Economic environment - Sample Essay
With these points recognised I have priorities them, in order of most to the least effect that have on Keith Ian. I am going to look at how they affect Keith Ian’s sales revenue, profitability and market share. Rate of Inflation Inflation is defined as a rise in the general level of prices of goods and services in an economy over a period of them. Inflation also reflects erosion in the purchasing power of money. Purchasing power is the number of goods/services that can be purchased with a unit of currency, in this case being pound sterling. Inflation has effects on an economy’s performance and can be altogether positive and negative.
High inflation may prompt employees to demand rapid wage increases this is in order to keep up with the costs of consumer prices. Cost-push inflation states that rising wages in turn can help fuel inflation. If employees of Keith Ian decide that they need a wage increase in line with consumer inflation then this could be bad for Keith Ian as they will need to make more money in order to make a higher profit which is less likely to happen so they may have to come to the conclusion that they are going to have to deal with the fact that they are loosing out on profit.
In turn they may have to loose out on other things for example cleaners. High inflation in house prices may lead to shortages of houses for Keith Ian to be able to sell due to consumers speculating about the future, thinking that house prices are going to carry on rising. Consumers are more willing to buy properties as they feel positive about the future and that it’ll be worth what more than they bought it for. This is not always the fact as house prices fluctuate all the time, but with the increase in peoples buying interest to houses this has positive affects for Keith Ian.
They are able to sell houses at increasing prices as they are sure that people will be willing to buy, this means that the employees at Keith Ian will be receiving more commission on the properties they sell due to there increased price. Also with the increasing prices their profitability will be increased. This is more likely to happen in the short term as eventually as a year passes they realise that they cant rely on speculation as inflation fluctuates all the time therefore it is uncertain what will happen in the future.
If there was a decrease in house prices, this would do the adverse affect as they feel that is going to carry on decreasing therefore not wanting to buy a house yet as they speculate that it’ll be cheaper if they wait. Uncertainty over future inflation may discourage investment and savings this could be bad for a business like Keith Ian due to the fact that people will be less willing to save therefore not able to save for a deposit on a house, this is more the case with first time buyers.
But not having any new buyers into the market decreases the opportunity that Keith Ian may have on selling houses as they will have less people to be able to market there houses towards making it more challenging for them. They may find that their sales revenue may be decreasing and housing sellers may decide that they have to put the value of their property down in order to get the sale that they want to achieve, therefore leaving them with less commission on the houses due to the decrease in sales price.
Interest Rates and Availability of Credit Most houses are not purchased with cash. This is because they are too expensive for most people to afford. Therefore the majority of potential homeowners have to take out a loan in order to pay for it, these loans are called mortgages. A home buyer or builder can obtain a loan either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly.
Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. If interest rates are low then people are more inclined to take out loans, but at the moment interest rates are relatively high then people will be less willing to take out loans. This is because repayments on the loan will be high, and may in fact be too high for people to pay back especially people with low incomes.
With a decrease in the number of homes purchased, it leads to a decline in the housing market. Due to the current times, deposits to buy houses have increased. With higher interest rates it is taking people long to save for there deposit needed, this could both bring about positives and negative. A positive is that instead of people buying a house they may rent for the mean time while they are saving up on a deposit for a house, this would therefore increase Keith Ian’s rental sales.
On the other hand, if people start to rent they may in fact decide that they never want to buy a house and carry on renting leading to Keith Ian’s sales of bought houses dramatically decreasing, this means that the profitability of Keith Ian will be decreased. The housing market is a market where the availability of credit matters greatly. If the availability of credit is low, then less people will be able to take out loans. This will lead to a decline in the housing market, therefore affecting Keith Ian’s profitability; also decreasing the commission they make due to the amount of houses they are able to sell decreasing.
If credit is made readily available this means that more people are able to take out loans therefore increasing activity in the housing market for Keith Ian. At this moment in time credit is relatively hard to get due to the high deposits people have to pay in order to get the mortgage, is means that less people are taking out mortgages resulting in a decrease in sales revenue. As I said above people therefore may be more inclined to rent accommodation.