2.5 External Influences

Question 1

What are some examples of external factors that impact the business?

Answer 1

• Government
• World events
• Consumer tastes
• Economic climate
• Pressure groups
• Changes in population
• Social factors
• Environmental factors
• Legislation and regulation

Question 2

What is the definition of appreciation of a currency?

Answer 2

• a rise in the value of the currency

Question 3

What is the definition of Base rate?

Answer 3

the rate of interest around which a bank structures other interest rates, if the Bank of England raises the base rate, all the other borrowing and savings rates are likely to move in the same direction and vice versa

Question 4

What is the definition of a boom?

Answer 4

the peak of the economic cycle where GDP is growing at is fastest

Question 5

What is the definition of the consumer price index (CPI)?

Answer 5

-a common measure of price changes used in the EU

Question 6

What is the definition of Deflation?

Answer 6

-a fall in the general price level, also used to describe a situation were economic growth is falling or negative when inflation is falling

Question 7

What is the definition of Depreciation (of a currency)?

Answer 7

a fall in the value of the currency

Question 8

What is the definition of a downturn?

Answer 8

a period in the economic cycle where GDP grows. but more slowly

Question 9

What is the definition of Economic, trade or business cycle?

Answer 9

regular fluctuations in the level of output in the economy

Question 10

What is the definition Exchange rate?

Answer 10

the price of one currency expressed in terms of another

Question 11

What is the definition of Fiscal policy?

Answer 11

using changes in taxation and government expenditure to manage the economy

Question 12

What is the definition of Government expenditure?

Answer 12

the amount spent by the government in its provisions of public services

Question 13

What is the definition of Gross Domestic Product (GDP)?

Answer 13

a common measure of the total output of a countrys economy

Question 14

What is the definition of Index linked?

Answer 14

the linking of certain payments such as benefits, to the rate of inflation

Question 15

What is the definition of inflation?

Answer 15

The percentage rate at which average prices rise during a year within the whole UK economy

Question 16

What is the definition of monetary policy?

Answer 16

using changes in the interest rates and money supply to manage the economy

Question 17

What is the definition of a recession?

Answer 17

a less severe form of depression
a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Question 18

What is the definition of recovery or upswing?

Answer 18

a period where economic growth begins to increase again after a recession

Question 19

What is the definition of a slump or depression?

Answer 19

the bottom of the economic cycle where GDP start to fall with significant increases in unemployment

Question 20

What is the definition of taxation?

Answer 20

the charge made by government on the activities, earnings and income of businesses and individuals

Question 21

How is inflation measured?

Answer 21

• a common approach to measuring inflation is to calculate changes in the consumer price index (CPI)
• this involves gathering information about the prices of goods and services in the economy
• Each month the government records price changes of about 600 goods and services
• From these records an average price change is calculated and converted into an index number
• this can be compared with previous figure to calculate percentage change prices (i.e. the inflation rate)

Question 22

How can inflation affect businesses?

Answer 22

• inflation rates between 1 and 5% are not likely to have a big impact on businesses
• however once the CPI gets into double figures and beyond, inflation can have some damaging effects on business, these reasons being:
• increased costs
• uncertainty
• borrowing and lending - e.g. firms with long term borrowing will find the real value of the money they repay will be lower following a period of high inflation
• consumer reactions
• international competitiveness - if inflation is higher in UK than other countries the UK businesses may lose competitiveness against foreign rivals

Question 23

How can inflation rates increase the costs of a businesses?

Answer 23

• shoe leather costs (business used to send employees around on foot to find this out hence the name)–> suppliers prices increasing all the time but at different rates, time must be spent searching for the best deal as well as more time tracking competitors prices to decide on what to set yours
• Menu costs (because for restaurant when changing prices they need new menus) –> raising your prices costs money, you need to inform customers, brochures might have to be printed and websites updated
• hyperinflation –> management is likely to have to spend more time dealing with worker’s pay claims, (annual contracts deals instead of 3 year ones), if hyperinflation occurred pay negotiations would have to be monthly, larger risks of strikes as workers and managers have different thoughts about future inflation rates

Question 24

How can inflation cause uncertainty for business?

Answer 24

• whether to spend or to save there money –> should they invest now if prices may be higher in 6 months?
• long term contracts–> if prices are changing ever 6 months how can a supplier put a price on a 3 year contract when he doesnt even know what the price is going to be in a few months

Question 25

How can inflation affect borrowing and lending for business?

Answer 25

• debts that have occurred in the past can be settled quickly as they are eroded by inflation
• but in this environment interest rates rise to match inflation, if there is prolonged inflation interest rates are likely to become index linked - linked to the index of prices
• so interest rates might charge at the rate of inflation plus 5% or 10%

Question 26

How can inflation affect consumers reactions?

Answer 26

• prolonged inflation leads to more saving, and less willing to borrow money
• the value of saving tends to fall as inflation erodes their real value –> start to save more to make up for the previous real value
• less spending being business make less sales
• during hyperinflation consumer spending may differ –> on pay day there would be huge activity in shops as people spend there money as and when they get it –> suppliers of fresh food would have to gear up to deliver all there goods on one day of the week

Question 27

How can inflation affect international competitiveness?

Answer 27

• high inflation can impact businesses that import or export goods and services
• if the UK has higher inflation rates than its trading partner, UK businesses will become uncompetitive
• cheaper to import from overseas business that by UK based products as the prices are rising less quickly

Question 28

What factors can cause inflation?

Answer 28

• Cost Push: occurs when there is an increase in the cost of production (including wages, raw materials, taxation and interests rates) that forces firms to increase their prices in order to protect their profit margins.
• Demand Pull: the process by which prices rise because there is excess demand in the economy

Question 29

What are some factors can can cause cost push inflation?

Answer 29

• Increase in the cost of raw materials
• Minimum wage & other wage increases
• Skills shortages
• Taxation
• Energy prices

Question 30

What are the general affects of high inflation rates on a business?

Answer 30

• Inflation encourages investment – the value of outstanding debt reduces.
• Stock and property prices rise – making balance sheets look healthier
• Less resistance to rising prices – especially if national trend
• Higher prices may mean lower sales – Price elasticity
• Premium price products may suffer – price consciousness
• Workers want “Real” wage rises – can cause industrial relation issues

Question 31

What are the general affects of low inflation rates on a business?

Answer 31

• Low interest rates – benefits borrowers, hits savers
• Low relative to other countries – imports become more expensive, exports appear more competitive
• More certainty within the economy – people feel more confident as future prices can be predicted more easily.
• Marketing and admin costs lower – less frequent price adjustments
• Efficient firms survive, other disappear. In a period of high inflation, firms can hide inefficiencies under price rises.

Question 32

How can deflation cause a problems for a business?

Answer 32

• mainly associated with the a fall in demand
• consumers delay spending as they think they can make a purchase at a lower price in the future
• as a result businesses postpone investment and may lay off workers due to the need to cut production
• businesses may have to reduce their prices which can reduces their profits

Question 33

How can deflation be a benefit to a business?

Answer 33

• if deflation is the result of falling import prices or the fall in price of commodities it could be positive:
• a fall in UK import prices could be the result of a strong pound –> this means imported goods will be cheaper and will put downward pressure on the CPI
• this may not have a negative impact on the UK economy as if commodity prices fall, this might reduce the costs of outputs to many businesses - they might respond by actually increasing production

Question 34

What happens when exchange rates fall (weaker pound or stronger foreign currency)?

Answer 34

• price for exports –> fall
• demand for export –> rises
• price for imports –> rises
• demand for imports –> lowers

Question 35

What happens when exchange rates rise (stronger pound or weaker foreign currency)?

Answer 35

• price for exports –> rises
• demand for exports –> falls
• price for imports –> falls
• demand for imports –> rises

Question 36

How can businesses be affected by exchange rates?

Answer 36

-fall in exchange rates –> good for exporters
-rise in exchange rates –>
good for importers
-fluctuating exchanges rates an cause uncertainty –> difficult to predict demand for exports and the cost of imports
-another problem is that it usually costs money to switch from on currency to another –> cost for importer thus reduced profits

Question 37

What are the effects of interest rates of costs in general?

Answer 37

-changes in interest rates are likely to affect the overheads of a businesses
if interest rates rise, businesses are likely to pay higher interest payments on their borrowing –> only if loans are variable

Question 38

What are the effects of interest rates on the costs of loans?

Answer 38

• Investment projects are often financed through loans
• A rise in interest rates increases the price of borrowing money
• Projects financed this way will therefore find that their costs have increased, reducing profitability
• This could convince some businesses not to venture into new ideas
• Total investment in the economy will then fail

Question 39

What are the effects of interest rates on the attractiveness if savings?

Answer 39

• Businesses have the option to save their money rather than investing in things like buildings and machinery
• A rise in interest rates makes saving more appealing, so a business may decide to save profit in order to make more, shelving their desired investments for when interest rates are not as generous

Question 40

What are the affects of interest rates of paying off existing loans?

Answer 40

• A rise in interest rates leads to an increase in the cost of existing variable rate borrowing
• A business could choose to pay off existing loans rather than increasing the investment
• This will reduce costs
• It also prevents further risks from borrowing

Question 41

What are the effects of interest rates of a fall in demand?

Answer 41

• A rise in interest rates is likely to reduce total spending in the economy
• This might affect the profitability of investment projects
• A predicted fall in demand may prevent certain projects from going ahead

Question 42

What are the effects of interest rates of domestic consumption?

Answer 42

• Consumers will be hit by a rise in interest rates
• The costs of loans will rise
• This will deter customers from purchasing things using credit, such as cars and furniture; these goods are known as consumer durables because they are used up over a long period.
• An example of this is housing; consumers are less likely to enter the market because they fear being unable to keep up with the repayments
• If unemployment begins to rise due to the fall in demand, this will reduce consumer confidence, making consumers even less likely to spend

Question 43

What are the effects of interest rates of domestic investment?

Answer 43

• Businesses are likely to cut back plans for investment if interest rates rise
• Investment goods, like houses and machines, are made by businesses
• These businesses will see a fall in their demand

Question 44

What are the effects of interest rates on stock?

Answer 44

• Businesses keep stocks of raw materials and finished goods
• Stocks cost money to keep, because a fall in stock levels could be used to finance a fall in borrowing and interest payments, so a rise in interest rates will increase the price of holding stock
• This will encourage businesses to de-stock
• This will be especially true if demand levels change drastically
• With fewer sales, less needs to be produced, so less stock needs to be kept
• Cutting stock affects all the businesses that are needed to sell a product; if less stock is needed, less raw materials will be required from the supplier
• Destocking due to a rise in interest rates therefore causes a fall in demand throughout the industry

Question 45

What are the effects of interest rates on exports and imports?

Answer 45

• A rise in interest rates tends to lead to a rise in the value of one currency against another
• A rise in the value of the pound, for example, will make it harder for the UK to export profitably
• However, foreign businesses will find it cheaper because they will be able to reduce their prices
• The rise is therefore likely to be a fall in exports and a loss of sales to importers in the domestic market
• Both will reduce demand and hit UK businesses

Question 46

What is a way that government can affect business decision making?

Answer 46

Governments can affect business decision-making using fiscal policy. This involves changing taxation and government expenditure to influence the economy. Taxes vary from country to country but are paid by both businesses and individuals.

Question 47

What are direct taxes?

Answer 47

taxes on income

Question 48

What are indirect taxes?

Answer 48

taxes of spending

Question 49

What are the main direct taxes in the UK?

Answer 49

• Income tax – Paid on personal income and that from paid and self-employment.
• National Insurance Contributions (NIC) – Paid by businesses and individuals on employee’s earnings.
• Corporation tax – Paid by companies based on how much profit they make
• Capital Gains tax – Paid on the capital gain (profit) made when selling an asset.
• Inheritance tax – Paid on money transferred to another individual usually after death

Question 50

What are the main indirect taxes in the UK?

Answer 50

• Value Added Tax (VAT) – paid mainly when buying goods and services (except food, children’s clothing)
• Excise Duties – Paid when buying certain goods such as petrol and tobacco.
• Customs Duties – Paid when buying certain goods from abroad.
• Council Tax – Paid by residents to the council to help fund local services.
• Business Rates – Paid by businesses to the council to help fund local services.

Question 51

What effect does changes in taxation have of businesses?

Answer 51

the main areas that are affected are:

• consumer spending
• prices
• business,costs, revenue and profits
• business spending and investment
• shares
• importing and exporting
• tax avoidance and evasion
• other effects

Question 52

How does taxation effect consumer spending?

Answer 52

• Changes in certain types of taxation are likely to increase the income consumers have left after tax. These includes reductions in income tax rates, increase in personal allowance and an increase in the limits on which inheritance tax is paid or a reduction in the rate of inheritance tax.
• If consumers have more income left they might increase spending on the products of businesses.
• Increase in income tax, National Insurance Contributions and council taxes are likely to leave consumers with less income and could reduce spending on products.

Question 53

How does taxation effect prices?

Answer 53

• An increase in VAT or excise duty will raise the costs of a business. To compensate businesses raise the price of their goods. An increase in customs duty will increase the price of goods being imported into a country.

Question 54

How does taxation effect business costs, revenue and profits?

Answer 54

• Increases in some taxes might raise the costs of a business e.g. VAT.
• A business might try to raise prices to cover this and maintain profit.
• However, higher prices can reduce sales so profit could still be affected if revenue falls.
• Rise in corporation tax, business rates employer’s National Insurance Contribution and Landfill tax will all tend to reduce business profits.
• Reductions in taxes are likely to increase the profits of a business.

Question 55

How does taxation effect business spending and investment?

Answer 55

• Increases in costs reduces profits mean that businesses have less retained profits.
• This can affect the ability of business to pay its debts, buy stocks and meet other expenses.
• It can also affect whether it invests in new factories or machinery.

Question 56

How does taxation effect shares?

Answer 56

• Changes in capital gains tax and stamp duty might affect shareholding.
• For Example, an increase in capital gains tax might deter shareholders or delay sales of shares.

Question 57

How does taxation affect business operations and employees?

Answer 57

• Increases in National Insurance Contributions of employers might deter employers from recruiting extra workers.
• Changes in taxation on company car or mileage allowance and might also change how a business offers these benefits to employees.

Question 58

What other effects does taxation have on business?

Answer 58

• Certain types of business might be affected by changes in tax.
• For example an increase in landfill tax might encourage businesses to recycle.
• A rise in passenger duty could discourage holiday makers and reduce the demand for holidays.

Question 59

How can taxation lead to tax avoidance and evasion?

Answer 59

• Increases in taxation often lead businesses to try to avoid paying the tax.
• For example, they might not hire workers to avoid higher National Insurance Contributions or switch from buying imports to avoid Customs Duties.
• In some cases they might even try to the law, for example dumping waste in countryside to avoid landfill taxes, which is illegal.

Question 60

what effect can changes in government expenditure on businesses?

Answer 60

• if the government increases spending to more than it raises in taxes total spending in the economy will rise
• however too much spending can lead to inflation and higher interest rates
• government cuts have let to a drop in disposable income for many –> less sales and demand

Question 61

What are the stages of a business cycle?

Answer 61

• boom
• downturn
• recession
• upswing

Question 62

What happens during a boom?

Answer 62

• the peak of the cycle is called a boom
• during a boom GDP is growing fast because the economy is performing well
• existing firms will be expanding and new firms will be entering the market
• demand will be rising, jobs will be created
• wages will be rising and the profits made by firms will be rising
• however prices may be rising also

Question 63

What happens during a downturn?

Answer 63

the economy is still growing but at a slower rate

• demand for goods and services will flatten out or begin to fall, unemployment will start to rise and wage increases will slow down
• many firms will stop expanding, profits may fall and some firms will leave the market
• prices will rise more slowly

Question 64

What happens during a recession/ depression?

Answer 64

-at the bottom of the business cycle GDP may be flat
-If GDP starts to fall, the bottom of the cycle may be referred to as a slump or depression
demand will start to fall for many goods an services - non-essential
-unemployment will rise sharply
-business confidence is low
-bankruptcies rise and prices become flat or even fall

Question 65

What happens during a recovery or upswing?

Answer 65

• when GDP starts to rise after a recession
• businesses and consumers regain their confidence and economic activity increases
• demand starts to rise, unemployment begin, unemployment begins to fall and prices start to rise again

Question 66

What are the factors of a business that are impacted by the business cycle?

Answer 66

• output
• profit
• business confidence and investment
• employment
• business start-ups and closures

Question 67

How is the output of a business affected by the business cycle?

Answer 67

• during a boom –> increasing output to meet rise in demand
• provide non-essential and luxury products
• during a recession –> reducing output and cutting capacity, business that trade essentials such as supermarkets will avoid the worst of the downturn

Question 68

How is the profits of a business affected by the business cycle?

Answer 68

boom –> profits are likely to rise as demand is rising and it is easier to raise prices

• recession –> when national income begins to decline it becomes harder to make profits, businesses cut their costs to maintain profit levels
• many will have to tolerate lower profits and some will make losses

Question 69

How is business confidence and investments affected by the business cycle?

Answer 69

• going through recovery and boom –> business confidence is high, owners are optimistic about the future and are prepared to take more risks like launching a new product
• during a recession –> confidence low and business owners are pessimistic, cautious and anxious about the future, they arent likely to take risks and more inclined to contract their businesses, investments are likely to fail

Question 70

How is employment affected by the business cycle?

Answer 70

boom –> unemployment falls because businesses are taking on more workers to cope with rising demand,sometimes firms might struggle to recruit the quality and quantity of staff as their are fewer people seeking work
-during a recession –> businesses lay off workers and unemployment rises

Question 71

How are business start-ups and closures affected by the business cycle?

Answer 71

• in a boom more people are prepared to set up a business, this is because demand is rising and it is easier to make profit, business confidence will be high so new entrepreneurs will be more enthusiastic
• However during a recession it is not a good time to start a new business
• business closures will be rising and inefficient businesses, those with cash-flow problems and those producing non-essential products, are most at risk

Question 72

How does economic uncertainty effect the decision making of businesses?

Answer 72

unpredictable variables, like inflation, interest rates, exchanges rate need to be taken into account when making decisions
-the level of uncertainty increases the risk businesses take when making long-term decisions thus some investment projects arent undertook

Question 73

How does economic uncertainty cause unexpected events for businesses?

Answer 73

• the behaviour of some economic variables are volatile

- the effects of such volatility can have have a very unsettling effect on businesses

Question 74

How does economic uncertainty effect business confidence?

Answer 74

• can effect investment decisions –> due to unpredictability and volatility of economic variables
• if business confidence is high owners are more likely to be optimistic and take more risks
• if businesses are faced with economic uncertainty business confidence is low, of owners are more likely to be pessimistic with less investment being made and lo development

Question 75

How is anti-competitive or restrictive practice defined?

Answer 75

attempts by firms to prevent or restrict competition

Question 76

How is barriers to entry defined?

Answer 76

obstacles that make it difficult for new firms to enter a market

Question 77

How is collusion defined?

Answer 77

two (or more) businesses agreeing to a restrictive practice such as price fixing

Question 78

How is a contract of employment defined?

Answer 78

a written agreement between an employer and an employee in which each has a certain obligation

Question 79

How is discrimination defined?

Answer 79

favouring one person over another, for example in the EU t is unlawful to discriminate on grounds of race, gender,age and disability

Question 80

How is employment tribunal defined?

Answer 80

a court that deals with cases involving disputes between employers and employees

Question 81

How is the national minimum wage defined?

Answer 81

a wage rate set by the government below which it is legal to pay people at work

Question 82

How is unfair dismissal defined?

Answer 82

the illegal dismissal of a worker by a business

Question 83

What is a problem with having too much legislation?

Answer 83

• will discourage enterprise and deter foreign investment in the UK
• This might stifle growth in national income, reduce job creation, decrease tax revenue and reduce consumer choice

Question 84

What is the problem with having too little legislation?

Answer 84

some stakeholder’s best interests may be neglected

Question 85

What is the role of legislation in a business?

Answer 85

-regulates the rights and duties of people carrying out businesses to ensure fairness
-protects people dealing with businesses from harm
-ensure the treatment of employees is fair and indiscriminate
-protects investors,creditors and consumers
-regulates dealing with the businesses and suppliers
ensures a level playing field for competing businesses

Question 86

What ares does legislation cover in a business?

Answer 86

• consumer
• employment
• health and safety
• competition
• environment

Question 87

What are some ways that consumers are protected by legislation?

Answer 87

• goods must fit their description
• must be of a satisfactory quality
• goods are fit for their intended purpose
• businesses may not use unfair commercial practices,such as misleading advertising
• consumers have the right to return and get a full refund of goods that do not comply with the law
• services must be done at a reasonable price and at the time stated
• a customer can request that an unsatisfactory service is repaired or carried out again at no cost
• distance selling regulation provide further protection for consumer again online businesses

Question 88

how does consumer legislation affect businesses?

Answer 88

• increases costs –> improving the safety and quality of the goods cost money
• improve quality control
• deal with customer complains to nip the problem in the bud before they use the legal system
• to treat customer fairly

Question 89

What are the two areas which are mainly covered by employee legislation?

Answer 89

• individual employment

- industrial relations

Question 90

How are employees entitled to equality?

Answer 90

-it is a basic rule that men and women are entitled to have equal pay for doing equally valuable work

Question 91

What is the basic pay employees are entitled to?

Answer 91

-pay national minimum wage no matter when the worker is paid or how frequent

Question 92

What is it illegal to discriminate a employee on?

Answer 92

• sex
• pregnancy and maternity
• marital status
• sexuality
• disability
• race
• age
• religion
• trade union membership
• whether the worker is part time,full time or temporary or permanent

Question 93

What are some employee rights?

Answer 93

in terms of employment:

• reasonable notice before dismissal
• right to redundancy
• right to a written employment contract
• right to request flexibility working
• right to NMW
• right to maternity/paternity leave

Question 94

How are employee protected concerning industrial relations?

Answer 94

• protection from unfair dismissal
• employers must recognize unions if it have 50%+ staff members
• regulations of procedures for industrial actions, like ballots
• Role/powers of employment tribunals
• EU works Council requirement

Question 95

How is business effect by employment legislation?

Answer 95

-compliance costs –> employees are entitled to work in the UK, responsibility for the well-being of employees
, deal with tax authorities
-higher labour costs –> introduction of national minimum wage
-changing work practices –> job advertisements dont discriminate
- loss of flexibility –>legislation makes running a business too rigid
-penalties –> fail to comply with the law may result in penalties like fines, damaging of PR

Question 96

How is the environment protected by legislation?

Answer 96

• pollution and emissions into the air –> limit or even get rid of some pollutes (e.g. stop dumping waste in water)
• destruction of wildlife habitats
• traffic congestion
• resource depletion

Question 97

How does environmental legislation affect businesses?

Answer 97

• marketing –> good for PR, however those may see them as threats as pressure groups are criticizing them
• finance –> positives, energy-saving measures can lead to lower costs in the future and more efficient, however will increase costs trying to find alternative business practices
• operation management –> change in materials used, to change in production methods, to storage to after-sales service
• Human Resources –> Staff need to be recruited and trained to deal with ever increasing government regulation concerning the environment –> may be outsourced
• staff need to be made aware of policy changes in a business –> training may need to be in place to ensure compliance
• Social enterprises driven by environmental considerations may be motivated by these new targets

Question 98

What are some anti-competitive or restrictive practices?

Answer 98

• increasing prices –>raising prices to levels above what would be in a competitive market
• restricting consumer choice –> a manufacturer might refuse to supply a retailer stock if they stock rival products
• raise barrier to entry –> spending huge money of advertising to squeeze other out of the market, lower prices temporarily
• market sharing –> collusion , could increase the prices together
• excessive predatory pricing

Question 99

what are the aims of competition policy?

Answer 99

• wider consumer choice in the market
• technological innovation which promotes dynamic gains
• effective price competition between suppliers
• investigating allegations or anti -competitive behavior which might have a negative effect on consumers

Question 100

What are the positive affect competition policy has of businesses?

Answer 100

• stops unlawful/unfair conduct of businesses
• more competitive environment
• easier for small firms to break into the market
• encourages innovation

Question 101

What are the negative affects competition policy has on businesses?

Answer 101

• put constraints on business activities

- delay business practices and cost them more money

Question 102

What are some penalties for breaking competition policy?

Answer 102

• fine of up to 10% of annual turnover
• Criminal prosecution
• disqualification of directors
• civil action by those affected

Question 103

What are some areas that are protected by health and safety regulation?

Answer 103

• providing and maintain adequate safety equipment and protective clothing e.g. fire extinguishers, protective overalls
• ensuring workers have enough space to do there jobs
• guaranteeing a hygienic environment with adequate toilet and washing facilities
• maintaining workplace temperatures and reasonable noise levels
• providing protection from hazardous substances
• providing protection from violence,bullying, threats and stresses in the workplace
• providing adequate breaks for rest

Question 104

How does Health and safety legislation affect businesses?

Answer 104

costs –> extra training, written statement of their general policy, supervision to ensure the health and safety of workers

• health and safety inspectors have the right to enter business premises to ensure that health and safety measures are being carried out
• penalties –> employee safety might be compromised which can lead to accidents in some cases fatal
• benefits –> good PR form good health and safety records, easier to attract and retain high-quality staff, workers may feel protected and more secure leading to loyalty and more motivation –> increased productivity

Question 105

How is Cartel defined?

Answer 105

a group o businesses (or countries which join together to agree on pricing and output in a market in an attempt to gain higher profits at the expense of customers

Question 106

How is colluding defined?

Answer 106

in business, were several businesses (or countries ) make agreements among themselves which benefit them at the expense of either rival businesses or customers

Question 107

How is market structure defined?

Answer 107

the characteristics of a market, such as the size of the barriers to entry to the market, the number of businesses in the market or whether they produce identical products, which determine the behaviour of businesses within the market

Question 108

What are some industries that have little or no competition?

Answer 108

• broad band and fibre infrastructure
• energy generation
• water supply

Question 109

What are the determinants of competitiveness?

Answer 109

• number and size of businesses
• barriers to entry
• product differentiation
• knowledge of buyers and sellers
• degrees of interrelationship
• legal factors

Question 110

How can the number and size of business determine competitiveness?

Answer 110

• large number of competitors/ a few number of large competitors e.g. supermarkets
• these provide barriers to entry to the market due to their sheer size and the amount of businesses there
• monopolies are very uncompetitive

Question 111

How can barrier to entry determine competitiveness?

Answer 111

how easy is it to set in in a market –> (hard to set up new oil/ pharmaceutical company)
- based on price and availability of resources
expertise and knowledge needed
- when barrier to entry are high competition tends to be lower
- one consequence of this is that businesses often compete on issues other than prices such as promotion and place

Question 112

How can product differentiation determine competitiveness?

Answer 112

• how much can your product be differentiated
• cant really differentiate homogeneous products e.g. milk –> focus on price
• therefore the way products are made and the cost differentiates the products e.g. lager fosters and carling
• However for some fosters and Carling it is about how they are branded –> the stronger the perceived difference, the stronger the brand
• where product differentiation is strong the non-price elements of the marketing mix such as promotion tend to be emphasised by business

Question 113

How can knowledge of buyers and seller determine competitiveness?

Answer 113

the way your products are perceived

• identify the benefits of their business to help them sell their product
• in these situation business with the perfect knowledge tend to focus on product, promotion and place rather than price

Question 114

How can degree of interrelationship determine competitiveness?

Answer 114

• the action of ones business –> how much does it affect others
• one farming planting carrots has little impact on farmer doing the the same in another field

Question 115

How can legal factors determine competitiveness?

Answer 115

• allows new businesses to enter the market
• competition in the UK is restricted to stop businesses colluding and created/monopolies/oligopolies ( taking advantage of customers)
• theses are bad for customers because they often offer high prices as the customer cannot by from anywhere else

Question 116

What are the impact on a business in a competitive environment?

Answer 116

• price
• profit
• communication with customers
• innovation
• product rang
• marketing

Question 117

How is price impacted in a competitive environment?

Answer 117

• highly competitive –> lower prices to compete (profit margin can be lower)
• lower competition –> higher prices due to less alternatives

Question 118

How is profit impacted in a competitive environment?

Answer 118

-highly competitive market –>profit margins are lower
-not very competitive markets –>charge a high price to make more profit
-

Question 119

How is communication with customers impacted in a competitive environment?

Answer 119

• business that communicate with customer e.g. customer service are more competitive and successful
• how is your business perceived

Question 120

How is innovation impacted in a competitive environment?

Answer 120

-change a product to make it better or target a new market –> need to stand out in the market

Question 121

How is product range impacted in a competitive environment?

Answer 121

opportunity to hit more target markets

- satisfy a larger amount of customers –> cars eco-friendly or sport car

Question 122

How is marketing impacted in a competitive environment?

Answer 122

• using USP
• make the product more appealing than competitors
• low competition –> not much need for marketing –> lower costs

Question 123

what is competition like in global markets?

Answer 123

• Large numbers of customers
• Increased competition
• Legislative & logistical issues

Question 124

What is competition like in national markets?

Answer 124

• Still large customer base
• Less language & legislative issues
• Can be highly competitive

Question 125

What is competition like in regional markets?

Answer 125

• Smaller pool of customers and competition

- Can serve the specific needs of regional population

Question 126

What is competition like in local markets?

Answer 126

• Serves the specific needs of the local population.

- Still facing comp from other regional suppliers

Question 127

what are the problems with operating in a large market?

Answer 127

• Even large markets can be dominated by a few small firms (groceries, fuels).
• Difficult to enter market due to large initial outlays.
• Rivals monitor competitors more closely, pricing & promotional strategies vitally important

Question 128

what are the problems with operating in a small market?

Answer 128

• Can business generate sufficient sales to be viable?
• Small business may appear attractive due to lack of competition, but there will be lower demand.
• Larger, stronger rivals may enter who work in multiple fields and can afford lower returns due to diversification of product range.

Question 129

How does taxation affect export and imports?

Answer 129

• customs duties can affect business

- raised custom duties imported products a UK imports are higher so domestic products are more competitive

Question 130

What economic variables could change and impact on business performance ? Revenues and costs

Answer 130

Inflation
Exchange rates 
Interest Rates 
Taxation and Govt spending 
The business cycle

Question 131

What are the effects of INCREASING interest rates on businesses - 4 reasons

Answer 131

Consumers - are likely to have less money to spend as payments o mortgages or other borrowings will increase
Amount paid in interest on any borrowing by the business will rise - pushing up costs
Consumers are less likely to “borrow to buy” as the credit will cost more due to the high interest rates
Businesses are less likely to invest

NOTE a decrease in interest rates would be beneficial to businesses as opposite to above - increase demand, encourage investment etc

Question 132

What does the Govt spend ~40% of the economy spend on ?

Answer 132

Health NHS, Defence and Education

Question 133

Which type of private sector businesses are largely dependent upon Govt for their income

Answer 133

Publishers of textbooks
Road building firms
Pharmaceutical firms
railway companies

Question 134

What impact of a change in taxation and govt spending have on the following ?

To help reduce the level of unemployment
To cut the growth rate of the economy when it is rising to fast
to improve the competitiveness of British firms
to cut the rate of imports specially of consumer goods

Answer 134

To help reduce the level of unemployment
Govt spending up = extra spending on road building, health
Govt puts taxes down = reduce income tax to allow families to have more disposable income

To cut the growth rate of the economy when it is rising to fast
Govt spending down = cut spending on health , education and defence
Govt puts taxes up = increase income tax to force people to think harder about what they buy

to improve the competitiveness of British firms
Govt spending up = extra spending on education
Govt puts taxes down = cut corporation tax

to cut the rate of imports specially of consumer goods
Govt spending down = cut benefits to reduce peoples ability to buy exports
Govt puts taxes up = increase VAT on all goods other than food and drink

Question 135

What are the effects of the business cycle on business ?

Answer 135

Economy slows - consumers reduce spending
Economy in boom = consumers demand rises rapidly

In general the effect of the business cycle on businesses is mainly dependent on one thing INCOME ELASTICITY OF DEMAND

Question 136

What are the effect of changes in income on inferior / normal / luxury goods ?

Answer 136

Product Change in real income Change in demand Explanation
Inferior Increase Decrease Consumers stop buying cheaper substitutes as they have more money
Decrease Increase Consumers switch to these products to save money as incomes fall

Normal Increase Increase at same rate as real income Affluent customers can by more of this type of product
Decrease Decrease “ “ “ “ As consumers tighten their belts they will cut back on these products

Luxury Increase Increase at faster rate than real incomes As consumers incomes rise these luxuries are the ones that
most of their extra income will be spent on
Decrease Decrease at faster rate than real incomes These will be the first products to disappear as consumers
tighten their belts

Question 137

How does the law affect business decisions ?

Answer 137

Effects of consumer protection laws on business
Effects of Employee protection laws on business
Effects of Environmental protection laws on business
Effects of Competition policy on business
Effects of H&S on business

Most changes to the law lead to a increase in costs for a business

Question 138

How does the consumer protection laws affect business ?

What are the 2 major Acts of Parlaiment ?

Answer 138

Need to ensure the product does what it claims to do
Is i corectly labelled
Is it sold in the correct weight or measure
Rights of consumers to refunds or to exchange faulty products

Sale of Goods Act
Trade Descriptions Act

Question 139

How does the employee protection laws effect business ?

Answer 139

Employers must ensure
Fair pay
Sick leave
Maternity and Paternity leave
Employment contracts 
Relationship with Trade Unions
responsibilities of a business to employees who are made redundant

Question 140

What are the implications of minimum wages, contracts of employment, sick pay, maternity leave, redundancy and Trade Union rights on a business ?

Answer 140

minimum wages - increased labour costs but in plus side employees may feel more motivated by a fair wage

contracts of employment - reduces employers flexibility in how they use their staff

Sick Pay / Paternity / maternity leave - increase cost of paying for cover for these staff but conversely staff may feel more valued as they feel well
treated by employers so this reduces staff turnover and recruitment costs

redundancy - Statutory rights so closing a factory has a negative impact on cash flow in the short term

Trade Union rights - can be benefits and drawbacks for employers

Question 141

How does the environmental protection laws effect business ?

Answer 141

A range of legislation now governs how businesses treat the natural environment

Materials firms must use to make certain products
Processes firms are allowed to use to make certain products
Need to use recyclable materials for certain products
Landfill tax
Need to carry out Enviro Risk Assessments for different parts of a businesses activities

Question 142

Who are the CMA and what are their 3 main aims ?

Answer 142

Competition and Markets Authority

1. Investigate takeovers and mergers
2. Investigate allegations of anti competitive practices
3. Take legal action against those who COLLUDE to maintain high prices in a market

Question 143

What are the effects of H&S on a Business

Answer 143

Safe physical conditions
precautions that firms are required to take when planning work
way in which hazardous substances should be treated in the workplace

Question 144

Name 2 positive and 2 negative effects of H&S legislation on businesses ?

Answer 144

Positive - prevent incidents that create negative publicity / motivate employees who feel safe / accidents can delay/stop production and cost money

Negative - extra paperwork / pay extra for safety equipment / need to pay to adjust physical work conditions

Question 145

Why is a market dominated by a single business bad for consumers - 3 reasons ?

Answer 145

Consumers have little choice
Prices tend t be high
Little incentive for dominant firm to innovate or provide great customer service

Question 146

What examples of barriers to entry could firms build to prevent new firms entering the market ?

Answer 146

Patents and technological breakthroughs
Incredibly strong brands and high advertising budgets
heavy spending on infrastructure

Question 147

In a oligopoly non price competition exists…Name 5 aspects of non price competition

Answer 147

Branding
Product Design
Product features
Advertising 
Technical Innovations

Question 148

What are aspects of a fiercely competitive market ?

Answer 148

Many small businesses competing with one another usually on price
Profits margins low and means consumers often get a bargain
A business that can find an effective method of differentiation in this market will stand a better chance of success
Most businesses have little choice other than keeping costs as low as possible in hope of undercutting rivals

Question 149

Market Size - big markets, small markets, markets whose size is changing and collusion ?

Describe them

Answer 149

Big markets - still offer scope for new competition by them carving out a NICHE

small markets - fewer customers and lower sales = easier to build up barriers to entry

markets whose size is changing - growing markets = attract new entrants seeking higher profits on offer, Shrinking markets sees established firms exiting as profitability tends to be low

collusion - some companies are tempted in a competitive market to behave illegally which is not sensible given the legislation in the UK