What Is The Cost-Of-Living Crisis?
The Cost-of-Living crisis results from high inflation, decreasing people’s purchasing power, and low wage growth in households. Inflation is the annual increase in the average price of goods in the consumer price index (CPI), a basket of everyday grocery items. This has made it challenging for the average citizen to afford essential goods to sustain their lives, such as energy or food.
How Has the Cost-Of-Living Crisis Affected Workers?
Workers in particular industries (such as the public sector) have unionized to protest against their employers, demanding higher salaries to match the inflation rate. If the dispute between union members and employers continues, workers practice labour strikes when they refuse to go to work. A recent example is the NHS strikes involving nurses and ambulance staff, which are essential jobs that people rely on so it can be quite dangerous if their pressure to increase wages is ignored.
How Are Small Businesses Impacted?
Small businesses are the most vulnerable players during this crisis. While larger firms have brand-loyal customers, richer shareholders, and greater credit scores to take out loans, smaller businesses are burdened by the rising costs of raw materials. To remain competitive, they may have to lower their profit margins or use up excess reserves as higher prices will reduce demand.
How Should Small Businesses React?
A critical economic theory known as the shutdown rule states that firms should continue to operate as long as price (average revenue) can cover average variable costs in the short term. For example, If the revenue generated by a restaurant can pay for workers’ wages, ingredient costs, and other variable costs, it would be advantageous to continue running the firm as its subnormal profits would pay towards its rent (a fixed cost).