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PART A: THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 
 
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have no spare capacity or they lack certain categories of skilled labour, or they face shortages of key 
material inputs. Further rises in demand will, therefore, tend to be met by increases in prices rather than 
by increases in production. In general, business will be profitable, with few firms facing losses. 
Expectations of the future may be very optimistic and the level of investment expenditure high. 
It can be argued that wide fluctuations in levels of economic activity are damaging to the overall 
economic well-being of society. The inflation and speculation which accompanies boom periods may be 
inequitable in their impact on different sections of the population, while the bottom of the trade cycle 
may bring high unemployment. Governments generally seek to stabilise the economic system, trying to 
avoid the distortions of a widely fluctuating trade cycle.
 
5
Inflation and its consequences 
High rates of 
inflation
are harmful to an economy. Inflation redistributes income and wealth. Uncertainty 
about the value of money makes business planning more difficult. Constantly changing prices impose 
extra costs.
5.1 Inflation 
Inflation 
is the name given to an increase in price levels generally. It is also manifest in the decline in 
the purchasing power of money.
Historically, there have been very few periods when inflation has not been present. We discuss below 
why high rates of inflation are considered to be harmful. However, it is important to remember that 
deflation
(falling prices) is normally associated with low rates of growth and even recession. It would 
seem that a healthy economy may require some inflation. Certainly, if an economy is to grow, the money 
supply must expand, and the presence of a low level of inflation will ensure that growth is not hampered 
by a shortage of liquid funds. (Liquidity is the ease with which assets can be converted into cash.) 
5.2 Why is inflation a problem? 
An economic policy objective which now has a central place in the policy approaches of the 
governments of many developed countries is that of stable prices. Why is a 
high
rate of price inflation 
harmful and undesirable? 
5.2.1 Redistribution of income and wealth 
Inflation leads to a redistribution of income and wealth in ways which may be undesirable. 
Redistribution of wealth might take place from accounts payable to accounts receivable. This is because 
debts lose 'real' value with inflation. For example, if you owed $1,000, and prices then doubled, you 
would still owe $1,000, but the