2.4.5 Economic influences Flashcards
Demand pull
high disposable incomes means an increase in demand = prices go up
Economy
refers to the state of production and consumption of goods and services in a country
how is the government involved with the economy?
taxes
subsidies
policies
public sector
Business cycle
the pattern of economic growth, followed by a boom, recession, recovery and back to growth an economy follows
Boom
when economic growth is high, employment is high and inflation may also be high
Recession
when economy growth is negative, unemployment is high and inflation is usually low
Recovery
the period immediately after a recession, when there is positive growth but this is low
Unemployment
when a worker is willing and able to work, but cannot find a job
Inflation
the percentage change in the general price level over a period of time
What is inflation supported by and what can it cause to decrease?
Inflation is supported by the rising income and inflation can cause a decrease in purchasing power
What does price rise/ higher inflation create?
- less purchasing power
- uncertainty
- less investments due to uncertainty
- costs are rising
- wages may rise = wage price spiral
What is CPI?
consumer price index - how inflation is measured
What is the Retail price index
index creates showing average prices every month
- 600-700 products
- property mortgage
- staple items
- financial services
- vehicles
- school uniforms
What are the effects of inflation?
- cuts the value of cash
- people on a fixed incomes may be affected - won’t have bonuses so have to make money last longer
- negative effects on pensioners, people on benefits, people with savings
- interest rates increase - encourages people to save to lower inflation
- if interest rate is lower than inflation = negative
- if wages rise in line with inflation = won’t be as bad
What happens when inflation increases?
inflation increases due there being too much money in the economy, The Bank of England then increase interest rates meaning people spend less and save money
How does too high inflation affect a business?
- workers may demand higher prices
- less competitive if inflation is higher than international competitors
- creates uncertainty - less confidence to invest
- cost-push inflation - firms face higher costs but consumers have low demand
- Low PED
How does too low inflation affect a business?
- increased competitiveness in the international market
- lower wages
- lower interest rates so can borrow and invest money knowing they can keep prices low
- increased disposable income if normal wage growth is constant
Interest rates
the cost of borrowing and the reward for saving
Implications of high interest rates
- banks charge more for loans
- less customers due to people having lower income and paying more interest
- businesses with overdrafts will have higher costs as they have to pay more interest
- business selling luxury products may be more negatively effected as luxury products are the first thing that consumers eliminate when they have less disposable income
- any businesses that sell goods on credits would be impacted by high interest rates (car garages) - sales decrease and longer time to pay
Implications of low interest rates
- can make large equipment purchases due to the lost cost of borrowing
- easier to borrow money from bank
- loans can fund business growth
- consumer confidence increases
- less saving and more spending
Exchange rates
the value of one currency in relation to another
Strong pound - high exchange rates
impact on imports
- imports cheaper making it hard for UK firms to compete
- reduces costs from buying abroad - allowing firms to make more profit per unit
- reduces costs of production - lower prices
Strong pound - high exchange rates
impact on exports
- lower sales volume - have to charge higher in other currency to maintain current profit made on each product sold
- may find it harder to sell products abroad
- domestic producers may find the increased competition, from cheaper imports, causes a fall in demand
weak pound - low exchange rates
impact on imports
- imported stocks cost rise
- firm may have to increase prices -fewer customers
- might keep prices the same but profit margins would be lower
- cost of production will increase
weak pound - low exchange rates
impact on exports
- exports will be less expensive and so more expensive
- encourages consumers to buy domestically produced goods instead of imports
SPICED
Strong pound, imports cheaper, exports dearer
WPIDEC
Weak pound, imports dearer, exports cheaper
Disposable income
money available to spend on non-essential items
High Unemployment - positives on a business
- reduces business costs -cheaper labour costs
- large pool of labour to choose from
- greater supply of labour
- low wage growth
- demand for inferior goods rise
- low staff turnover
High Unemployment - negatives on a business
- profits and sales may fall as customer have lower disposable incomes
- may have to increase wages for remaining staff
- may have low skilled workforce which reduces productivity
low Unemployment - positives on a business
- higher demand due to higher disposable incomes
- higher motivation and morale among workforce
low Unemployment - negatives on a business
- upward pressure on wages
- higher staff turnover - headhunting
- harder to recruit
Methods of control of government
monetary policy
fiscal policy
Monetary policy
control demand by increasing/decreasing interest rates
Fiscal policy
control demand by increasing/decreasing taxes or by increasing/decreasing government spending
Fiscal policy - taxation
direct taxes for businesses on income and profits, corporation tax and national insurance
indirect taxes for business are VAT, business rates, excises duties (fuel, tobacco and alcohol)
Fiscal policy - if the government want to reduce the demand they might
- increase income tax - this would take spending power out of the pockets of consumers, resulting in a decrease in demand
- they may do this if worried about inflation
Fiscal policy - if the government want to increase the demand they might
- reduce income tax - enabling families to keep and spend more money they earn
- they may do this if worried about deflation
VAT
value added tax. - tax that is applied to purchases of goods and services
What are the impacts of income tax on a business ?
-too high
- lower employee motivation
- fewer customers due to having a lower disposable income
What are the impacts of income tax on a business ?
-too low
-more customers due to an increase in disposable income and therefore purchasing power
Features of a slump
- consumer spending low
- business growth low
- rising unemployment
- prices start to fall
Features of a boom
- unemployment low
- increase in demand
- wages rise
- prices and costs rise due to inflation
- business confidence
features of a recession
- falling levels of consumer spending and confidence
- rising unemployment
- spare capacity increases
Strategies for a boom
- growth
- increase prices
- innovation and capital resources
Strategies for a recession
- build relationship with customers
- discounts to generate some income
Strategies for a slump
- focus on the core products
- business needs to cut costs
Strategies for a recovery
- recruitment
- marketing and branding
- growth
- identifying gaps in the market - market positioning
what does the monetary policy do?
- Monetary policy involves the use of interest rates and changes to the money supply to achieve relevant economic objectives.
- Since 1997 monetary policy has been controlled by the Bank of England who make decisions about changes in interest rates and the money supply
- The main objective of monetary policy has been keeping inflation low and stable. However, the Bank also tries to support stability of economic growth.
