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Business > 2.4.5 Economic influences > Flashcards

2.4.5 Economic influences Flashcards

1
Q

Demand pull

A

high disposable incomes means an increase in demand = prices go up

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2
Q

Economy

A

refers to the state of production and consumption of goods and services in a country

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3
Q

how is the government involved with the economy?

A

taxes
subsidies
policies
public sector

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4
Q

Business cycle

A

the pattern of economic growth, followed by a boom, recession, recovery and back to growth an economy follows

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5
Q

Boom

A

when economic growth is high, employment is high and inflation may also be high

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6
Q

Recession

A

when economy growth is negative, unemployment is high and inflation is usually low

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7
Q

Recovery

A

the period immediately after a recession, when there is positive growth but this is low

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8
Q

Unemployment

A

when a worker is willing and able to work, but cannot find a job

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9
Q

Inflation

A

the percentage change in the general price level over a period of time

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10
Q

What is inflation supported by and what can it cause to decrease?

A

Inflation is supported by the rising income and inflation can cause a decrease in purchasing power

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11
Q

What does price rise/ higher inflation create?

A
  • less purchasing power
  • uncertainty
  • less investments due to uncertainty
  • costs are rising
  • wages may rise = wage price spiral
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12
Q

What is CPI?

A

consumer price index - how inflation is measured

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13
Q

What is the Retail price index

A

index creates showing average prices every month

  • 600-700 products
  • property mortgage
  • staple items
  • financial services
  • vehicles
  • school uniforms
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14
Q

What are the effects of inflation?

A
  • 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
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15
Q

What happens when inflation increases?

A

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

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16
Q

How does too high inflation affect a business?

A
  • 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
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17
Q

How does too low inflation affect a business?

A
  • 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
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18
Q

Interest rates

A

the cost of borrowing and the reward for saving

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19
Q

Implications of high interest rates

A
  • 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
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20
Q

Implications of low interest rates

A
  • 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
21
Q

Exchange rates

A

the value of one currency in relation to another

22
Q

Strong pound - high exchange rates

impact on imports

A
  • 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
23
Q

Strong pound - high exchange rates

impact on exports

A
  • 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
24
Q

weak pound - low exchange rates

impact on imports

A
  • 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
25
Q

weak pound - low exchange rates

impact on exports

A
  • exports will be less expensive and so more expensive

- encourages consumers to buy domestically produced goods instead of imports

26
Q

SPICED

A

Strong pound, imports cheaper, exports dearer

27
Q

WPIDEC

A

Weak pound, imports dearer, exports cheaper

28
Q

Disposable income

A

money available to spend on non-essential items

29
Q

High Unemployment - positives on a business

A
  • 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
30
Q

High Unemployment - negatives on a business

A
  • 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
31
Q

low Unemployment - positives on a business

A
  • higher demand due to higher disposable incomes

- higher motivation and morale among workforce

32
Q

low Unemployment - negatives on a business

A
  • upward pressure on wages
  • higher staff turnover - headhunting
  • harder to recruit
33
Q

Methods of control of government

A

monetary policy

fiscal policy

34
Q

Monetary policy

A

control demand by increasing/decreasing interest rates

35
Q

Fiscal policy

A

control demand by increasing/decreasing taxes or by increasing/decreasing government spending

36
Q

Fiscal policy - taxation

A

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)

37
Q

Fiscal policy - if the government want to reduce the demand they might

A
  • 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
38
Q

Fiscal policy - if the government want to increase the demand they might

A
  • reduce income tax - enabling families to keep and spend more money they earn
  • they may do this if worried about deflation
39
Q

VAT

A

value added tax. - tax that is applied to purchases of goods and services

40
Q

What are the impacts of income tax on a business ?

-too high

A
  • lower employee motivation

- fewer customers due to having a lower disposable income

41
Q

What are the impacts of income tax on a business ?

-too low

A

-more customers due to an increase in disposable income and therefore purchasing power

42
Q

Features of a slump

A
  • consumer spending low
  • business growth low
  • rising unemployment
  • prices start to fall
43
Q

Features of a boom

A
  • unemployment low
  • increase in demand
  • wages rise
  • prices and costs rise due to inflation
  • business confidence
44
Q

features of a recession

A
  • falling levels of consumer spending and confidence
  • rising unemployment
  • spare capacity increases
45
Q

Strategies for a boom

A
  • growth
  • increase prices
  • innovation and capital resources
46
Q

Strategies for a recession

A
  • build relationship with customers

- discounts to generate some income

47
Q

Strategies for a slump

A
  • focus on the core products

- business needs to cut costs

48
Q

Strategies for a recovery

A
  • recruitment
  • marketing and branding
  • growth
  • identifying gaps in the market - market positioning
49
Q

what does the monetary policy do?

A
  • 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.

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