What Are Two Economic Factors That Affect Financial Decisions?

Economic theory, at its very root, deals with the analysis of decisions. It is about how to gain value and exploit it. Two central variables affecting financial and business decisions are the macroeconomic climate and efficiency concerns under competition.

An important motivator in modern economies is the stability of the broader economy. This affects consumers and businesses alike. The main purpose of all business is profit, and what motivates investment and work is an expected rate of return. If the macroeconomic variables threaten to reduce that return, then investments will drop and unemployment will rise. If inflation is expected to rise, many investment projects will be canceled because rising prices take value away and harm final returns.

The concept of “macroeconomic variables” seems vague and general, but it is really about expectations. No one wants to create additional value through labor if that value will be expropriated or destroyed. Inflation can destroy value and negate labor, while lack of a transparent legal order can lead to expropriation of value. Businesses and consumers are confident when their own investment and labor will see a consistent return that is protected both in law and in basic monetary policy.

Efficiency serves as another important factor affecting business decisions. This factor becomes more intense in proportion to both the intensity of competition and the decline of market options. The market for portable mp3 players, for example, is saturated with numerous firms from around the globe. Demand remains high, but if economic problems such as unemployment continue to rise, the amount of disposable income for non-essential items will decline. This means that all firms will have to squeeze harder to gain more value from less labor within a declining market. Efficiency will thus become the main concern.

The current market environment helps shape corporate decisions. Efficiency is most important in highly competitive markets because, all else being equal, the most efficient producer is also the lowest-cost producer. That's an advantage in the marketplace.