Describing Economic Environment and The Factors Affecting it (Essay Sample)

Economic Environment
Name
Institution
Introduction
Economic environment is a major determinant of a company’s success or failure. It can be defined as peripheral economic aspects that affect how consumers and businesses buy or demand for products and services thus affecting the performance of the company. This is because companies cannot control many of these factors. They are categorized into micro and macro economic factors depending on their level of complexity. Micro economic factors include competition from rival companies, market availability, demand for the goods or services provided, availability of suppliers and an up to task distribution chain. On the other hand, macro economic factors include inflation, interest and tax rates, employment and unemployment, recessions, income levels, currency exchange and saving rates. To best appreciate the effect of economic environment, let us consider a nationwide house building company based in the UK. The company builds up to standard houses across the nation and they support around 2300 employees. For the company to thrive, it must be able to support its employees and be able to produce up to standard housing that its target market can afford. In this case, considering the economic environment, the company cannot be able to control the available size of the market or control demand of houses. This affects the competitive advantage of the company. Also, macro economic factors such as income and inflation affect the capability of people to afford and invest in better housing. This is an adverse effect to the company invested in house building. Though these factors are incontrollable, they can be evaluated to forecast the growth trajectory of the company.
Microeconomics issues
Further elaborated, microeconomics is a branch of social science that studies the implication of individuals and firms’ decision making in regards to the allocation, distribution and utilization of scarce resources. The main objective of microeconomics is to evaluate market forces that establish prices of goods and services in the market as well as the allocation of limited resources. Demand and supply are the basic determinants of prices in the market (Chappelow 2019). Looking at the demand and supply of houses in the UK, it is evident that demand for houses have always been high their supply. Some of the factors that have led to the demand surplus include;
1 Affordability- Due to the economic growth, there has been a tremendous rise in income earned thus people are able to spare enough to purchase houses.
2 Consumer confidence- Due to the steady economic growth, people are confident of the housing market. They expect prices to rise in the future thus the boom in demand.
3 Population- England’s population has been on a steady increase for several years now. This has led to an increase in single households thus increasing the demand for houses.
4 Cost of renting- The cost of renting have increased to about 22%. This is relatively more expensive than buying a house using mortgage. People are therefore opting to buy houses than renting them thus the high demand.
5 Availability of mortgage- banks are now more willing to give mortgages with bigger multiple incomes which has led to an increase in demand for houses.
Despite the booming demand, supply cannot seem to keep up. The supply of house is inelastic and cannot respond to changes in prices. Also, there are a lot of planning restrictions on the use of the greenbelt land. The widespread opposition by local communities to building new houses citing increased congestion has contributed to the slow supply of houses. Lastly, due to the surplus demand of homes, suppliers are enticed to build more which in return reduces the house prices ultimately restricting supply.
When the structure of several firms producing the same goods or services is determined by the competition existing between them, this is referred to as a market structure. The market structure when it comes to house builders is oligopoly. This means that only a few house builders control the majority of supply of homes. This poses several hindrances like; Consumers are faced with a shortage of choice, house builders participating in the oligopoly can easily create market entry barriers to keep new firms from joining the market, house builders can add fees and consumers will be obliged to pay since there is almost no competition, they may also drip the supply of homes into the economy so as to increase their profits and boost shareholders confidence when in the real sense, owner occupies are dropping.
Macroeconomics issues
Macroeconomics can be defined as a branch of economics which analyzes structure, performance and behavior of an economy by focusing on factors like inflation, employment and unemployment, gross domestic product and so on (Chappelow 2019). As mentioned earlier, these factors are completely out of control of house builders. The government has therefore taken several measures to cushion house builders from the harsh effects of these economic factors. Some of these measures include;
1 Housing supply change – as previously mentioned, there has been a housing shortage across UK due to the constant increase of households. The number of households is predicted to keep rising in the coming years with an estimate of 240,000 households an year until 2033. It is evident that house builders cannot manage to provide homes at this rate. To boost house builders, the government has set a target to increase housing supply to about 17% of new built homes each year. Also, the government has put in place measures like improved mortgage availability to assist house builders and house buyers.
2 Help to buy changes – in 2013, the government launched the help to pay loan scheme to help the population acquire new build homes by covering around 20% of the home purchase where the owners are required to cover a 5% deposit and have a mortgage to cover the remaining 75%. The government has then partnered with house builders across Britain to make the scheme accessible to all. (Redrow 2020)
3 GDP levels – Gross domestic product is the total value of goods and services produced within the borders of a country within a certain period. It is a measure of a country’s economic performance. When the GDP growth is high, it translates to firms being able to hire more employees and pay better salaries. It also boosts the confidence of consumers to invest in things like home ownership. This means that if that if the GDP increases more people will be able to buy homes and home builders will be able to supply more while the opposite happens when the GDP decreases. This is why the UK government is trying to boost the GDP so as to boost the housi