Unit 5 | Regulations - Economic factors affecting businesses

Inflation rate - Inflation means that firms have to constantly change their prices. Inflation creates uncertainty - firms won’t know how much they will be charging for their products in the future, so they can’t be sure if an investment will be profitable or not - therefore they invest less, and then they will become less efficient and less competitive. Also, inflation will increase production costs. 

High interest rates - Higher Interest rates will lead to a fall in the aggregate demand in the economy thus leading to difficulty for business to find customers willing to buy its product - as it is more expensive for foreign customers to buy goods exported from that country, and cheaper for that country’s population to buy imports. Lower interest rates will lead to a increase in demand in the economy.

Unemployment level - High level of unemployment in the country can also adversely affect a business. People will not have enough money to purchase a firm’s product.

Labor costs - High labor cost will result higher production costs. This will make a firm’s product more expensive as compared to other firms affecting its sales and profit margin.

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