Competition and the Economic Environment

Assignment 2: Economic policy

SHAN JI

The economic change of the government would affect mainly about three parts: demand from customers, the costs of running a business and affect on workers and supplies. The economic role of the government will depend mainly on the political ideology and structures that prevail in the country. Government believed that the economic system could be directed through aggregate demand-with changes in fiscal policy being the most appropriate way of doing this. Government accepts responsibility for improving the economy. They with the market economy to exist, but will from time to time try to improve inflation, or employment, or trade etc. in recent years the government has used interest rates if they wish to stop inflation rising; tried to keep income tax down because they believe this helps with employment/jobs and helps to create new business. The government also try to encourage the exports of goods in order to attempts to keep the balance of trade in balance.

The interest rate can be considered as the price of money. If you want to borrow money it is the percentage over and above the original loan that has to be paid back. This makes the interest rate a vital tool of economic management. A large amount of economic activity (both consumption and investment) is done on borrowed money, and so if the interest rate is changed it will either encourage or discourage borrowing and therefore tend to increase or decrease economic growth. Income tax is very familiar (and perhaps disliked!) by all whom work, but many people do not understand fully how it is charged. It is an important tax to the government as it is its main revenue-raising tax, though despite that it only represents just over a quarter of total tax revenue. National Insurance and VAT come fairly close on the list in terms of importance.

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In business situation one: a large retailer of electrical goods like TVs and Computers EG DIXONS or CURRYS. Firstly, if the government makes a substantial rise in interest rates, demand of goods will be affected, because interest rates increase will cause increasing of credit card rates on credit card agreement. So the consumers may decide not to buy the computers. When the business borrows money from the bank, as increased interest rates, the business would think about if they borrow money or not. Rental and purchase also are a problem with a increased interest rates, because all of these should be through the bank. Without the bank, the business can not do a lot of thing such as bank transfer, the bank loan, the insurance for the business and so on. The bank charge more interest rates, the business will pay more. These affect the costs of running a business and supply. Secondly, if the government makes a substantial rise in income tax rates at all levels. In this situation, people have less money to spend; computers and TVs will be expensive for some people. Therefore, people will decide to purchase second-hand instead of DIXONS. The shop might reduce their prices, it depends on the competition and the amount of money people can spend. In UK, there are two types of tax on company, for big company pay the corporation tax, for small company pay the income tax. That increases the costs of the business. The income tax goes up, if DIXONS pay low wage, they might loss some workers who’s looking for higher/better wages. The income tax cause low profit for the business. Thirdly, if the local government, Birmingham, makes a substantial rise in its tax on business, DIXONS and CURRYS might decide close down a few shops in Birmingham and open new shops in other cities such as London, Edinburgh or Manchester. Because the increased tax on business may cause the sharp increasing of costs on business. In this case, the business has to obtain more profits than before in order to cover their costs. Through DIXONS and CURRYS both are very companies, if they open more shops will be cheaper than Birmingham, and then they will think that whether it’s worthy to keep the shops in Birmingham or not. Normally, they don’t mention much about the tax, but if the tax is much higher than other places. That means the price of the computers and TVs is much higher than other places. Then the consumers might go to other places to purchase. The supply is bigger than demand, that will cause the waste of goods.

In business situation two, a newly set up sole trader in Birmingham selling relatively expensive skin and health care products. This business just have small amount of money to run the business. And they sell expensive products, if the interest rates are high, the shop might charge a higher price on their products. Then the consumers will adopt the quality of the products. They might think the products are overrated of their products. Some consumers may not be able to afford it. And the business is a new company, the consumers are not familiar about their brand. So they may not believe the brand and they cannot understand why they sell products for that high price. That may cause the market failure. This company target a rich group of people, this group of people won’t mention their credit card interest rate. But they pay a lot of attention on the brand and the quality of the products. If the brand is not famous, they are not willing to buy it. The business have lots of competitors such as CD, YSL, LANCOME etc. they are all famous brand, so the interest rate is not important as much as the brand. This is a new company, they have not got enough reputation with the bank, so the bank might not be willing to borrow money to the business or the bank will charge higher interest rates than the original interest rates. When the government increase the income tax, that will bring a strong load for the business. The company needs professional sellers to sell their products. If the income tax is too high, the company might be able to afford the wages of employees. So they may reduce the number of workers, of employ the non-skill workers instead of professional workers. This situation influences the reputation of the company. If the local government makes a substantial rise of the tax on business, the costs of the business will be high. And the business would feel harder of running the business.

In business situation three, a builder of houses operating mainly across the West Midlands. This kind of business is a risky business, because the business has to spend a lot of money before they get the money back. If the government charges a higher interest rates, when the company borrow money from the bank, they should pay a large amount money of the interest rates, that will bring more risk for the business and the bank. Because the business will take a long time to build and sell the houses. They can’t pay back the interests to the bank immediately. So if the business can’t sell the houses, the business will be closed down and the bank will make a loss on interests. When the customers purchase the houses, they usually go to the bank to use the mortgage of purchasing. The customers will take more money on the interests. Some people may not be able to afford the high interest rates. They might decide to buy smaller houses or another house. If the government make a rise on the income tax, people don’t have enough money to spend. Then they will take a long term mortgage to purchase a house. The business might reduce the number of houses to build. And the business will pay the income tax when they get the profit, but it will take a long time. On the tax of business, the business will decide to reduce the money to spend to build the house. Some business might reduce the quality of the materials of the houses in order to reduce the costs. It will bring serious problem on quality.

According above three situations, we can know how important the government uses the suitable economic role to control the businesses. In all words, government should use the fiscal policy, the monetary policy and the supply side policy to help and control the business in order to make economic growth.