The basis of economic theory is how one factor affects another resulting in a chain reaction which has one ultimate outcome, the prediction of which is of utmost importance to the economist. Once the results have been established, any changes in the economy can be easily traced to their end result, allowing for some reaction time as well as relevant policy implementation. The factors which affect others to the greatest extent and hold the most ‘clout’ in the world of economics are known as economic forces. These factors determine the competitive environment in which a firm operates. Employment, inflation rate, interest rate, government fiscal and monetary policy constitute the important economic forces. The remaining activities of the firm such as production, marketing and distribution depend directly on these economic forces.
Here, we delve into two aspects which economic forces affect to a great extent and which have enormous implications in both the macro and micro scales of the economy. Economic forces primarily affect business enterprises and the distribution of production activities across the globe as well as within a smaller region. The more indirect effects of economic forces can be felt by the population in the region where these forces are present. For instance, population shifts are a majorly influenced by the kind of economic forces prevalent across various regions. This point will be discussed in detail later through the course of this article.
Economic forces and business
Since the nature and environment in which the economy and its businesses operate are influenced by economic factors, it becomes important to study these forces to observe and record their effects and repercussion for future reference. The economic, social, political and technological state of the country has important ramifications as far as business firms are concerned.
In order to understand economic forces which affect businesses, we take a counter intuitive approach and try to explain the opposite first – the concept of externalities. Externalities are generated whenever a firm or business enterprise goes about its activities without intending certain outcomes to occur. In other words, the spill-over effects of production activity can be defined as an externality. These externalities could be positive or negative. For instance, if a firm owns a manufacturing plant which deals with the production of chemical fertilizers, then there are certain harmful by-products which are generated in the process. The discharge of these effluents into nearby rivers or streams by the manufacturing plant, adversely affects the health of the population dependent on the river water as a source for the town water supply. Also, plants and animals in the region have to bear the ill effects of such an activity. This displays how one production activity can generate external costs which are borne not by the producers themselves, but by a certain section of the population. Similarly, there could be positive effects generated from activities such as a night school for adults. By educating the elders of rural households, knowledge is passed on to the young minds, which has an overall positive future impact.
The other side of such a setup would be the external factors affecting production activities of these firms which are outside the control of the firm itself. In the context of economic forces, there are factors like the inflation rate, prime lending rate, stage of the business cycle, trade policies established by the government (excise duty, export ban etc) as well as the existing monetary and fiscal policies which directly influence the environment in which business firms operate. However, these forces cannot in any way be influenced by any individual firm, and are hence known as external economic forces or factors.
Any firm or business enterprise looking to expand abroad need to take into account the economic forces prevalent in that region of the world. For instance, the prevailing wage rate, unemployment rate, inflation rate, conversion rate of the US Dollar, current stage of the economy in the business cycle (recession, boom period, recovery phase etc) have a significant impact on the operations of the firm as well as directly affect the profits garnered by it. Any firm which wants to have a global presence needs to be aware of the global economic scenario. The economic forces may be beyond the control of the firm, however, operations of the firm have to take place within the domain of such a setup. Some of these forces may affect the business to a greater extent while others may be less significant.
To summarise the above discussion, each firm needs to identify the economic forces which majorly influence the operations of that particular sector. Critical business decisions and the final outcome of the firm’s activities are hugely dependent on them. A successful businessman can visualize these economic forces and the prospective business opportunities that they entail. This helps anticipate costs and hence, determine profit expectations.
Economic Forces and Demographic Shifts
We have so far discussed the implications that economic forces have on the economy and business ventures. However, on a more personal level, these macroeconomic variables have profound effects on the demography of a nation. Though not immediately evident to the untrained mind, factors like unemployment rate, inflation, trade policies etc do have an impact on the general public in a region. Any rational individual would prefer to reside in a city which promises gainful employment and low prices as compared to regions which do not have such a god record. If there are certain regions in the country where taxes on luxury items are lower, then the wealthy sections of the population would prefer to relocate themselves there rather than have to endure high prices in other States within the country.
So when such economic forces come into play, they change the demographic distribution across various regions by causing population shifts or migration. Low real estate rates in say Texas, would attract the young, working section of the population looking to raise families. Since businesses follow people, such a demographic shift would cause industries such as healthcare, education and retail to look in that direction and set up shop where they are assured a steady clientele. The opposite is also true sometimes, i.e., population shifts affect economic forces in a region. For instance, Florida is known as the aging State due to the fact that the State has attracted a lot of immigrants and about 15% of its population consists of war veterans. This influences the unemployment rate in the State. An inter-related network of sorts can be observed as far as economic forces, population shifts and businesses are concerned.
These facts show how economic forces are an essential tool in predicting movements in business activity as well as population movements in an economy. It is important for our Governments and Central Planning bodies to identify economic forces and use them to the advantage of the nation.