1.3 External environment

Question 1

what is external environment?

Answer 1

forces outside the business in which it has no control over

Question 2

positive factors to the external environment:

Answer 2

• product becomes popular or fashionable, raising demand.
• A major competitor leaves a market.
• The number of consumers in a country increases.
• Interest rates fall, making it cheaper to borrow money to buy products.
• Consumers enjoy steadily rising incomes, increasing demand for products.

Question 3

negative factors to external environment:

Answer 3

• Consumers demand environmentally friendly products, increasing business costs.
• New businesses enter a market increasing the degree of competition.
• The market is oversupplied with products, depressing prices.
• More people become unemployed, reducing consumer incomes and spending.

Question 4

what are market conditions?

Answer 4

Refers to number of features of a market such as the level of sales, the rate at which they are changing and the number and strength of competitor

Question 5

what is demand?

Answer 5

the quantity of a good/service that consumers are willing and able to buy

Question 6

name market conditions for a business:

Answer 6

• Number / size / power / supply of competitors
• Fashion + technology
• Tastes + preferences
• Suppliers
• Consumers income
• Innovation (new idea)

Question 7

what are the 3 types of good?

Answer 7

• inferior- consume less as your income rises
• normal- consumer more as your income rises
• luxury- consume more as your income rises

Question 8

examples of products for which demand is strongly influenced by income levels:

Answer 8

Jewellery
Luxury electrical items
Restaurant meals
Long-haul holidays
Household furniture

Question 9

examples of products for which income has little influence on demand:

Answer 9

Bread, milk and other basic foods
Cigarettes and tobacco
Petrol
Water
Lottery tickets

Question 10

what are ‘real incomes’

Answer 10

incomes that are adjusted for the rate of inflation (increase in prices) top show changes in purchasing power.

Question 11

what is a gross domestic product (GDP)?

Answer 11

Measures the value of a country’s total output of goods + services over a period of time (usually one year.)

Question 12

what is the formula for income elasticity of demand?

Answer 12

% change in quantity demanded
___________________________
% change in income

Measures the impact that a change in income has on quantity demanded of a good .
It shows how sensitive demand is to income changes.

Question 13

income elastic (search graph)

Answer 13

+1 (more than 1) -> Luxury/normal -> Incomes rising creating a surge in demand

+0 -> Normal goods -> An increase in income increases the quantity demanded

Value is greater than 1 (>1 ) eg +2 or -1.5 -> A small change in income leads to a large change in demand for the product.
(+ or -) Greater than 1 eg +2 or -1.5

Question 14

income inelastic

Answer 14

> 0 <1 -> Necessities -> Incomes rising will only have an insignificant effect on demand

<0 -> Inferior -> An increase in income decreases the quantity demanded -> A decrease in income will see quantity demanded increase

Value is less than 1 (<1) eg +0.3 or -0.7 -> Can be + or -
-> Has income inelastic demand. A change in income does not have a substantial impact on sales.

Question 15

Luxury/normal products:

Answer 15

Incomes rising + quality will also rise

Question 16

Inferior products:

Answer 16

When incomes rise customers switch to other products. Example - Bikes to cars
If incomes fall, customers switch back again as on a lower budget.

Question 17

what is elastic?

Answer 17

describes demand that is very sensitive to a change in price

Question 18

what is inelastic?

Answer 18

Describes demand that is not very sensitive to a change in price

Question 19

what are interest rates?

Answer 19

cost of borrowing + reward for saving

Question 20

what are demographic factors

Answer 20

human population- influence the defining characteristics of the population, including age, gender and ethnic background.

Question 21

what is demography?

Answer 21

study of human population

represents two stakeholder groups:

• workforce / cost of production
• consumers / level of demand for products

Question 22

Environmental issues- how do businesses pollute?

Answer 22

• emission of gas in the production process
• pollution when transporting goods and services
• dumping waste
• destroying natural environments to build factories
• building homes on greenfield sites

Question 23

what was The Environmental Protection Act, 1991?

Answer 23

The act requires businesses to minimise pollution as a whole

Question 24

what was The Environment Act, 1993

Answer 24

• established the Environment Agency - Overseeing environmental protection.
• fines are imposed on firms who breach legislation.
• grants for greener production methods
• carbon Trust - Firms who invest in energy-saving technologies

Question 25

what is fair trade?

Answer 25

involves paying a fair price to suppliers of goods + services from less developed countries.

Question 26

rising interest rates

Answer 26

• costs of servicing existing loans may increase
• costs of imported products may fail
• demand for products (especially bought on credit) may fail

Question 27

falling interest rates

Answer 27

• costs of servicing existing loans may decrease
• costs of imported products may rise
• demand for products (especially those bought on credit) may rise