10 - Economic factors

Question 0

What is inflation

Answer 0

Inflation is the increase in the price of gods and services measures over a set period of time.

As inflation increases, the money you have,buys you fewer goods and services than a year ago

Question 1

What are economic factors

Answer 1

Things that the business has no control over e.g inflation, interest rates and exchange rates

Question 2

What are the impacts if inflation on a business and the possible reaction.

Answer 2

• increase of price of products will lead to higher production costs
• energy prices might rise which will leave the business with the option of :

1. passing the price increase to customers through higher prices
   - which may cause a reduction in sales as it is not affordable any more.
2. They can absorb the cost which will reduce profitability , however their prices will remain stable .
3. The business will look for ways of reducing costs by buying raw materials from a cheaper supplier. And saving energy through reduction of heating and lights

Question 3

What happens when prices in the u.k increase too much

Answer 3

• businesses may start to import more goods from abroad as they are cheaper.
• businesses may have to reduce prices in order to compete

Question 4

What happens when inflation goes into negative figures

Answer 4

• consumers will be able to buy more for their money
• goods and services will become cheaper
• businesses may see a surge in demand as consumers can afford items which were once beyond their expenditure

Question 5

What is exchange rate

Answer 5

This is the price at which one currency is bought and sold for another

Question 6

What is the impact of changes in exchange rates on businesses
( higher or lower rates )

Answer 6

• the higher the exchange rate the greater the potential profit a business can earn through importing goods.
• when exchange rates fall, this means that the profit margins on importing goods have shrunk. Due to this businesses will then have to decide whether to increase price of product in order to retain profit.
• OR continue selling at the same price, sustaining a smaller profit margin.

Question 7

What can increase in exchange rates lead businesses to do.

Answer 7

• make businesses stop importing goods and exporting
• only deal with suppliers and customers within the u.k
• encourage the government to adopt the euro to make it easier to business with other European countries

Question 8

What are interest rates

Answer 8

This is the price or cost of borrowing money.

if a bank lends a business money the rate of interest charged is the banks reward for taking the risk.

Interest payments are one source of income for banks

Question 9

What do savers want and what do borrowers want

Answer 9

Savers want high interest rates

Borrowers want low interest rates

Question 10

What is the impact of increase in interest rates on businesses.

Answer 10

• businesses that have external loans will find that their expenditure has risen
• in order to combat the increase cost of loans, businesses may decide to raise its prices.
• if a business was planning an expansion or to move, this would require a increase in borrowing or put ideas on hold.

Question 11

What is the impact of a decrease in interest rates on businesses and consumers

Answer 11

• consumers might take out a loan as the cost has been reduced so can afford the repayment
• businesses will see a fall in their expenses if they have external loans.
• businesses may wish to expand
• when interest rates fall consumers may will see their returns decrease and might decide to spend rather than save.