Ethical and environmental considerations - OCRThe economic climate and its impact on businesses

The economy includes all activities in a country concerned with the manufacturing, distribution, and use of goods and services. The economic climate has a big impact on businesses. The level of consumer spending affects prices, investment decisions and the number of workers that businesses employ.

Changing levels of consumer income

Income is money that consumers receive either from work or from investment. The amount of income someone earns will influence how much they spend.

How increases in consumer income affect businesses

As consumers’ incomes increase, people have more money to spend. This means that demand for many goods and services will increase as consumers look to spend their extra money. They might buy upgraded versions of products they already have, eg a new car, or take an expensive holiday. Businesses will expect to sell more of these luxury goods and services, so they will produce more, perhaps employing more staff.

How reductions in consumer income affect businesses

If consumers’ incomes fall, people will have less money to spend. They will buy fewer goods and services, as they will make do with what they already have. When they do spend money, they may buy cheaper alternatives, such as supermarket own-brand products or second-hand items. Businesses will expect to sell less when this happens, so they will plan to reduce the amount they produce, possibly making staff redundant.

Not all businesses will see demand for their products change in this way. The effect of a change in consumer income will depend on what a business sells. For example, pound shops that sell products at discounted prices often see sales increase when consumer incomes fall.

Unemployment

If somebody does not have a job, this does not necessarily mean they are unemployed. Some people choose not to work, either because they are wealthy or because they have family to look after. Others may not be able to work because they are ill. People who are unemployed are those who are actively seeking employment but are unable to find work.

How people become unemployed

Some reasons people become unemployed are that they are:

• maderedundant – people whose last job ended because there was no more work available or no further need for their role
• dismissed – people whose last job ended because they broke their contract of employment, eg by engaging in misconduct
• a school, college or university leaver – people who have completed full-time education and are seeking work for the first time

The impact of unemployment

Unemployment means that an economy is not making full use of the workers that are available. The economy will not grow as quickly as it could, and it may start to slow down. This downturn in economic activity will directly affect businesses.

Higher unemployment will mean that many households will have less income. For many businesses, this will result in lower sales as people spend less. However, the demand for some goods and services will increase when unemployment is higher. This is because consumers swap to cheaper alternatives. For example supermarkets’ own-brand products are sometimes thought of as lesser-quality, cheaper goods. Businesses that provide them may benefit from higher levels of unemployment.

Businesses that benefit when there is an increase in unemployment will also have more people to choose from if they need more staff. Businesses looking to recruit people may also be able to offer lower pay and still attract new staff, although they cannot offer less than the national minimum wage.