Assessing Economic Assessing Economic ConditionsConditions

Assessing Economic Assessing Economic ConditionsConditions

Bayu Adhi Tama, MTI Bayu Adhi Tama, MTI bayu@unsri.ac.id bayu@unsri.ac.id

Assessing Economic Assessing Economic ConditionsConditions

Economic ConditionsEconomic Conditions•Reflect the level of production and consumption for a particular country, area, or industry– Macroeconomic conditions

Overall economic state of a country

– Microeconomic conditions Focus on conditions in a particular business

or industry

Impact of Economic Impact of Economic ConditionsConditions

•Economic conditions can affect:– Revenues of a business– Expenses of a business– Total value of a business

Impact of Economic Impact of Economic ConditionsConditions

•Some firms are more sensitive to changes in economic conditions than others:– Demand for fast food demand is not very

sensitive to declining economic conditions.– Demand for new automobiles is more

sensitive to weak economic conditions than food products.

Harley Davidson ExampleHarley Davidson Example•Demand for motorcycles is stronger when: – The economy is strong.– Customers have more income to buy

motorcycles.

•High demand for Harley Davidson’s motorcycles:– Generates greater revenue.– Improves company performance.

Harley Davidson ExampleHarley Davidson Example•Demand for motorcycles is weaker when: – The economy is weak.– Customers have less income to buy

motorcycles.

•Lower demand for Harley Davidson’s motorcycles:– Generates less revenue.– Weakens company performance.

Harley Davidson ExampleHarley Davidson Example•Harley Davidson tries to predict demand so it will have a sufficient supply of motorcycles to meet future demand.– Demand for motorcycles depends on

economic conditions.– Number of motorcycles produced also

depends on economic conditions.

•Government policies also affect economic conditions.

Harley Davidson ExampleHarley Davidson Example•Harley Davidson must determine/menentukan:– How prevailing economic conditions will

affect the demand for the motorcycles it produces.

– How prevailing government policies(kebijakan) will affect the demand for its motorcycles.

Macroeconomic Effects Macroeconomic Effects • The performance of most firms depends on three macroeconomic factors:– Economic growth

Changes in the general level of economic activity

– Inflation Increases in general level of prices over

specific period of time

– Interest rates/suku bunga Changes in the cost of borrowed money

Economic GrowthEconomic Growth• When the change in the general level of economic activity is higher than normal:– Total income level of all U.S. workers is relatively

high./total pendaptan lebih tinggi – There is a higher volume of spending on products

and services./volume membelanjakan barang lebih tinggi

– Firms that sell products and services should generate higher revenues./prusahaan menjual produk lbh bnyk yang akan mnghasilkan bnyak penghasilan

RecessionRecession• (penurunan)Occurs when economic growth is negative for two consecutive quarters

• Lowers demand for products and services– Reduces/mengurangi the revenue/pendapatan of

firms that sell products and services.– Can cause firms to shut down factories in

response to low economic growth. General Motors Ford

Indicators of Economic Indicators of Economic GrowthGrowth

•Gross Domestic Product (GDP)– The level of total production of products and

services in the economy– Total market value of all final products and

services produced in Indonesia.

•Aggregate Expenditures(jumlah pengeluaran)– Total amount of expenditures(pengeluaran)

Alternative Indicators Alternative Indicators of Economic Growthof Economic Growth

•Unemployment level• Industrial production level•New housing starts•Personal income level

InflationInflation•An increase in the general level of prices of products and services over a specified period of time.– Estimated by measuring percentage

changes in the consumer price index (CPI).– CPI is a market basket of prices on a wide

variety of consumer products: Grocery products, housing, gasoline,

medical services, electricity, etc.

Impact of InflationImpact of Inflation•Can affect a company’s operating expenses(inflasi dpt brdmpak pada biaya operasi)– Can increase cost of supplies and materials.– Can impact indexed wages (labor cost).– Higher inflation can cause large increases in

operating expenses.

•Can affect a company’s revenues– Companies may charge higher prices to

compensate for their higher expenses.

Interest RatesInterest Rates• Represent the cost of borrowing money– Firm’s interest expense is based on market

interest rates and can have significant impact on a firm’s profitability. Firms may postpone expansion and other

projects when interest rates are too high.

– Interest rates also impact a firm’s revenue The increased cost of financing new homes

reduces demand for new homes. Revenues for construction firms and

equipment manufacturers also decline.

Market Price Market Price DeterminationDetermination

•Market price of a product is influenced by: – The total demand for that product by all

customers– Supply of that product produced by firms

•The interaction between demand and supply determines the market price.

Demand and SupplyDemand and Supply•Demand schedule

– Indicates the quantity of the product that would be demanded by customers at each possible price.

– Quantity demanded is higher when the price is lower.

Demand and Supply Demand and Supply (cont’d)(cont’d)

•Supply schedule– Indicates the quantity of the product that

would be supplied (produced) by manufacturers at each possible price.

– Quantity supplied (produced) is higher when the price is higher.

Interaction of Supply and Interaction of Supply and DemandDemand

• Interaction of demand and supply schedules determines the market price– Surplus: the quantity supplied by firms is

more than the quantity demanded by customers.

– Shortage: the quantity supplied by firms is less than the quantity demanded by customers.

– Equilibrium price: occurs when quantities supplied and demanded are equal.

Factors Influencing Market Factors Influencing Market PricesPrices

•Consumer income– Determines the amount of products and

services individuals can purchase High levels of economic growth result in

more income for consumers. Increased demand causes demand

schedule shifts and price increases.

– When consumer income declines: Demand decreases and creates a surplus

as the demand schedule shifts and prices decrease.

Factors Influencing Market Factors Influencing Market PricesPrices

•Changes in consumer tastes and preferences:– Impact the quantity of products and services

demanded by consumers Increased demand leads to price increase. Decreased demand leads to price decrease.

Factors Influencing Market Factors Influencing Market PricesPrices

•Change in production expenses– A decrease in expenses can lead to increase

in quantity supplied and create a surplus. Firms must lower prices in order to

eliminate the surplus.

– An increase in expenses can lead to decrease in quantity supplied and create a shortage. Firms can increase prices until shortage is

corrected.

How Government Policies Affect How Government Policies Affect Business PerformanceBusiness Performance

Case StudyCase Study