1.3 Understanding that businesses operate within an external environment

Question 1

External environment

Answer 1

The external environment refers to aspects that are out of the control of the business and include competition, market conditions, economic factors, social and environmental issues and demographic factors

Question 2

PESTLE

Answer 2

P olitical
E conomic
S ocial
T echnological
E nvironmental

Question 3

How competition can affect costs and demand

Answer 3

High competition in a market:
- More competitors in a market
- Greater variety of options for consumers
- Pressure on costs

Question 4

How market conditions can affect costs and demand

Answer 4

Market conditions: characteristics of a particular market and may include its size, growth, barriers to entry, seasonal factors and the amount and intensity of competition.

• Market with high market growth, low competition = greater opportunities for higher demand

Question 5

How economic factors affect costs and demand

Answer 5

Economic factors: include economic cycle stage, interest rates, inflation, exchange rates

• Higher interest rate = higher cost of borrowing, higher reward for saving = less demand
• Lower interest rate = cost of borrowing decreases, lower incentive to save = more demand
• Falling incomes = less disposable income = less likely to spend = fall in demand

Question 6

How demographic factors can affect costs and demand

Answer 6

Demography: study of human populations and includes factors such as age, gender, income, birth and death rates, ageing populations e.t.c.

• Affects the nature of goods and services purchased

Question 7

How environmental issues and fair trade affect costs and demand

Answer 7

• Fair trade
• Higher costs for a business
• Greater demand, better reputation, unique selling point