Unit 2 Business Environment Assignment Armani
2.1 What specific benefits and constraints that organisations might face operating in a different economic system (i.e. in free and command economic systems)?
Look at specific political, economic and social aspects such as government interference, population, labor force, market growth, exchange rates, trading partners, consumer tastes and preferences. Given answer can be correlated with the Armani or any other organisation. Benefits and constraints in free-market and command economy system
In a free-market economy, all economic decisions are taken my firms with no government intervention. Firms take their decision about the acquisitions and allocations of all economic resources and economic decisions are influenced by supply, price and demand. In command economy central government make all economic decisions for example, planning, acquisition of factors of production and distribution of resources. Under free-market economy, organisations choose the system of production that suits the operations in order to meet their economic objectives e.g. production efficiency and profit without direct government interference.
Under the command economy, central government chose the system of production however inefficient it is without consideration for profit as primary objective (Fender, 2012). There is no price control imposed on firms by government instead price is determined by forces of supply and demand. The central government can impose price control if it feels the consumer is being exploited.
Consumers, under the free-market economy, have wider choices to make economic and buying decision about their taste and preferences, including purchase of product (s) that meet their needs. The command economy on the other hand central government have some influence, competition is non-existed. There are no foreign exchange restrictions for both local and foreign firms. Organisations are free to transfer part of their profits to overseas subsidiary or parent company. Under command economy, this is tightly control through the financial and legal or regulatory systems (Cuciniello, 2009). Command economy stifle innovations, efficiencies and competitions and this affect free labor force movements, market growth and consumers’ buying behavior.
Organisations operating these two market systems are constraints in terms of growth, competition, efficiency and proper allocation of economic resources. Consumers are restricted to wide range of goods and services when organisations operate in command economy, like Russia, China and North Korea, for example. The opposite is the case in a free-market economy. Whilst growth is stifle in command economy, growth strive in free-market economy. Another big difference in the free market and command market economy is what will be produced. In the free market economy, although some of the people think that the organisation is in command but this is not the case. In free market economy, it is the customer who decides what will be produced. The Armani started its business with the fashion clothing, but slowly, the processes of the company are affected by the consumer taste. In 2005, Armani started to explore the hospitality industry and made alliance with the EMAAR Hotels and Resorts because the consumers were also demanding the luxury in the hotel industry. On the other hand, the consumer taste has no value in deciding the product of an organisation. It is the government who decide what will be produced without any input from the consumers. This is one of the important reasons of the failure of the command market economy because the government cannot know what the people want unless their input is not taken (Grigoroudis, Tsitsiridi & Zopounidis, 2013).
The interference in the command market economy affects the operations of the organisations and they cannot take the business decisions without the permission of the government. All the processes in the command market economy are always audited by the government officials. The government also interfere with the internal functions of the organisations along with the price setting of the products or services. While the organisations feel themselves restricted in the decision making process in command market economy, in free market economy, only the stakes of the government in an organisation decides how much the government can interfere in the company business. Only the labour in the command market economy could be said that it is not in the control of the government and has its own decision making process, but indirectly the governments also tries to control the labour also through many rules and regulations. In the free market economy, the labour gets the support of the government, but the organisation is the main decision making authority here.
2.2 Assess the impact of fiscal and monetary policy on business organisations and their activities. Using the concept of Aggregate Money Demand (AMD = C+I+G+X-M)
or otherwise, explain with reasons, what might happen to business activity in general and to Armani specifically, if the following happened:
i. A general fall in the level of income tax?
Due to unexpected behaviours a fall in level of tax can have a very little multiplier effect, and overestimated by the government when the reform is imposed. When consumer confidence is low a fall in tax will not stimulate any increase in consumption because they are feeling pessimistic about future economic prospects, this could be due to a lack of job security. Therefore the demand for firm products will not increase.
ii. A rise in the value of the pound
A rise in the value of the pound may not harm a firm’s export. This may be due to two reasons, the first is if the quality of the goods is high relative to its competitors and the second being if the goods are price-inelastic. The latter is very helpful as it allows firms to not cut its prices when selling abroad to hold on to its current consumers, but rather increase it in line with the rise in value of the pound making them more expensive for foreign residents. Subsequently, because the foreign consumers are not responsive to any increase in price they will not cut back on demanding the firms’ product, in return raising firms revenue. Increased revenue will increase the amount the business has to spend on capital goods.
iii. Fall in rate of interest
There is often a time lag between when the government reduces the interest rate and when it is reflexes in the four components of AD. This is because most form of savings is done on fixed interest rates and it takes time for commercial banks to change these. So consumption is delayed, causing investment to also be delayed (GaliÌ and Gertler, 2009)
iv. Increasing unemployment
When there is an increasing number of unemployed people in the labour force it allows firms to have a wider range of job applicants. Leading to an increased level of productivity because firms are able to select the most suitable candidate for the job, in most cases it’s the job a applicant will feel most satisfied doing. Therefore increased worker morale will also improve the quality of the products which will enhance the company’s international competitiveness
v. A large increase in the level of Government expenditure –
A large increase in the level of Government expenditure can be very harmful if there is information failure. When the government is informed of there being a possibility the economy may be going into a recession, they will boost their spending dramatically. If in fact the economy is heading for a boom then the increased spending will reinforce this cycle rather than stabilizing it. This will result in high levels of demand-pull inflation as the economy is already producing at full capacity and the increased consumer expenditure, investment (because of the multiplier effect) and government expenditure will shift AD to the right.