Supply and demand
A market is any place where buyers and sellers meet to trade products. The market price is the amount customers are charged for items
Market prices depend on levels of supply and demand. The levels of supply and demand are constantly changing in accordance to T a number of factors, and can thus have a big impact on the success of a business.
Demand is the amount of a product customers are prepared to buy at different prices. Supply is the amount of a product businesses are prepared to sell at different prices.
There are many different types of market. The goods market is where everyday products such as DVDs are traded. The commodities market is where raw materials such as wheat are traded.
Market prices change when supply and demand patterns change. * An increase in demand following a successful advertising campaign usually causes an increase in price. (D P ) * An increase in supply when a new business opens usually causes a fall in price. (S P ).
As the market price changes so does a firm’s costs. For example When the price of commodities such as oil and electricity increases, a business finds its own costs of production rise. Higher costs are: * Passed on to the consumer in the form of higher prices. (This course of action occurs more) or * Absorbed by the firm. This leaves prices unchanged but means lower profit margins for the company.
Credit is borrowed money. Many small firms are dependent on credit such as bank loans and overdrafts to help finance their business activities.
Interest is the reward for lending (reward to banks) and the cost of borrowing (loss to the borrower). The interest rate is the percentage rate charged on a loan or paid on savings. For example, an annual interest rate of 5% means £5 is paid in interest for every £100 saved or borrowed. (interest is the extra money you pay back on top of the amount already borrowed)
The Bank of England decides on Interest rates in the UK.
An increase in interest rates can affect a business in two ways: * Customers with debts have less income to spend because they are paying more interest to lenders. Sales fall as a result. * Firms with overdrafts will have higher costs because they must now pay more interest.
The impact of a change in interest rates varies from business to business. Firms that make luxury goods are hit hardest when interest rates rise. This is because most customers cut back on non-essentials when their incomes fall as a result of interest rate rises.
Role of government
In the UK voters elect a national government at Westminster and local government in town halls. Voters expect the government to manage the economy well. Government economic objectives include: * Low unemployment, that is, as many workers in