Businesses’ responses to changes in the economic climate
Individual businesses have no control over the economic climateThe general level of wealth, consumption and activity within a particular area or region.. This means that they must be able to respond as the economic climate changes.
When the economic climate changes, it will usually result in one of the following:
- an increase in consumer spending, if people have more money available
- a decrease in consumer spending, if people have less money available
It is important that a business is able to respond accordingly. Potential responses include making appropriate changes to products, targeting different markets or adjusting prices appropriately. For example, some popular chocolate bars have reduced in size over the years, even though their price has remained the same.
Changes in the economic climate are usually characterised by changes in:
- the unemploymentBeing without a job or source of income. rate
- interest rate The price at which you can borrow money, or the return on how much money you can save.
- exchange rateThe value of one currency against another.
The following table shows how consumers and businesses may respond to changes in each of these areas:
| Change | Consumers | Businesses |
| Higher unemployment rate | May spend less, as fewer people are earning | May lower prices in order to encourage people to buy |
| Lower unemployment rate | May increase their spending, as more people are in work | May increase prices as demand increases |
| Increased interest rates | May spend less, as they are encouraged to save | May reduce products’ sizes but leave the price unchanged, increasing the profit margin. This is sometimes called ‘shrinkflation’ |
| Decreased interest rates | May spend more, as there is less incentive to save | May launch bigger versions of products to charge higher prices |
| Increased value of pound sterling (exchange rate) | May spend more on imported goods, as they are relatively cheap | May target new domestic markets for their products to attract new customers |
| Decreased value of pound sterling (exchange rate) | May spend less on imported goods, as they are relatively more expensive | May target new international markets for their products as exports are cheaper |
| Change | Higher unemployment rate |
|---|---|
| Consumers | May spend less, as fewer people are earning |
| Businesses | May lower prices in order to encourage people to buy |
| Change | Lower unemployment rate |
|---|---|
| Consumers | May increase their spending, as more people are in work |
| Businesses | May increase prices as demand increases |
| Change | Increased interest rates |
|---|---|
| Consumers | May spend less, as they are encouraged to save |
| Businesses | May reduce products’ sizes but leave the price unchanged, increasing the profit margin. This is sometimes called ‘shrinkflation’ |
| Change | Decreased interest rates |
|---|---|
| Consumers | May spend more, as there is less incentive to save |
| Businesses | May launch bigger versions of products to charge higher prices |
| Change | Increased value of pound sterling (exchange rate) |
|---|---|
| Consumers | May spend more on imported goods, as they are relatively cheap |
| Businesses | May target new domestic markets for their products to attract new customers |
| Change | Decreased value of pound sterling (exchange rate) |
|---|---|
| Consumers | May spend less on imported goods, as they are relatively more expensive |
| Businesses | May target new international markets for their products as exports are cheaper |