Topic 1.5 Unit 24

 This topic considers the economic factors that affect the business.  How does the interaction of supply and demand affect the price charged and the quantity sold?  How do changes in the interest rates affect exports and imports?  What is the business cycle and how are businesses affected at different stages in the cycle?  How are stakeholders affected by these factors?

 Market demand and supply  The impact of changes in interest rates for small business,  Impact of changes in exchange rates,  How business cycles affect small business, and,  The effect of business decisions on stakeholders.

 Understand that prices in commodity markets are determined by the balance between supply and demand,  Appreciate the difference between commodity markets and normal markets,  Understand the effect on small businesses of price changes in the raw materials and energy costs.

 Commodities – raw materials such as coal, copper, oil, iron ore, wheat and soya,  Commodities market – where buyers and sellers meet to exchange commodities – eg London Metal Exchange or New York Mercantile Exchange.  Demand – the amount consumers are willing and able to pay for a product,  Supply – the amount sellers are willing to offer for sale at a given price.

 Shortage – when the demand for a good or service is greater than the supply. When there is a shortage the of goods the price tends to rise.  Surplus – when the demand for a good is less than the available supply, resulting in the price going down.  Goods Market – the market for everyday products such as clothes or food, petrol, going to the cinema or DVDs

 Raw materials like copper, iron ore, oil, coal and wheat are called commodities.  Farmers produce a range of commodities from wheat and potatoes to carrots and milk.  Many commodities are traded on organised global commodity markets where buyers, representing the DEMAND for a commodity come together with sellers, representing the SUPPLY, to agree prices. Farmers, for example, send their wheat harvest to be sold. The price they get is set by the balance between supply and demand.

 Demand for a product is the amount that buyers and willing and able to purchase at a given price.  Wheat for example is used to make bread, pasta, biscuits, beer, flour and animal feed. The demand for wheat is affected by decisions of millions of businesses and individuals throughout the world who buy these products. If the demand for wheat rises it will affect the price. Countries like China and Russia are major importers of wheat.

 China is a fast growing economy with fast rising incomes, so more Chinese people are choosing to eat more meat, this increases the demand for wheat as it is used to for food.  Ice cream on a hot day,  Drinks when you are thirsty  A comfy chair when you want to sit down.

 The supply is the amount that sellers are willing and able to sell at any given price. The supply of wheat is just as affected by global conditions as the demand for wheat. There are thousands of small farmers who grow wheat, the supply of wheat depends partly on the price that farmers think they can get for it, against, the price they may get for growing something else. It also depends on the weather conditions, pests and size of the harvest. In 2007 bad weather lead to a bad harvest leading to a fall in the world supply of wheat.

 If the DEMAND for a commodity is greater than the supply then there will be a shortage. Prices of that commodity will rise when a shortage exists in a market. The greater the shortage the bigger the rize in price.  In other situations the SUPPLY of a commodity may be greater than the demand. In this situation there will be a surplus and prices will fall.

 In recent years the price of oil has risen sharply the fallen back just as quickly. However the price of most items in the shops does not change like this. There is a difference between the commodity markets and the market for everyday goods and services that we all use, called the GOODS MARKET.

 Consumers like prices to stay the same. They find it confusing if prices keep changing sharply week by week, eg paying 80p for a cup of tea in a teashop one week and £1.50 the next week! So businesses are under pressure to keep their prices the same, it can also be expensive to keep changing the prices – lots of different labels.  In normal economic conditions, most businesses can fix the price of the products they sell, at least in the short term.

 Businesses have little control over the price they have to pay for some raw materials they buy. The price is determined on International markets. Small changes, however, can in the price of commodities can affect small business dramatically.  The price of commodities like oil, coal etc can change on a minute to minute, day to day basis, this means that small businesses will find it very hard to plan and can throw cash flow forecasts in to chaos.

 Simply this means that a plumber may have to pay more for his copper pipe so his prices will have to go up.  Bakers may find wheat prices rising rapidly, making their costs go up.  Builders may have to pay more for steel for building projects.

 For many small businesses the largest cost is paying wages. There are many other costs such as rent and taxes or new machinery.  Many small businesses also have to buy raw materials (commodities) and energy. If commodity prices change it can have a major impact on the costs of production for a small business. The size of the effect depends on 3 factors:- 1. Proportion of costs on materials and energy 2. How large is the change in price? 3. Can the business pass on the increase?

 What proportion of the total costs are made up of raw materials and energy costs?  Raw materials can be a large proportion of the total costs, so when the price goes up so do the costs and there is a big impact on profits – they go down.  Businesses that do not spend a lot on raw materials are not as affected

 If commodity prices go up by 1%, this will have little impact on businesses, even those where they are a large proportion of total costs.  If commodity prices go up by 50% then they will have a larger more profound effect on all businesses.

 Some businesses have to absorb any extra costs because they can not ‘pass them on’ – they have to pay them themselves reducing their profit.  Some businesses can ‘pass on’ the increase – this means that they can increase their own prices to reflect the price they have paid for raw materials.  Many businesses will review the price and change it once a year.

 Ultimately changes in the costs of raw materials are important to a business because they have an impact on their profits and survival. Rises in costs will lead to a fall in profits unless it can raise the price or sell more products, if it can not then it may ultimately be forced to close.  Falls in costs, however, tend to make things easy for a business, it has to decide if it can raise profits by not passing on the saving or cut its own price and hope sales increase!

 This is the cut out game!  Snakes and ladders!  Use good things and bad things about Supply and Demand and the markets to make the game.

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 Homework  Unit 25 homework  Unit 25 review questions