When looking at changes in the level of spending, this can directly influence an economy. What...

When looking at changes in the level of spending, this can directly influence an economy. What are some of the challenges that firms will be facing when consumers start to spend more money?

Expert Solution

Yes, it is true that level of spending can directly influence an economy. If level of spending increases, then there will be more demand due to which companies can earn more profits which will increase employment opportunities and again income of people will increase and they willspend more. It will help the economy to grow. On the other hand there are some problems also for firms when consumer spending increases. In the short run it is not so easy to increase supply to meet increased demand as they can only increase production by increasing variable factors like labour etc. which has its own limitations.we cannot increase production solely by increasing variable factors. It will createshortage of goods as comparison to demand and will create inflationary situation in the market. Firms have to increase physical, financial and human resources by taking time factor into consideration to increase their production capacity.Thus there are challenges also for firms along with profits when consumer dpends more.

Rahul Sunny answered 2 years ago

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