1.3 Understanding that businesses operate within an external environment

Question 1

Factors in the external environment that may affect a business

Answer 1

• Competition
• Market Conditions
• Consumer income
• Interest rates
• Demographic changes
• Environmental and ethical factors

Question 2

Competition

Answer 2

Affects a business’ costs and demands as the presence may reduce demand for a product or service
Can also increase business costs as a business may increase its spending on promotion and advertising or may in invest in R&D to improve the products offered for sale

Question 3

Market condiitons

Answer 3

Affects a business’ costs and demands.
- If a market is increasing in size, a business must ensure it competes against other competitors to secure its own share of the increasing market, and this increases costs

Question 4

Consumer income

Answer 4

Affects a business’ costs and demands
- If consumer incomes are decreasing, demand for luxury items may decrease
- Businesses may also invest more heavily in promotional and advertising campaigns to try and increase demand, and this also increases business costs

Question 5

Interest rates

Answer 5

Affects a business’ costs and demands
- Increase in interest rates increases the costs of business’ borrowing whilst also reducing the amount spent by consumers as they make decisions to save instead of spend

Question 6

Demographic changes

Answer 6

e.g ageing population
- Increase in population ages = increase in the number of people in higher age brackets - increases demand for items such as holiday packages targeted at senior citizens and cruises
- As net migration continues to increase, demand for cultural shops such as Polish food stores continue to increase = reduces demand for groceries

Question 7

Environmental and ethical factors

Answer 7

As consumers are demanding products which are produced ethically and in an environmentally friendly way which increases business costs and can decrease demand if businesses fail to address changing needs