Seminar: Applying economic concepts to your business

Topic Number:5

Principles of Business

Overview

The economic environment is an important determinant of business success. This seminar looks to determine the implications and impacts of the global economy on your business.

You are tasked with initially explaining the concept of supply & demand and the factors that influence it in relation to your business activity.

As part of this analysis you will determine a number of the key economic indicators in relation to your business. As you have recently learnt about the various strategies you can adopt when ‘going global’, determine how the theory of comparative advantage can help your business.

Finally, if you were going to make an investment abroad explain if you would opt for direct or indirect FDI.

Learning outcomes of this seminar

• Be able to explain the concept of supply & demand and the factors that influence it in relation to your business activity

• Identify and describe the key economic indicators that could impact your business?

• Illustrate and apply the comparative advantage theory in your business

• Critically evaluate and describe the various global investment options

Agenda for this seminar

What is the impact on key economic indicators such as GDP, inflation and employment?

Explain how you would use the concepts of comparative advantage to your businesses benefit.

If you were going to make an investment abroad explain if you would opt for direct or indirect FDI. Explain your rationale.

Explaining the concept of supply & demand and the impact of a slowing Asian economy on the UK’s economy? How could this impact your business?

Structure for the session

You will have 15 minutes to

discuss each question

We will have a debrief at the

end of each 15 minutes to hear your thoughts on each area

Feel free to ask questions but please do not have separate conversations ‘we are all in

this together’!

Explaining the concept of supply &

demand and the impact of a slowing Asian economy on the UK’s economy?

How could this impact your business?

Lets look at the UK & Developing Asia

According to the IMF (2012:60), developing Asia (DA) is moderating primarily due to the slowing of exports to the EU region, reliance on Euro banks, crisis and deteriorating business sentiment. However, domestic demand still fuels growth in key economies across the region (e.g. China) (IMF, 2012:60).

Source: IMF, 2012

Implications for supply and demand in the UKSelling UK goods/services in DA (Exports)

Demand goes down

Short term supply stays the same

Implication on price?Price goes down

Implications for supply and demandSelling UK goods/services in DA (Exports)

Demand goes down

Long term supply decreases

Implication on price?New equilibrium price is reached

Implications for supply and demandSelling UK goods/services in DA (Exports)

Quantity

Pric

e

InitialDemand Initial

Supply

Implications for supply and demandSelling UK goods/services in DA (Exports)

Quantity

Pric

e

Initial Demand Initial

Supply

ReducedDemand

Implications for supply and demandSelling UK goods/services in DA (Exports)

Quantity

Pric

e

Initial Demand Initial

Supply

ReducedDemand

Reduced Supply

Implications for supply and demandSelling DA goods in the UK (Imports)

Supply goes down (as GDP in DA has

fallen)

Short term demand in the UK remains the same

Implication on price?Price rise

Demand goes down (as GDP decreases*)

Implication on price?New equilibrium price is reached

Implications for supply and demandSelling DA goods in the UK (Imports)

Supply goes down (as GDP in DA has

fallen)

* This is an assumption; in reality a number of outcomes could occur

Quantity

Pric

e

InitialDemand Initial

Supply

Implications for supply and demandSelling DA goods in the UK (Imports)

Quantity

Pric

e

InitialDemand Initial

Supply

Implications for supply and demandSelling DA goods in the UK (Imports)

Reducing Supply

Quantity

Pric

e

InitialDemand Initial

Supply

Implications for supply and demandSelling DA goods in the UK (Imports)

Reducing Supply

ReducedDemand

What is the impact on key economic

indicators such as GDP, inflation and

employment?

Implication for UK; GDP

DA GDP

If the UK export more than it imports

to the DA

If the UK import more than it exports

to the DA

What about substitution?

Implication for UK; Inflation

DA GDP

If supply goes down and demand stays

the same then goods become more

expensive leading to increased inflation

Implication for UK; Unemployment

DA GDPIf DA goods prices increase it will lead to increased cost of

production and unemployment

could go up

If DA goods prices increase it will lead to increased cost of production and UK companies seek to purchase the goods

in the UK umemployment will

go down

Explain how you would use the concepts of comparative

advantage to your business’s benefit

Comparative Advantage: A Re-cap

View video: https://www.youtube.com/watch?v=FpTBjRf8lGs

Consider your core production lines: Where should you produce them?

100

(1C=1R)

100

(1R=1C)

50

(1C=4R)

200

(1R=1/4C)

Cars Rice

A

B

Consider the per unit opportunity cost and go for the lowest option

Remember the rule to calculate

the opportunity cost: Other goes over

Consider why one location has lower opportunity cost

Source: Wikipedia.org

How will this benefit your business?

Higher Margins

Lower Costs

More Profit

Are there any other implications?

If you were going to make an

investment abroad explain if you would opt for

direct or indirect FDI. Explain your

rationale.

Firstly consider the options

View video: https://www.youtube.com/watch?v=I8w7Kv2aZPg

Firstly consider the options

Direct Indirect

• Invests directly in business operations in another country

• M&A or establish a new business

• More control• Greater stake• Form global synergies• More sticky

• Investing in a company operating in another country through a financial instrument

• Invest in shares or bonds

• Less control• Less stake• No global synergies• Less sticky

Secondly, consider what your business needs and what its current resource position is

Do you currently have the

ability/capability or do you need to

acquire it?

Does it make strategic sense for

your business?

Do you have the required

resources?

Consider how you would structure a

deal

Thirdly, identify good opportunities to invest in, considering fit with your organisation

Determine if you will be able to realise the

anticipated synergies

Scan the market for a strategic fit

End of Seminar

Note: This recording is for your personal use only and not for further distribution or wider review.

© Pearson College 2013