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Business economics comprises of an economic theory and quantitative measures which help in identifying various important operations and aspects of company. The aspects which can contribute in the expansion of organization include capital, labour and product markets (Hill, Cronk and Wickramasekera, 2013). For conducting the present research, business economy of UK has been chosen. This report constitutes two theories which are micro and macro economics with their impacts. Furthermore, it also discusses about the changes in UK economy which occur due to implementation of these theories. In addition to this, the report also evaluates the expectations from Central Bank of England.
Micro Economic Theory and its Impact
Microeconomics can be referred as economic analysis which influences the behaviour of particular product, person or a business firm. Microeconomics is a process which helps company in such a way that it is able to reach at the equilibrium stage. There are various laws and principles which help in analyzing the marginal analysis. One of the theories of microeconomics is “Theory of Product Pricing”. This theory comprises of two concepts that are theory of consumer behaviour and production and cost theory (Liedholm and Mead, 2013). This theory explains about the demand and supply in the business environment that needs to be assessed by the firm. Along with that, theory evaluates the business environment through product pricing strategies. It also helps in allocating resources for the production so that they can maximize their profits as well as minimize cost of the firm. In addition to this, it also explains different market situations which help in determining the product pricing strategy of products and services.
Company uses different pricing strategies to sell their merchandise which will give them higher profits. This strategy helps in analyzing their present and loyal customers associated with the organization. Theory explains that if company will know about the needs, tastes, preferences and requirements of customers and try to meet their expectations, then, this will increase the profitability as well as effectiveness of products (Chetty and et.al., 2012). Additional revenue which is obtained from the existing products of company further helps in improving its production process.. The pricing strategy which this theory follows is variable pricing strategy that constitutes the total cost of variable characteristics which are related to the production. These characteristics comprises of interest rates and various aspects of production. Variable pricing strategy enables the product’s prices to have a balance between sales volume and income per unit sold.
Macroeconomics can be defined as the process which analyzes the ways in which aggregate economy behaves. It also covers different phenomena such as growth rate, GDP, inflation etc. It is the study of whole economic system which comprises of total production, consumption, savings and investment. There are various theories and models which assesses the economic issues and problems which are affecting the economy. The theory which is chosen for macroeconomics is “Theory of Prices”. This theory constitutes various aspects such as inflation, deflation and reflation. Theory of price is an economic theory which evaluates that the price for any specific product and service is the relationship between power of supply and demand (Boulouta and Pitelis, 2014). Theory of price helps in setting optimal market price for the goods and services. Inflation affects all the economies of the world and thus, there is a rapid increase in the price level. Inflation can affect the economy in a positive as well as in a negative way. Deflation is opposite of the inflation because it is the contradiction of purchasing power which declines the price level. With the motive to monitor inflation, reflation is effective where prices of commodities decrease.
Changes in UK economy related to the interest rates have affected the British economy over the past 7 years. According to the economists, Selvaraj (2015) explains that the economy crisis will influence the entire service sector (Selvaraj, 2015). As per the survey, economic crisis and vast competitive market is affecting the UK economy. Some economists have stated that the idea of interest rates has been slow down to zero which is affecting the business in a positive way and helping out in the recession period. As per the views of Roberts and et.al., (2014), they suggested that manufacturer’s market can take advantages from low interest rates. This is because it helps in developing business activity (Roberts and et.al., 2014). Low interest rate is beneficial for companies which will help in taking the loans and in expanding the market share. UK companies stated that rising level of global economic crisis has resulted into delays in the new orders that are placed by the clients. This has a negative impact on the organizations. According to Hughes and Kitson, (2012), they asserted that the chance of low borrowing costs for long period will be welcomed by mortgage holders but will disappoint the savers (Hughes and Kitson, 2012).
In contrast to this, when interest rates were cut to 0.5% in March 2009, Mahadeva and Sterne, (2012) have predicted that interest rates would remain less in the British economy and in the Eurozone for a long period (Mahadeva and Sterne, 2012). The predictions stated that the interest rates will rise. But, it remained at zero for several years. This suggests that predictions were not appropriate. Hill, Cronk and Wickramasekera, (2013) explains that the global economy is showing that low inflation will gets rise in the upcoming years (Hill, Cronk and Wickramasekera, 2013). If there is low interest rate in the UK economy then it will set the benchmark for mortgages, overdrafts and loans. Low interest rates have reduced the relative cost of interest payments on the UK government debt. Boulouta and Pitelis, (2014) concluded that public sector debt has risen significantly in the past six years. This has made the cost of servicing debt lower that is important for the relative cost of interest payments (Boulouta and Pitelis, 2014). If there are benefits for the low rates then there are limitations for it as well because of which many people and old employees are suffering. For example, with low interest rates, people who are saving money in a bank are gaining lower interest rate. For instance, pensioners who are relying on interest payments for income will be getting affected from these low interest rates. If inflation is higher than nominal interest rates then it will give a negative impact to the savers in the real value. During recession period, savers are highly getting affected by low interest rates as well as through high inflation.
The interest rate is constantly same from last 7 years that is 0.5% so; the figures will reassure Bank of England policy makers that they can keep borrowing costs low without fearing a rapid pick-up in inflation. One of the main expectations is that repo rate introduced by the banking authorities must be low as decrease in this rate directly affects the working practices of business enterprise in the market (Allard and et.al., 2013). Further, in case if any organization is planning to expand its operations in the market and if direct support is needed from banks then in such case, when repo rate is high, companies have to pay high interest on the bank loan. So, this would directly has an unfavourable impact on the entire organization as overall cost would increase and in turn profit margin will decline when specific amount is taken from the bank as a loan. Apart from this, it also influences the growth of business in the market. With the help of this information, it can be stated that central bank has to lower down the repo rate so that organizations can be easily benefited with the help of this.
On the other hand, large number of businesses expects that central bank may decrease the tax rates and this benefits the operations of business as profit margin increases. Apart from this, decline in taxation rates adversely affects the income level of government as they receive lesser income from companies. Overall decrease in the interest and repo rate has an unfavourable impact on companies and businesses (Neuenkirch, 2012). Apart from this, alteration in the rate of interest can encourage the firms to allocate more funds in the nation which is a kind of development. So, these kinds of changes can be easily made by central bank with the motive of economic development. Moreover, firms are also demanding that central bank should focus on the equity market as this will be directly beneficial for the investors in market. New investment plans can be introduced through which higher returns can be obtained easily and through this, requirement of the investors can be satisfied effectually.
The entire study being carried out has supported in understanding about macro and micro economic policies which influences the entire nation. Further, interest rates are the most crucial in case of businesses where higher rates prevent from obtaining loan from banks and vice versa. Therefore, it is necessary for banking authorities to control the interest rates for the benefit of entire nation.
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