The Economy & Business
Business: Edexcel GCSE, topic 1.5.5
Economic Booms and Recessions
The economy has a major impact on businesses.
Economic cycles
- The economy is the state of a country’s production and consumption of goods and services. A country’s economy goes through cycles of booms and recessions.
Booms
- A boom is when the economy is growing significantly and the businesses in it are generally doing well.
Recessions
- During a recession, economic output falls (for 2 successive quarters there is negative economic growth) and because of this, businesses usually experience a fall in demand for their products.
What Determines if There is a Boom or Recession?
The economic climate (whether it is doing well or poorly) reflects whether businesses are doing well or badly for several reasons. A few different factors can indicate the state of the economy:
Unemployment
- A recession leads to high levels of unemployment. This is bad for businesses because unemployed people have less money (disposable income) to spend.
- If less people buy goods, a business' revenues will fall and it is likely that profits will fall too.
- For example, the sales of supermarkets like Sainsbury's might fall during a recession because consumers will tend to buy essential groceries, but not expensive wine and DVDs.
Consumer spending
- A recession can lead to a fall in consumer spending because of:
- Unemployment - If someone loses their job, they will spend less.
- Reduced consumer confidence – If people are worried about the future then they are more likely to save just in case they lose their job. This leads to less spending.
- Decreased income – People’s income may fall during a recession and this leads to less money being spent on goods and services.
Changes in Income and Businesses
The effect that a change in income has on businesses is less simple. Some firms might benefit from a fall in income and some firms might suffer from a fall in income.
Necessities
- A fall in income can mean that people have to spend a greater proportion of their money on necessities.
- Even if income falls, it is unlikely that people will change the amount of money they spend on products like water.
- This means that they will have less money to spend on their wants (like a Playstation 4 console).
- Because of this, businesses that provide products and services for consumers’ wants rather than their needs will suffer if incomes fall.
Luxury products (and services)
- When people’s income falls, people are less likely to spend money on ‘luxury’ goods or services and instead will favour discount shops and cheap goods and services.
- Aldi and Lidl tend to increase their market share of grocery shopping in recessions, with supermarkets like Waitrose losing market share.
- Poundland and Primark generally increase their market share when incomes fall.
Test yourself on The Economy & Business
What are the 2 components of economic cycles?
What happens during a recession?
What are the factors that indicate the state of economy?
What is likely to happen to the sales at a supermarket like Waitrose during a recession?
During a recession, which supermarket is most likely to increase their market share?