2.5 - External Influences Flashcards
What is inflation?
Inflation is the general rise in prices in an economy over time.
What is the Consumer Price Index (CPI)?
It measures the monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation.
What are exchange rates?
The exchange rate is the value of one currency expressed in terms of another.
What is an appreciation of the pound?
An increase in the value of the pound against other currencies.
What is a depreciation of the pound?
A decrease in the value of the pound against other currencies.
How will an appreciation of the pound affect businesses which export?
- Sales are likely to fall as products become more expensive when compared to overseas competitors.
- Prices may need to be lowered in order to remain competitive.
How will an appreciation of the pound affect businesses which import?
- Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced.
- Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits.
How will a depreciation of the pound affect businesses which export?
- Sales are likely to rise as products become cheaper when compared to overseas competitors.
- Businesses may choose to increase selling prices to increase profit margins.
How will a depreciation of the pound affect businesses which import?
- Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically-produced.
- Businesses may seek domestic suppliers to reduce costs and maintain profit levels.
What are interest rates?
The interest rate is the percentage charged for borrowing money and the percentage reward offered for saving money.
How does a rise in interest rates affect businesses?
- If they rise, businesses will have to pay more on new or variable rate borrowing which will increase their costs.
- Businesses may be less willing to invest when their retained profit may be more profitably invested into savings schemes.
- Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales.
- Exporting businesses may see demand fall for their products overseas as higher rates usually strengthen the pound and make their products more expensive abroad.
What are direct taxes?
Direct taxes are levied on income e.g. income tax and corporation tax.
What are indirect taxes?
Indirect taxes are levied on spending e.g. VAT.
What is the impact of taxation on revenue?
- Revenue may fall for businesses as increased income tax will reduce the disposable income of consumers and so demand may fall. Also, increased VAT will make products more expensive and customers may switch to alternative products.
What is the impact of taxation on costs?
- Operation costs will rise as a result of increased taxes such as VAT and NI contributions. These increased costs mat lead to higher prices for consumers and so lower sales and profits may fall.
- Import costs are increased also when customs duties are raised.
What is the impact of taxation on business decision?
- Business spending an investment may be affected by increases in corporation tax as less profit is retained.
- Businesses may choose to forego business improvement or relocation.
- May take steps to avoid paying specific taxes or pay lower rates of taxation.
What is a recession?
A recession occurs when an economy experiences two consecutive quarters or more of negative economic growth.
What is a boom?
A boom is a period of time where an economy experiences increasing/high rates of economic growth.
What are the characteristics of a recession?
- Increasing/high unemployment
- Low confidence for firms/households
- Low inflation or deflation
- Increase in government expenditure
What are the characteristics of a boom?
- Decreasing unemployment + more vacancies
- High confidence and more risk taken
- Increasing rate of inflation
- Improvement in govt budget as tax revenue rises and expenditure falls
What is economic uncertainty?
Economic certainty occurs when it is difficult to forecast the level of supply and demand in an economy.
Why might economic uncertainty occur?
- Fluctuating exchange rate
- Economics growth uncertainty
- Turbulence in the price of key commodities such as oil
How can businesses ensure they remain prepared for economic uncertainty?
- Building up cash reserves when times are good
- Keeping informed about the economic climate
- Being ready to take advantage of opportunities when they arise
What does the consumer protection legislation state?
It aims to ensure consumers are treated fairly by the companies with which they interact. Products/Services must be:
* Fit for purpose
* Of satisfactory quality
* As described
How do the consumer protection laws affect businesses?
- Meeting these requirements will result in increased expenditure
- May have to hire staff to ensure each factor is met
What does the employee protection legislation state?
It aims to prevent the exploitation of workers. It covers:
* Pay and working conditions
* Equality of employment
* The right to be part of a union and to take action
* Contracts and termination of employment
How do the employee protection laws affect businesses?
- Compliance costs
- Changing working practices
- Potential penalties (and rewards)
- Higher labour costs
What does the environmental legislation state?
It aims to hold businesses responsible for their environmental impact. It covers:
* Pollution
* Destruction of wildlife
* Traffic congestion
* Air quality
* Resource depletion
How do the environmental laws affect businesses?
- Businesses that fail to adhere to the laws may be fined or forced to cease commercial activity until the problems they have caused are resolved.
What does the competition policy legislation state?
It aims to protect the interests of both consumers and businesses by restricting anti-competitive practices. It covers:
* Abuse of market power so as to limit monopoly power
* Anti-competitive acquisition activity
* Cartel activity and collusion
How does the competition policy law affect businesses?
- The Competition and Markets Authority may potentially take steps such as preventing a merger or instructing a business to dispose of subsidiaries in order to correct the market.
What does the health and safety legislation state?
It requires businesses to operate in a way that protects the physical and mental wellbeing of its employees and contractors as well as its customers. It covers:
* The provision of adequate breaks
* Temperature and noise levels
* The provision of safety equipment
* Hygienic, safe, and sanitary conditions
* Preventing stress
How does the health and safety law affect businesses?
- Staff training and supervision
- Change to working hours and rest provisions
- Arrangement of manuals, signage, and safety documentation
- Purchase and maintenance of safety equipment
- Drawing up and implementing code of practice
- Serious health and safety breaches can lead to fines or investigation by the Health and Safety Executive and in some cases can lead to prosecution
What is the degree and nature of competition?
- The competitive environment concerns the degree to which a business is affected by rivals that operate in the same market.
- The threat competition presents to businesses operating in a market will determine how quickly the business responds, - the greater the threat, the quicker the response required, and vice versa.
- Operating in a competitive market can have impacts on the marketing and operational strategy.
What is market size?
Market size is the number of customers and sellers in a particular market.
Why may market size be a problem for niche-market businesses?
Businesses entering these markets may struggle to support a high volume of goods due to limited demand as the market size is small. For these businesses, the specialised knowledge or skills required may well limit the competition and the higher costs of production may well put off new businesses from launching.
Why may market size be a problem for mass-market businesses?
Businesses entering large markets may face more competition from established businesses, higher costs of promotion, and challenges in deciding their pricing strategy.
