External Factors Impacting the Future of Business Essay

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Updated: Feb 10th, 2024

The cost of a raw material increases

When the cost of raw materials increases, the overall cost of producing one unit of the item also increases. The cost of total production will increase. The cost of raw materials is variable. Therefore, as production increases, the cost of raw materials increases in tandem. When the cost of production increases, net revenue declines, assuming the price of the end product remains constant. Net revenue is the net of total revenue and total cost.

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The impact of an increase in raw materials costs is an increase in the total cost of production. When this happens to a business, the manager has no choice other than raising prices or reducing the costs of other input items (Barrows & Smithin 2009, p.10). Alternatively, the manager can opt for substitute raw materials which may be cheaper.

Revised answer to the question

Raw materials are variable in the long term. They change with the increase or decrease in output as shown below.

Raw materials are variable in the long term

Fixed and variable costs

The total cost of producing a single unit of output is calculated by adding fixed cost with total cost. Because fixed cost is constant, the total cost is determined by variable cost. To keep the cost of production low, variable costs should be managed to be kept at a minimum.

Why the two answers differ

In the revised answer, I correctly considered the cost of raw material as input and analyzed the effect of the cost of raw materials increase from that perspective.

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The value of Sterling (ÂŁ) strengthens so that you and everybody else can buy more foreign currency for each pound sterling

The strengthening of the British pound encourages imports and discourages exports. If the business manufactures its products for home consumption using raw materials imported overseas, strengthening of the pound is good news. This is because the cost of production will go down.

Revised answer to question two

The price of one unit of currency in terms of another is defined as the exchange rate. The exchange rate system may be flexible, fixed, or managed float. When foreign currency becomes less expensive compared to local currency, the latter is considered to have been appreciated. The UK has a free-floating exchange system. The value of the currency against others is determined by demand and supply. A strong currency is advantageous for the following reasons:

  • Cheaper imports.
  • Low cost for production.
  • Lower inflation.
  • Lower interest rate.

Effects of currency movement on AD-AS analysis

Effects of currency movement on AD-AS analysis
Effects of currency movement on AD-AS analysis.

Currency appreciation leads to a decline in the cost of production.

Why the two answers differ

I considered the overall effect of the strengthening of the pound on the economy.

Your product becomes more popular with consumers

A product becoming more popular with consumers is a boon to the business. This is because the demand for the product will increase. When this happens, the business may find itself in a situation where it is not able to satisfy the demand. Retailers may decide to increase the price of the product to ration it. This makes sense as predicted by the law of demand. The law states that an increase in demand leads to a price increase.

Demand curve

If retailers were to increase prices, demand would go down. The best strategy for managing increased demand is increasing production to match new demand (MC Graw-Hall and Garratt 2010, p. 56). Doing so would require investing in new production equipment and hiring more human resources.

Revised answer to question three

An increase in demand leads to an increase in total revenue

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Demand curve

An increase in demand will lead to an increase in sales.

Why the two answers differ

I assumed that the producer can produce more products to match increased demand.

There is an economic downturn in one of your main export markets

An economic downtown in one of the key export market would have serious repercussions for the business. Sales and profits of the business will decline. This is due to reducing the purchasing power of consumers in the export market.

To cope with reduced sales, the business would have to put on hold plans to hire new workers or any form of investment (Worthington & Rees 2005, p. 98).

Revised answer

The economic downturn is a period of low economic activities. It reduces output; hence, income. The following graph shows the effect of the recession on income.

Real median household income

If the US were the target market, sales would reduce due to lower purchasing power.

Why the two answers differ

I considered the effect of the economic recession on consumer’s income in the revised answer. I assumed the export market was affected by the downturn in the USA.

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Average wages in the UK are expected to rise

Labor is an important input in the production process. The cost of inputs determines the end price of a product. When average labor increases in the UK, it means the business may be required to raise its wages to match the average. Failure to do this would lead to industrial unrest, or losing the best employees to competitors. Industrial unrest would give the business bad publicity.

Losing the best employees is very expensive for business. It takes time and resources to scout, recruits, and train employees.

Revised answer to question five

The level of wages is determined by the demand and supply of labor. The level of Wages is also higher when labor is more productive. When labor supply is less than demand, wages go up as shown in the graph below.

Why the two answers differ

In the second answer, I considered labor as a commodity that is affected by the forces of demand and supply to determine equilibrium labor.

The price of a good that can be used by consumers instead of yours goes down

The price of a good that can be used by consumers instead of yours goes down

In the first figure, an increase in the price of a product leads to a decline in demand for a product. Consumers opt to buy substitutes which are now cheaper in comparison. As a result, the curve for substitute products shifts to the right as shown in the second figure.(Sloman & Garratt 2010, p.58). The assumption is that consumers have information about available substitutes and their prices, and they are also rational buyers.

Revised answer to question six

A substitute is a product or good that can be purchased instead of another product. For most people, tea and coffee are substitutes. Increase the price of tea with lead to an increase in demand for coffee and the other way round.

Price

When the price of good A drops, the quantity demanded increases. As a result, demand for Good B, which is a substitute, falls from D* to D.

Why the two answers differ

I considered the interplay between the demand, supply, and prices of substitutes.

You invest in a new production plant that operates at twice the output of your old one

A plant that doubles output compared to the older plant is very beneficial to the business. This is because the new plant increases output, but the cost of production does not necessarily increase in proportion to the increase in output. For example, the old plant may have probably required 10 employees to man it, but the new plant may require the same amount of employees or lesser. Therefore, the new plant will increase labor productivity.

With a new plant, therefore, it is possible to reduce the cost of production. Being a low-cost producer is a big advantage in a business world that is very competitive (Schiller 2011, p. 65). A low-cost producer can price products competitively and still maintain a healthy profit margin.

Revised answer to question seven

The introduction of a new machine increases the average productivity of labor. As more workers (or other inputs) are engaged, productivity starts to decline.

The average productivity of labor

Why the two answers differ

I considered the short-run and long-run effect of a new plant on labor productivity.

Times are tough: the price at which you can sell your good covers your running costs but not all your costs

The price of a product does not cover all the costs. Pricing decisions are arrived at by considering operational costs plus a profit margin (McAleese 2004, p. 63). An indirect cost of harm that the production process may be causing the community is not reflected in the price of a product. Indirect costs that affect the community negatively are referred to as negative externalities.

Research and development costs that a business incurs have benefits that go beyond the company. The information adds to the general body of knowledge, and future research by others will build on that information. These benefits to society are not included in the price of the product.

Revised answer to question eight

Externality in economics is the benefit or cost not transmitted through prices.

The effects of a negative externality

The graph above shows the effects of a negative externality.

The effects of a positive externality

The graph above shows the effects of a positive externality.

Why the two answers differ

I considered the inefficiency brought by positive and negative externalities.

References

Barrows, D., & Smithin, J. N 2009, Fundamentals of economics for business (2nd ed.), Captus Press, Concord, Ont.

Begg, D., & Ward, D 2009, Economics for Business (3rd ed.), Higher Education, Maidenhead: McGraw-Hill.

McAleese, D 2004, Economics for business: competition, macro-stability, and globalization (3rd ed.), FT Prentice Hall, Harlow, England:.

MC Graw-Hall sloman, J. & Garratt, D 2010, Essentials of Economics (5th edition), prentice Hall, New York.

Schiller, B. R 2011, Essentials of economics (8th ed.), McGraw-Hill/Irwin, New York.

Sloman, J., Hinde, K., & Garratt, D 2010, Economics for business (5th ed.), Financial Times/Prentice Hall, Harrow, England.

Worthington, I., Britton, C., & Rees, A 2005, Economics for business: blending theory and practice (2nd ed.), Financial Times/Prentice Hall, Harlow, England.

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