1.3 External environment Flashcards
what is external environment?
forces outside the business in which it has no control over
positive factors to the external environment:
- 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.
negative factors to external environment:
- 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.
what are market conditions?
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
what is demand?
the quantity of a good/service that consumers are willing and able to buy
name market conditions for a business:
- Number / size / power / supply of competitors
- Fashion + technology
- Tastes + preferences
- Suppliers
- Consumers income
- Innovation (new idea)
what are the 3 types of good?
- inferior- consume less as your income rises
- normal- consumer more as your income rises
- luxury- consume more as your income rises
examples of products for which demand is strongly influenced by income levels:
Jewellery Luxury electrical items Restaurant meals Long-haul holidays Household furniture
examples of products for which income has little influence on demand:
Bread, milk and other basic foods Cigarettes and tobacco Petrol Water Lottery tickets
what are ‘real incomes’
incomes that are adjusted for the rate of inflation (increase in prices) top show changes in purchasing power.
what is a gross domestic product (GDP)?
Measures the value of a country’s total output of goods + services over a period of time (usually one year.)
what is the formula for income elasticity of demand?
% 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.
income elastic (search graph)
+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
income inelastic
> 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.
Luxury/normal products:
Incomes rising + quality will also rise
Inferior products:
When incomes rise customers switch to other products. Example - Bikes to cars
If incomes fall, customers switch back again as on a lower budget.
what is elastic?
describes demand that is very sensitive to a change in price
what is inelastic?
Describes demand that is not very sensitive to a change in price
what are interest rates?
cost of borrowing + reward for saving
what are demographic factors
human population- influence the defining characteristics of the population, including age, gender and ethnic background.
what is demography?
study of human population
represents two stakeholder groups:
- workforce / cost of production
- consumers / level of demand for products
Environmental issues- how do businesses pollute?
- 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
what was The Environmental Protection Act, 1991?
The act requires businesses to minimise pollution as a whole
what was The Environment Act, 1993
- 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
what is fair trade?
involves paying a fair price to suppliers of goods + services from less developed countries.
rising interest rates
- costs of servicing existing loans may increase
- costs of imported products may fail
- demand for products (especially bought on credit) may fail
falling interest rates
- costs of servicing existing loans may decrease
- costs of imported products may rise
- demand for products (especially those bought on credit) may rise
