1.2.5 The Wider Economic Environment Flashcards
What are the different implications for firms ( there’s 5)
- Interest rates
- Exchange rates
- Taxation
- Unemployment
- Inflation
Interest rates:
Consequences of an increase in interest rates
Makes it more expensive to take out a loan & borrow money
It also encourages saving, since the reward for keeping money in a bank is higher
What does it mean if firms have a lot of financial capital
They could earn a high return
Exchange rates:
What does a depreciation in the pound mean
That the uk exports become more price competitive
Why would firms reduce the price of the good in the export market if the pound is depreciating
To increase sales
What does it mean if uk goods are relatively price inelastic
A depreciation in the pound will not increase sales in the export market significantly
The higher the level of consumer & firm confidence & the more disposable income they have…
the more likely they are to purchase UK exports
What does it mean if firms are net importers of raw materials
Costs of production would increase because imports are relatively more expensive when the pound is weaker
What does it mean if firms have a fixed contract for how long they import materials from another country
Changes in exchange rate shouldn’t affect quantity purchased/ price paid
What might firms think if the pound depreciates
They can increase their profit margins by keeping the price the same, w/o having to increase efficiency or productivity to lower their AC
Taxation:
Who sets indirect taxes
Government
What does indirect tax do
Increases production costs for producers
What does it mean if demand is perfectly inelastic/ supply is perfectly elastic
Incidence of the tax falls on the consumer
What does it mean if demand is more elastic
Incidence of the tax will fall mainly on the supplier
What does it mean if demand is more inelastic
Incidence of the tax will fall mainly on the consumer
What does elastic mean
Very responsive to change in price
What does inelastic mean
Quantity demanded does not respond to price changes
Unemployment:
What does high unemployment mean
Firms have a larger supply of labour to employ from
Advantages of unemployment
Causes wages to fall, which would help firms reduce their costs
Disadvantages of unemployment
As consumers have less disposable income, consumer spending falls so firms may lose profits
Cost firms to retrain workers
Inflation:
What is inflation
The sustained rise in the general price level over time
How does workers demanding higher wages cause inflation
As firms have to put up prices to make up for the higher costs of labour
How would unpredictable inflation reduce business confidence
As they are not aware of what their costs would be - could also mean there is less investment
