economic growth
or a recession.
Solutions to Cyclical unemployment
 The government attempts to manage economy so as to avoid substantial
swings in business cycle
 Government may aim to maintain a competitive rate of exchange so that
overseas demand for domestic goods does not fall

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2. Structural unemployment- unemployment caused by the decline in important
industries, leading to significant job losses in one sector of the industry.
This can be a result of;
 changes in consumer taste and expenditure
 Workers in some industry may find demand for their products declining
 Improvements in technology in many industries means that employers are
looking for adaptable and
multi-skilled workers. Manual and unskilled workers thus find it difficult to
adapt to these requirements
 Deindustrialisation has left many without jobs where their skills are transferable
Solution to structural unemployment
o The government will aim to provide educational and training programs for
workers without the necessary skills
o Workers can migrate to areas where their skill is needed .
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3. Frictional unemployment- unemployment resulting from workers losing
or leaving jobs and taking a substantial period of time to find alternative
employment.
Solution to frictional unemployment.
 The government will provide information about job opportunities through
introduction of job centres or employment agencies
 The government can also reduce unemployment benefits for those who are
slow to find alternative employment to motivate them to find work more
quickly

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 SOLUTIONS TO
UNEMPLOYMENT
i. Supply side polices- these will increase the productive capacity of an
economy, they are used to increase the production or supply of goods and
services they include :
Education and training- This will improve the skills of the workforce and
make them employable
• Privatisation- this will lead to increase in productivity and investment
thereby resulting to an increase in demand for labour
• Subsidies, tax holiday and tax cut- these incentives given to producers by
the government in order to encourage production and investment at lower
cost, increase in production means more staff needed
ii. Free trade- will lead to an expansion in the market for products thereby
leading to an increase of production in goods. These will require more labour

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iii. Research and development- this may lead to inventions and innovative
products which will lead to increase in demand for labour to produce them

iv. Improvement of labour mobility- the government can control the level of
fictional unemployment caused by high bargaining power of trade unions by
controlling their activities and power

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Balance of payments (BOP) (current accounts)
 Balance of payments- this account records the value of trade in goods and
services between one country and the rest of the world.
 A deficit in BOP means that the value of goods and services imported
exceeds the value of goods and serviced exported.
 A surplus of BOP on the other hand means that value of exports exceeds the
value of imports.
Impact of persistent BOP deficit on the country
 A fall in the value of its currency
 A decline in the country’s reserves of foreign currency
 An unwillingness of foreign investors to invest in the economy

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The impact of the above problems to a business are as follows:
 An exchange rate depreciation will make importing expensive
 A decrease in amount of goods produced
 Increase in prices of goods produced
 Lack of demand of business products may lead to firm laying off workers
Government may make the following polices to control BOP deficit e.g. tariff
and quotas which may have serious retaliation by other countries thus
reducing export demands.

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Exchange rates
 Exchange rate exchange - the price of one currency in terms of another.
Find the current exchange rate of Kenyan shilling to;
 US dollar……………………………………………….
 Uganda shilling………………………………………...
 South African Rand ……………………………………
Turkish lira ……………………………………………...
Exchange rate depreciation- a fall in the external value of a currency as
measure by its exchange rate against other currencies
Exchange rate appreciation- a rise in the external value of a currency as
measure by its exchange rate against other currencies

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Domestic firms that gain from appreciation are;
 Importers of foreign raw materials and components for whom the domestic
currency cost of these imports will be falling. Increasing their
competitiveness
 Importers of foreign manufactured goods, who are able to import the
product more cheaply in terms of domestic currency
Domestic firms that lose from appreciation are;
• Exporters of goods and services to foreign markets, because of the higher
products and services in terms of the foreign currency
• Businesses that sell goods and services to the domestic market and have
foreign competition- the domestic products will be more expensive compared
to imported goods, thus consumers are likely to switch to the cheaper option

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Domestic business that gain from depreciation are;
 Home-based exporters- who can now reduce their prices in oversea markets
 Business that sell domestic products will experience less price completion
from importers
Domestic business likely to lose from depreciation are;
• Manufactures who depend heavily on imported supplies of materials,
components or energy sources
• Retailers that purchase foreign supplies.

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INTERNATIONAL COMPETITIVENESS –
NON-PRICE FACTORS
 It must not be thought that low prices alone will guarantee success of a
business product if they are only slightly less than those of competitors.
 Consumers consider many non-price factors in making purchasing
decisions too.
 The following are the factors, other than product prices, that can determine
the international success – or competitiveness – of a business:
 Product design and innovation: An innovative product, such as the latest
Apple iPad, will attract custom, even though it may be sold at premium
prices.
 Quality of construction and reliability: For several years, Japanese cars
have been declared the most reliable on the US market and, even though they
are not the cheapest models around, this encourages consumer interest.
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 Effective promotion and extensive distribution: These two factors go some
way to explain the universal success of McDonald’s restaurants.
 After-sales service: This includes extended guarantee periods.
 Investment in trained staff and modern technology: This should allow
flexibility of production to meet frequent changes in consumer tastes. Higher
labour productivity can overcome drawbacks caused by higher costs of other
resources.

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MARKET FAILURE
Market failure occurs when market forces fails to allocate resources efficiently.
Examples of market failure include:
 Existence of externalities

 Failure to produce public goods

 Under-provision of merit goods

 Over-production of demerit goods

 Existence of monopolies
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 GOVERNMENT POLICIES TO
SOLVE MARKET FAILURE
Government can use the following policies to solve problem of market failure.
These policies include;
 Taxation…………………………………………………………………………….........
………………………………………………………………………………………….
 Subsidies…………………………………………………………………………….......
………………………………………………………………………………………….
 Regulation………………………………………………………………………….........
………………………………………………………………………………………….
 Direct provision………………………………………………………………………....
Campaign………………………………………………………………………………
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 MACRO ECONOMIC POLICIES
These are policies designed to impact the whole economy
1. Fiscal policy- The policy is concerned with decisions about government expenditure,
tax rates and government borrowing- This policy can help achieve government macro
economic objectives.
To achieve economic growth………………………………………………………………
To reduce inflation…………………………………………………………………………
To reduce unemployment…………………………………………………………………..
To ensure balanced trade (BOP)…………………………………………………………..
To ensure clean environment………………………………………………………………

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2. Monetary policy- This policy involves the use of interest rates and the supply of
money in the economy. The policy can be used to achieve government macroeconomic
objectives.
To achieve economic
growth………………………………………………………………
To reduce
inflation…………………………………………………………………………
To reduce
unemployment…………………………………………………………………..
To ensure balanced trade (BOP)…………………………………………………………..
To ensure a clean
environment………………………………………………………………

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3. Supply side policies- These are policies aimed at increasing Aggregate supply of
goods and services in the country. These policies include:
 Research and development
 Education and training
Subsidies
Tax cut and tax holiday
Privatisation
These policies can be used to achieve government macroeconomic objectives.

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ASSIGNMENT
Complete the task given in hard copy and return it on Monday 22/06/2023

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