2.3 The Ecnomic Climate Of A Business

Question 1

What is the economy?

Answer 1

The state of a country in terms of the production and consumption of goods and services and the supply of money, made up of million individuals of consumers and businesses.

Question 2

What is the economic climate?

Answer 2

The general situation in a country affecting the wellbeing of individuals, firms, and the government in areas such as output, prices, and employment

Question 3

What are the aspects of the economic climate?

Answer 3

• Interest rate changes
• Levels of employment
• Consumer and business spending
• Income and demand

Question 4

What are interest rates?

Answer 4

The cost of borrowing and the reward for saving, expressed as a percentage

Question 5

How can interest rates affect the economic climate?

Answer 5

• High interest rates causes consumers to save more money, which means they borrow less money thus weakening the economic climate
• Low interest rates causes consumers to borrow more money thus improving the economic climate

Question 6

How can interest rates affect a business?

Answer 6

• High interest rates means businesses have to pay more interest on loans, therefore costs will increase and revenue will decrease
• Low interest rates means the cost of borrowing money will reduce, and will increase revenue and cut costs

Question 7

What is a loan?

Answer 7

An amount of money provided to a business for a stated purpose in return for regular repayments including interest charges

Question 8

What is an overdraft?

Answer 8

A flexible loan which businesses can use, whenever necessary, up to an agreed limit

Question 9

What is unemployment?

Answer 9

Being available for work but not having a job or losing the job you have

Question 10

What are the effects of high interest rates?

Answer 10

• Weakening economic climate
• Businesses may suffer falling sales as consumers save more
• Sales of goods purchased using borrowed money (like houses and mortgages) may fall significantly
• Businesses are likely to reduce production to match sales
• Businesses may postpone expansion plans like opening new shops

Question 11

What are the effects of falling interest rates?

Answer 11

• Improvement in economic climate
• Rising sales, especially in luxury and non essential products
• Production of goods and services will rise, possibly increasing consumer income
• Businesses may need to employ additional workers, also helping to increase consumer spending

Question 12

How are businesses affected by employment rates?

Answer 12

• Increased employment results in higher employment costs as wages may increase or more people may be employed, but sales may increase as more people have an income to spend
• Decreased employment can result in lower employment costs but can decrease sales as less people want to spend money

Question 13

How can consumer income affect a business?

Answer 13

• Increased consumer income means businesses may have to pay employees more, but sales will increase because more consumers will have money to spend
• Decreased consumer income means businesses will have to pay employees less, but sales will decrease as less people want to spend money

Question 14

How can increased consumer spending affect different stakeholders?

Answer 14

• Business; increased sales, have the ability to increase prices, this can increase profits
• Employees; businesses need to supply more goods, therefore need more employees, employment rate increased, wages may increase
• Suppliers; businesses need more raw materials as sales go up, increased supplier sales, have the ability to increase prices
• Government; amount gained in taxation increases, they have the ability to spend more money in areas such as health or education