What is business risk? State, in brief, its economic causes.
The business has to decide the current actions based on future assumptions. In many cases the future prediction is correct, and sometimes it is not. This uncertainty of estimation is called business risk. Thus, risk originates from assumptions about the uncertain future.
Clarke and Clarke divide risk factors into three categories. Prominent among them is economic risk. The risk that arises due to changes in market conditions is called market risk and economic risk. The significant economic factors causing risk are:
1. Timing Risk:
Time risk is the change in demand of people with the change of time. Timing risk is one of the economic factors of business risk.
2. Locational Risk:
The sales of a particular product are high in a particular location, but if due to some adversity the trader is forced to change that location then the sales of the product may decrease in many cases. So, relocation also becomes a risk factor.
3. Competitive Risk:
At present, most of the markets are competitive. In this age of competition if the future forecast is wrong then the business has to face huge losses. So, ‘competition’ is one of the causes of economic risks.
4. Risk due to change in demand:
If the demand of the customers decreases, the sales of the business are bound to decrease. Then, the businessmen have to fall into uncertainty. Usually, in the case of luxury goods, the sales also change a lot due to the change in demand. This type of risk is called risk due to change in demand.
Important Questions from this Chapter:
- Difference between Business and Profession
- Economic objectives of business
- Business risk and its economic objectives
- Characteristics of Commerce
- Classification of Industry with examples
- Short Notes on Warehousing and Advertising
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