1.5.4 The Economy and Business

Question 1

Economic climate:

Answer 1

general situation in a country affecting the well-being of individuals, firms and the gov in areas

Question 2

What does the level of demand in the economy refer to?

Answer 2

refers to the spending that takes place in an economy

Question 3

What can demand come from?

Answer 3

• consumers
• government
• business
• overseas

Question 4

What might change demand?

Answer 4

• level of economic activity - if there is a recession demand will fall
• interest rates - if interest rates fall, borrowing and demand will increase
• changes in exchange rates - if the pound gets weaker, foreign demand will rise
• changes in taxation - an increase in most forms of taxation reduces customers’ disposable income, a fall in taxation will have the opposite effect and boost consumer demand for most goods

Question 5

Impact of high demand/economic activity on businesses:

Answer 5

• consumer incomes rise
• inflation may rise
• unemployment may fall
• interest rates may rise
• pound may become stronger

Question 6

Impact of low demand/economic activity on businesses:

Answer 6

• consumer incomes fall
• inflation may fall
• unemployment may rise
• interest rates may fall
• pound may become weaker

Question 7

Unemployment:

Answer 7

number of people who are out of work but are actively seeking a job

Question 8

Positives of unemployment for businesses:

Answer 8

• more workers will be available, resulting in job vacancies being easier to fill
• wage increases are less likely as more workers available - reduces costs
• lower staff turnover, harder for workers to gain employment elsewhere, decrease in recruitment and training costs
• high unemployment levels may make it easier for businesses to recruit new employees -> as there will be more people trying to find a job -> lead to business finding better quality employees for the position

Question 9

Negatives of unemployment for businesses:

Answer 9

• fall in demand as unemployment rises -> as customers will have less money to spend if they lose their job -> lead to reduction in sales
• ## workers less motivated as they may have less job security so productivity levels may decrease

Question 10

Impact of unemployment on the unemployed person:

Answer 10

• unemployed worker has no direct income from employment/relies on benefits
• their spending power will decrease
• skills of unemployed worker will decrease —> may need training in the future
• can cause depression and lack of motivation to find another job

Question 11

The trade cycle:

Answer 11

• Boom: high income levels —> consumer spending increases
• Recession: two consecutive quarters in year with an economic decrease, falling incomes

Question 12

What happens in an economic boom?

Answer 12

• in an economic boom the demand for most goods and services increases (especially luxury products)
  
  • however for some goods demand falls (e.g. cheap products → Poundland) as people can afford better and more expensive products

Question 13

What would happen if consumer incomes increased?

Answer 13

• if consumer incomes increased, the general population has more disposable income to spend on goods and services
• so there is a higher demand for most goods and services
• so there in an increase in spending for most goods and services (e.g. luxury goods)
• this means that businesses can afford to increase the prices of their goods and services (except for inferior goods) due to the high demand which leads to an increase in sales leading to an increase in revenue and therefore ultimately leading yo an increase in profit for a business as profit = revenue - cost and there has been an increase in revenue

Question 14

Inflation:

Answer 14

a rise in the average level of prices in the economy

Question 15

How is inflation measured?

Answer 15

inflation is measured using the consumer price index (CPI)

Question 16

What does the CPI measure?

Answer 16

changes in the price of food, housing, clothing and other products

Question 17

Impacts of inflation on businesses:

Answer 17

• consumers’ costs rise when rate of inflation rises
  
  • reduces customer purchasing power as it reduces disposable income
  • so buy fewer goods and services from businesses
• when an increase in inflation causes a business’s costs to rise a business ca either absorb the costs or pass them on to its customers by raising prices
• rise in general level of prices leads to general increase of costs of raw materials business —> suppliers and wages increase —> cost of production increases —> revenue decreases —> profit decreases as profit is revenue - costs
  
  • increase in fixed and variable costs

Question 18

What sorts of businesses tend to do well in recessions?

Answer 18

1. Discount stores and low-cost option may win the market and sell more units of goods in a recession
2. Businesses that sell to the top 1% in society may continue to do well as these people often do not reduce their spending much during recessions

Question 19

Interest rate:

Answer 19

the percentage return on savings or the cost of borrowing

Question 20

Impacts of increasing interest rates on UK businesses:

Answer 20

• businesses on variable interest rates may struggle to repay loans
• increases fixed costs as loans will be more costly due to increased interest rates
• small businesses less likely to borrow money to start-up/expand
• any savings earn more interest
• decrease in consumer spending as businesses may increase price of product/service so that business can pay higher interest rates - higher price of product/service may deter customers reducing spending
• customers spending may also decrease as borrowing money costs more so demand for certain goods/services so sales decrease

Question 21

Impacts of decreasing interest on UK businesses:

Answer 21

• decrease in fixed costs —> allowing business to expand more easily reach a wider range of customers —> increase sales —> increase turnover —> increase profit
• consumer spending on goods/services increases as cost of borrowing decreases so customers more likely to spend money on goods and services —> increase in demand —> increase sales —> increase turnover —> increase profit
• cheaper for a business to borrow money for a start-up or expansion
• businesses will have more money to spend and cash flow may improve

Question 22

Examples of taxes:

Answer 22

• National insurance
• Import tax
• Stamp tax
• Inheritance tax
• Income tax
• Corporate taxes
• VAT
• Taxes on alcohol, gambling, cigarettes
• Council tax, rates

Question 23

Income tax:

Answer 23

anyone who earns an income pays income tax

• includes workers, sole traders, partnerships

Question 24

Corporate taxes:

Answer 24

• LTD’s and PLC’s
• gov corporate tax - tax after profit

Question 25

VAT:

Answer 25

• Value added tax
• variable cost

Question 26

Taxes on alcohol, gambling, cigarettes:

Answer 26

excise duty

Question 27

Council tax, rates:

Answer 27

Fixed costs

Question 28

Impacts of reduction in business taxation:

Answer 28

• lower costs → because a business pays a number of different taxes → as a result, the business may achieve higher profit if sales remain constant
• customers may have more disposable income due to lower taxes → spending with small businesses increases → as a result the business may see an increase in revenue

Question 29

Economy:

Answer 29

includes all activities in a country concerned with the manufacturing, distribution, and use of goods and services