Today, many people question if the movement of interest rates affect the profitability of a firm in the short run or the long run. Interest rates are always changing, and different types of loans offer various interest rates. The bank, constitution, or person lending the money issues interest rates on loans to compensate the risk of loaning money. Thus, firms borrow money from banks in order to increase their business activity to generate profits. Overall, the movement of interest rates may affect the profitability of a firm in both the short run and the long run. Profitability affects the financial strength of a firm and has implications for its ability to weather downturns. Additionally, the permanence or impermanence of the recent improvement
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The profitability of the firm is less hurt in the long term. This is because the firm will have ample time to make the adjustments that it could not in the short run. However, the firm will still be hurt: even in the long run, any firm that requires capital for production and must finance that capital will be less profitable when interest rates are higher. Overall, in the long run of a firm, the interest rate, and the price level of goods and or services are determined in sequence of each other resulting in the firm’s profitability. First, the firms output is calculated by the amount of resources and technology available to create goods. Next, for any number of output, the interest rate adjusts to balance both the supply and demand curve for loanable funds. Finally, given the number of output and the interest rate, the price level of the products fluctuates to balance the supply and demand for money. Changes in the supply of money lead to proportionate changes in the price level of the products and services. This being said, it is easier to understand that when interest rates rise, company or firm owners find it more difficult to borrow money because of the high interest that must be paid. Thus, firms would be less willing to borrow money, as the interest burden weighs heavy. The firm would then in turn, postpone their investment and …show more content…
However, when putting a firm in terms of its short run and its long run it becomes much easier grasp. A firm may be more profitable in the short run due to lower, more moderate interest rates being issued by lenders. Also, in the short run, a firm may charge interest to customer purchases if goods are being bought by credit cards. In turn, the firm is then able to pay some interest it owes back, while still generating a profit. On the flip side, a firm may be less profitable in the long run due to higher interest rates. High interest rates overall, will always reduce a firm’s earnings if they are not selling the right amount of goods and services. Because high interest rates causing a reduction in a firm’s earnings, this forces the firm to hold back on expanding or the overall growth of their business. However, the firm has enough time in the long run to make needed adjustments in order to avoid situations such as what was stated previously. To conclude, the profitability is always affected in both the short run and long run of a firm. Many firms would dream to have fixed interest rates through both the short run and the long run because it would be much easier to plan for future growth of the
The profitability of the firm is less hurt in the long term. This is because the firm will have ample time to make the adjustments that it could not in the short run. However, the firm will still be hurt: even in the long run, any firm that requires capital for production and must finance that capital will be less profitable when interest rates are higher. Overall, in the long run of a firm, the interest rate, and the price level of goods and or services are determined in sequence of each other resulting in the firm’s profitability. First, the firms output is calculated by the amount of resources and technology available to create goods. Next, for any number of output, the interest rate adjusts to balance both the supply and demand curve for loanable funds. Finally, given the number of output and the interest rate, the price level of the products fluctuates to balance the supply and demand for money. Changes in the supply of money lead to proportionate changes in the price level of the products and services. This being said, it is easier to understand that when interest rates rise, company or firm owners find it more difficult to borrow money because of the high interest that must be paid. Thus, firms would be less willing to borrow money, as the interest burden weighs heavy. The firm would then in turn, postpone their investment and …show more content…
However, when putting a firm in terms of its short run and its long run it becomes much easier grasp. A firm may be more profitable in the short run due to lower, more moderate interest rates being issued by lenders. Also, in the short run, a firm may charge interest to customer purchases if goods are being bought by credit cards. In turn, the firm is then able to pay some interest it owes back, while still generating a profit. On the flip side, a firm may be less profitable in the long run due to higher interest rates. High interest rates overall, will always reduce a firm’s earnings if they are not selling the right amount of goods and services. Because high interest rates causing a reduction in a firm’s earnings, this forces the firm to hold back on expanding or the overall growth of their business. However, the firm has enough time in the long run to make needed adjustments in order to avoid situations such as what was stated previously. To conclude, the profitability is always affected in both the short run and long run of a firm. Many firms would dream to have fixed interest rates through both the short run and the long run because it would be much easier to plan for future growth of the