2.5 - External Influences Flashcards
Define inflation
Is the percentage rate at which average prices rise during a year within the whole UK economy
Effect of inflation on businesses (3)
- A firm with a long-term fixed price contract may find that if costs rise rapidly while the contract is being completed, the fixed price does not even cover its higher level of costs damaging profitability
- Firms with substantial long-term borrowings will find the real value of the money they repay will be lower following a period of high inflation, as inflation has the effect of reducing the real value of money
- UK businesses may lose competitiveness against foreign rivals if inflation is higher in the UK than over countries as costs are likely to be rising more slowly this allows foreign firms to charge lower prices
Define exchange rate
is the value of one currency expressed in terms of another
Example of the pound (£) appreciates
£1 was $1.60 but is now $1.80
Impact on exports if the pound (£) appreciates
UK exports get more expensive, so sales volumes slip
Impact on imports if the pound (£) appreciates
Imports to the UK get cheaper, making it harder for UK firms to compete
Example of the pound (£) when it depreciates
£1 was at €1.30 but now is €1.15
Impact on exports if the pound (£) depreciates
UK exports get cheaper, so sales volumes rise
Impact on imports if the pound (£) depreciates
Imports to UK get more expensive, so UK compete more effectively
Define rate of interest
Is the amount charged by a lender per year for borrowing money. This is expressed as a percentage of the amount of money outstanding
Effects on interest rates on businesses (4)
- Consumers are likely to have less money to spend as payments on mortgages or other borrowings will increase. This is likely to reduce demand
- The amount paid in interest on any borrowing by the business will rise, pushing up costs
- Consumers are less likely to ‘borrow to but’ so products that are often bought on credit, such as cars or sofas, will see demand fall, as the credit will cost more
- Businesses are less likely to invest as the opportunity cost of investment will be greater
The impact of a change of taxation and government spending - to help reduce unemployment (2)
- Extra spending on road-building, health and other services with big workforce’s (government spending up)
- Reduce income tax to enable families to keep and spend more of the money they earn (government puts tax down)
The impact of a change of taxation and government spending - to cut the growth rate when it is rising to fast (2)
- Cut the spending on health, education and defence to take a bit of spending from the economy (government spending down)
- Increase income tax to force people to think harder and more carefully about what they buy (Government puts taxes up)
The impact of a change of taxation and government spending - to improve the competitiveness of UK firms (2)
- Extra spending on education (government spending up)
* Cut company taxation (corporation tax) (government put tax down)
The impact of a change of taxation and government spending - to cut the rate of imports especially of consumer goods (2)
- Cut benefits e.g state pension to reduce people’s ability to buy exports (government spending down)
- Increase VAT on all goods other than food and drink
Effect of the business cycle on businesses
- Demand for products in the key impact
- If the economy slows, consumers will on average reduce spending
- In a boom period consumer demand rises rapidly
Effect of economic uncertainty
No business decision-makers will make any long-term decisions without thinking first about the likely state of the economy - therefore business leaders prefer economic stability to the uncertainty that comes with cyclical economic growth
What do the aspects of consumer protection legislation include? (4)
- Does the product do what it claims to do?
- Is the product correctly labelled?
- Is the product sold in the correct weight or measure?
- The rights of consumers to refunds or to exchange faulty products
What is the reason for consumer protection legislation? (2)
- Is to ensure that businesses actually deliver on what they promise the consumer
- Ensure that no business gains an unfair advantage over its rivals through deceitfulness
2 major acts of parliament covering consumer protection
- The sale of Goods act
* The trade descriptions Act
What major issues does employee protection cover? (7)
- Fair pay
- Sick leave
- Maternity and paternity leave
- Employment contracts
- Relationships with trade unions
- The ability of business to get rid of staff
- The responsibilities of businesses to employees who are made redundant
Implications of minimum wage for firms (fair pay) (2)
- Increase labour costs - may lead to increased automation in the longer term and increased unemployment
- Employees may be more motivated by a fair wage satisfying basic needs
Possible implications of right to a contract of employment to firms (2)
- Can reduce employers’ flexibility in how they use their staff
- Meets employees’ security needs
Possible implications of increased right to sick maternity and paternity leave to firms (2)
- Increased cost of paying for cover these staff
- Staff May feel more valued as they feel well treated by employers, reducing staff turnover levels saving on costs of recruiting new staff
Possible implications of redundancy for firms
Reducing capacity becomes expensive due to statutory payments to staff made redundant - means that closing a factory or office has a negative impact on cash flow in the short term
Possible implications of trade union rights for firms
Employers can be forced to deal with trade union if enough staff are members
Areas that environmental protection include (5)
- Materials that firms must use for certain products
- Processes firms are allowed to use to make certain products
- The need to use recyclable materials for certain products
- Landfill tax
- The need to carry out environmental risk assessments for different parts of a business’s activities
What is the Competition and Marketing authority (CMA) responsible for? (3)
- Investigating proposed takeovers and mergers
- Investigating allegations of anti-competitive practises
- Taking legal action against those who collide to maintain high prices within a market, such as cartels
What does CMA ensure? (3)
- That companies have to set competitive prices
- That companies do not collide with others in their market to the detriment of consumers
- Mergers and takeovers that will create overly powerful firms are prevented
Purpose of health and safety law
To protect employees and customers in the workplace
Positive effects of health and safety legislation on businesses (3)
- Should prevent incidents that create negative publicity
- Should help to motivate employees, who feel safe
- Accidents can delay or halt production - these should be avoided
Negative effects of health and safety legislation on businesses (3)
- Extra paperwork
- Need to pay for extra safety equipment
- Need to pay to adjust physical work conditions
Define competitive environment
Refers to how directly other firms’ products are in competition and how fierce rivalries are
Define monopoly
Is a business that dominates supply in a given market
Why are monopolies bad for consumers? (3)
- Consumers have little choice
- Prices tend to be high
- There is little incentive for the dominant firm to innovate or provide great customer service
Possible barriers that are created by monopolies (3)
- Patents and technological breakthroughs
- Incredibly strong brands and high advertising budgets
- Heavy spending on infrastructure
Define oligopoly
Is the name given to market dominated by just a few major suppliers
What happens in a oligopoly market? (3)
- Intense rivalries
- try to avoid price wars as it lowers profit margins for all the industry
- Non price competition: branding, product features, product design, advertising and technical innovations
Fiercely competitive markets (2)
- Tend to be characterised by many small businesses competing with one another often on price - keeps profit margin low ensuring consumers get a bargain
- Many of these markets tend to be for commodity products which are hard to differentiate
Market size - big markets (2)
- Offer scope for new competition - therefore in large markets there likely to be fair degree of
- Even dominant producers must constantly need to provide a good service to avoid opening an opportunity for a rival
Small markets - market size (2)
- Fewer customers and lower total sales
* Easier to build barriers to entry
Markets whose size is changing - market size (2)
- Growing markets attract new entrants seeking higher profits on offer
- Shrinking markets see established firms existing as profitability tend to be low and thus unattractive
Ways businesses respond to tougher competitive environments (3)
- Price cutting
- Increased product differentiation
- Collusion
Price cutting - Ways businesses respond to tougher competitive environments (3)
- Attracting new customers or hanging onto existing customers could be achieved by cutting the selling price
- Unless this is accompanied by cutting the cost of production, profit margins will fall
- Is rarely a successful long-term answe
Methods of product differentiation (5)
- Branding
- Product features
- Product design
- Advertising
- Technical innovations
Define collusion
Occurs when two or more rival businesses agree to fix supply within their market. This is illegal
