Business Economics

Micro and Macro Economic Theory and its Impact

Micro Economic Theory and its Impact

Microeconomics can be referred to as economic analysis which influences the behaviour of a particular product, person or business firm. Microeconomics is a process which helps the company in such a way that it is able to reach the equilibrium stage. There are various laws and principles which help in analyzing the marginal analysis. One of the theories of microeconomics is the “Theory of Product Pricing”. This theory comprises two concepts that are theory of consumer behaviour and the production and cost theory (Liedholm and Mead, 2013). This theory explains the demand and supply in the business environment that needs to be assessed by the firm. Along with that, theory evaluates the business environment through product pricing strategies. It also helps in allocating resources for production so that they can maximize their profits as well as minimize the cost of the firm. In addition to this, it also explains different market situations which help in determining the product pricing strategy of products and services.

Company uses different pricing strategies to sell their merchandise which will give them higher profits. This strategy helps in analyzing the present and loyal customers associated with the organization. The theory explains that if the company knows about the needs, tastes, preferences and requirements of customers and tries to meet their expectations, then, this will increase the profitability as well as the effectiveness of products (Chetty and et.al., 2012). Additional revenue which is obtained from the existing products of the company further helps in improving its production process. The pricing strategy which this theory follows is the variable pricing strategy that constitutes the total cost of variable characteristics which are related to the production. These characteristics comprise interest rates and various aspects of production. Variable pricing strategy enables the product's prices to have a balance between sales volume and income per unit sold.

Macro Economic Theory and its Impacts

Macroeconomics can be defined as the process which analyzes the ways in which the aggregate economy behaves. It also covers different phenomena such as growth rate, GDP, inflation etc. It is the study of the whole economic system which comprises total production, consumption, savings and investment. There are various theories and models which assess the economic issues and problems which are affecting the economy. The theory which is chosen for macroeconomics is the “Theory of Prices”. This theory constitutes various aspects such as inflation, deflation and reflation. The theory of price is an economic theory evaluates that the price for any specific product and service as the relationship between the power of supply and demand (Boulouta and Pitelis, 2014). The theory of price helps in setting the optimal market price for goods and services. Inflation affects all the economies of the world and thus, there is a rapid increase in the price level. Inflation can affect the economy in a positive as well as in a negative way. Deflation is opposite of the inflation because it is the contradiction of purchasing power which declines the price level. With the motive to monitor inflation, reflation is effective when prices of commodities decrease.

Changes in the UK Economy through These Theories and its Impacts

Changes in the UK economy related to the interest rates have affected the British economy over the past 7 years. According to the economists, Selvaraj (2015) explains that the economic crisis will influence the entire service sector (Selvaraj, 2015). As per the survey, the economic crisis and vast competitive market are affecting the UK economy. Some economists have stated that the idea of interest rates has been slowed down to zero which is affecting the business in a positive way and helping out in the recession period. The views of Roberts and et.al., (2014), suggested that the manufacturer's market can take advantage of low-interest rates. This is because it helps in developing business activity (Roberts and et.al., 2014). Low interest rates are beneficial for companies which will help in taking the loans and in expanding the market share. UK companies stated that the rising level of the global economic crisis has resulted in delays in the new orders that are placed by the clients. This has a negative impact on the organizations. According to Hughes and Kitson, (2012), they asserted that the chance of low borrowing costs for a long period will be welcomed by mortgage holders but will disappoint the savers (Hughes and Kitson, 2012).

In contrast to this, when interest rates were cut to 0.5% in March 2009, Mahadeva and Sterne, (2012) predicted that interest rates would remain less in the British economy and in the Eurozone for a long period (Mahadeva and Sterne, 2012). The predictions stated that the interest rates would rise. But, it remained at zero for several years. This suggests that predictions were not appropriate. Hill, Cronk and Wickramasekera, (2013) explain that the global economy is showing that low inflation will gets rise in the upcoming years (Hill, Cronk and Wickramasekera, 2013). If there is a low interest rate in the UK economy then it will set the benchmark for mortgages, overdrafts and loans. Low-interest rates have reduced the relative cost of interest payments on the UK government debt. Boulouta and Pitelis, (2014) concluded that public sector debt has risen significantly in the past six years. This has made the cost of servicing debt lower which is important for the relative cost of interest payments (Boulouta and Pitelis, 2014). If there are benefits for the low rates then there are limitations for it as well because of which many people and old employees are suffering. For example, with low-interest rates, people who are saving money in a bank are gaining lower interest rates. For instance, pensioners who rely on interest payments for income will be affected by these low interest rates. If inflation is higher than nominal interest rates then it will have a negative impact on the savers in the real value. During the recession period, savers are highly affected by low interest rates as well as through high inflation.

Expectations from the Central Bank of England

The interest rate has constantly the same for the last 7 years is 0.5% so; the figures will reassure Bank of England policymakers that they can keep borrowing costs low without fearing a rapid pick-up in inflation. One of the main expectations is that the repo rate introduced by the banking authorities must be low as a decrease in this rate directly affects the working practices of business enterprises in the market (Allard and et.al., 2013). Further, in case if any organization is planning to expand its operations in the market and if direct support is needed from banks then in such case, when the repo rate is high, companies have to pay high interest on the bank loan. So, this would directly have an unfavourable impact on the entire organization as overall cost would increase and in turn profit margin would decline when a specific amount is taken from the bank as a loan. Apart from this, it also influences the growth of business in the market. With the help of this information, it can be stated that the central bank has to lower the repo rate so that organizations can easily benefit with the help of this.

On the other hand, a large number of businesses expect that the central bank may decrease the tax rates and this benefits the operations of the business as the profit margin increases. Apart from this, the decline in taxation rates adversely affects the income level of the government as they receive lesser income from companies. Overall decrease in the interest and repo rate has an unfavourable impact on companies and businesses (Neuenkirch, 2012). Apart from this, alteration in the rate of interest can encourage the firms to allocate more funds to the nation which is a kind of development. So, these kinds of changes can be easily made by the central bank with the motive of economic development. Moreover, firms are also demanding that the central bank should focus on the equity market as this will be directly beneficial for the investors in the market. New investment plans can be introduced through which higher returns can be obtained easily and through this, the requirements of the investors can be satisfied effectually.

Conclusion

The entire study being carried out has supported in understanding of macro and micro economic policies which influence the entire nation. Further, interest rates are the most crucial in the case of businesses where higher rates prevent them from obtaining loans from banks and vice versa. Therefore, it is necessary for banking authorities to control the interest rates for the benefit of the entire nation.

References

• Hill, C. W., Cronk, T. and Wickramasekera, R., 2013. Global business today. McGraw-Hill Education.
• Liedholm, C. E. and Mead, D. C., 2013. Small enterprises and economic development: the dynamics of micro and small enterprises. Routledge.
• Boulouta, I. and Pitelis, C. N., 2014. Who needs CSR? The impact of corporate social responsibility on national competitiveness. Journal of Business Ethics.
• Chetty, R. and et.al., 2012. Does indivisible labour explain the difference between micro and macro elasticities? A meta-analysis of extensive margin elasticities. In NBER Macroeconomics Annual 2012.
• Selvaraj, S., 2015. The Euro Zone Debt Crisis and its Implications for the Global Economy. Journal of International Economics.
• Roberts, B. and et.al., 2014. The impact on the US economy of changes in wait times at ports of entry. Transport Policy.
• Hughes, A. and Kitson, M., 2012. Pathways to impact and the strategic role of universities: new evidence on the breadth and depth of university knowledge exchange in the UK and the factors constraining its development. Cambridge Journal of Economics.

UPTO55%

Avail The Benefit Today!

To View this & another 50000+ free

Enter Email

Submit