Economic Factors Affecting Businesses

Entrepreneurship tends to focus on identifying and fulfilling consumer needs in specific niche markets, but all businesses can be affected by large-scale economic trends. Accounting for trends in the overall economy can help business managers make better decisions. Economic factors that commonly affect businesses include consumer confidence, employment, interest rates and inflation.

Consumer confidence is an economic indicator that measures overall consumer optimism about the state of the economy. Confident consumers tend to be more willing to spend money than consumers with low confidence, which means businesses are more likely to prosper when consumer confidence is high. Periods of high consumer confidence can present opportunities for new businesses to enter the market, while period of low confidence may force companies to cut costs to maintain profits.

The economy tends to follow a business cycle of economic booms followed by periods of stagnation or decline. During boom periods, jobs tend to be plentiful, since companies need workers to keep up with demand. When unemployment is low, consumer spending tends to be high because most people have income to spend, which is good for businesses and helps drive growth. When unemployment is high, consumer spending tends to be low because unemployed people don't have excess income to spend.

An interest rate is the amount that a lender charges an individual or business to borrow money. Some small businesses rely on loans from banks or other financial institutions as a source of financing. Higher interest rates result in higher total business expenses for companies with debt. High interest rates can also reduce consumer spending, because high rates make it more expensive for consumers to take out loans to buy things like cars and homes.

Inflation is the rate at which prices in the economy are increasing. Inflation causes increases in business expenses such as rent, utilities, and cost of materials used in production. Rising costs are likely to force businesses to raise prices on their own products and services to keep pace with inflation and maintain profits. Inflation can reduce the purchasing power of consumers unless employers increase wages based on the level of inflation.