2.5 External Influences Flashcards
What is inflation
A general rise in prices over time
How are interest rates measured
Through the consumer price index (CPI)
What is the target inflation rate for the uk
2%
What effect will increased inflation have on customers
May not be able to afford things
May have to shop elsewhere for cheaper substitutes and inferior goods
Demand less products due to less disposable income
Consumers on fixed incomes
What effect will increased inflation have on businesses
Disrupts planning, lower investment
Demand might fall if people can’t afford products
Customers may go to cheaper places
Workers demand high wages
Demand may fall for luxury products
Higher demand for inferior product retailers
Prices of supplies rise-> higher costs -> cash flow problems -> less gross profit
Affects gross profitability and operating profit
Revenues may grow depending on PED
What affect will low inflation have on businesses
Businesses feel confident in a stable economic environment
They may look to invest and grow
What are exchange rates
The value of one currency expressed in terms of another
What is a pound appreciation
The currency is getting stronger or going up in value against another
What’s a pound depreciation
Currency becomes weaker or decreases in value
What does SPICED stand for
Strong Pound Imports Cheap Exports Dear
What does WPIDEC stand for
Weak Pound Imports Dear Exports Cheap
What are imports
Buy goods or services from a foreign country
What are exports
Selling abroad
What does the effect of exchange rates depend on
The rage of change and stability of the currency.
If it’s unstable it’s harder to plan
Depends on how adaptable the businesses is if they need to change suppliers
What does imports cheap exports dear mean
That is it expensive for foreign customers -> demand may fall in foreign countries
It’s cheaper for the business to import from overseas -> may get more for your money-> encourages you to buy in bulk -> variable costs decrease -> gross profit can increase -> can maximise shareholder wealth
Variable costs decreasing can also lead to lower prices-> more competitive and more market share
What does imports dear exports cheap mean
It’s expensive for businesses to import materials from overseas-> may have to increase the price for domestic customers -> cheaper for foreign customers so demand may increase overseas
May be encouraged to buy supplies from domestic businesses
Depends how much they trade abroad
What’s an interest rate
The reward for saving and cost of borrowing
Always expressed as a %
What is likely to happen if interest rates are high
People are less likely to borrow so businesses may not be able to buy things to improve the business, especially if they don’t have enough internal finance
They may see lower demand but only impacts certain businesses eg luxury item retailers
What’s likely to happen if the interest rate is low
Demand will be higher, more people will be borrowing due to it being cheap and there being no incentive to save. Stimulates spending
Business will be able to get the capital to finance innovation and buy things like land, property, machinery -> the more investment in this, the more growth-> more jobs, higher output
What is taxation
Paying tax to the government
Eg corporation tax, VAT, income tax
In return they should spend it on things like education, the NHS, infrastructure ect
This should benefit businesses because the workers will be better skilled, healthier and be able to get work easier-> less absenteeism
What’s corporation tax
Tax on businesses
Payed by ltd and plc
May have to increase prices to get more profit
What’s income tax
Tax payed on income
Sole trader and partnership pay this as they’re unincorporated
What’s direct taxation
Tax on income, wealth and profit
Eg income tax, national insurance contributions, corporation tax, capital gains tax
What’s indirect taxation
Levied on spending by consumers on goods/ services
Eg VAT (20%), excise duties on fuel, alcohol, car tax, TV licence
What’s the business cycle
A graph with level of GDP up the side and time on the bottom
Boom- economy growing really well. Lots of employment, demand for goods/ services, more disposable income, more spending, businesses are investing
Recession- two consecutive periods where the economy doesn’t grow, high levels of unemployment, less disposable income, less spending and investing, demand slows
Decline- sales decrease
Recovery- increasing consumer confidence, businesses start to invest, spare capacity is used up
Peak- lots of sales
Trough- demand is low
What’s economic uncertainty
If the business is experiencing economic uncertainty they may be less likely to spend as it may be safer to save
When it’s difficult to plan for the changes in economic circumstances, start to see instability-> higher the uncertainty, higher the risk-> business may become risk averse -> less likely to invest
What’s legislation
Laws and regulations a business has to follow
What’s consumer legislation and give examples
To do with those who consume the product
Eg
Sales of goods act 1979- products must be of a merchantable quality and fit for purpose
Trade descriptions act- stops businesses from presenting its goods in a misleading way
How does consumer legislation affect businesses
- increase in costs- description must be accurate, takes longer, must be of a certain standard
- quality control- checking product after it’s been produced
- dealing with customer complaints- gives power to the consumer. They may have to change the way they operate
- changes in business practice
What’s employee legislation
Eg?
Prevents exploitation of workers
How does employee legislation impact a business
Compliance costs- eg brail for someone blind
Higher labour costs- minimum wage
Changing working practices- equal pay
Loss of flexibility
Penalties- if you don’t comply you’re fined
If they’re not followed it will impact brand reputation and people may not want to work there. Realistically is won’t affect sales and it won’t affect customers
What’s environmental protection
Eg?
Aims to to prevent pollution, destruction of wildlife, traffic congestion and resource depletion ect
The environmental act 1995
Pollution permits
May have to provide another green space to prevent damage to wildlife habitats
Not cutting down trees
How does environmental protection impact a business
Finance - costs higher in short term but reduced in long term and you’re more efficient
Human Resources- train staff how to use environmentally friendly techniques
What’s competition policy
Eg?
Monitoring of monopolies, duopolies and oligopolies
Stops anti competitive practices or restrictive practices to reduce competition
Eg:
Increasing prices
Restricting customer choice-> mergers, takeovers
Raise barriers to entry
Market sharing
Competition act 1998
Give an example of a monopoly, duopoly, oligopoly
Monopoly- train lines
Duopoly- Pepsi, Coca-cola
Oligopoly- uk grocery market
What’s health and safety
Eg?
Ensures businesses provide a safe and healthy workplace
Eg
How does health and safety affect businesses
Costs- to make things safe
Penalties- fines
What are the factors affecting competitiveness in a market
The profit margin that businesses can generate
The growth rate of the market
The level of regulation within the industry
The number and size of competitors in the market
The volatility of costs incurred by businesses
The pace of innovation and new product development
The bargaining power of suppliers and customers
The level of differentiation between competitors
The seasonality of the product
What’s the impact of competition on businesses
It can lead to :
A fall in prices ( leading to lower profit margins)
Increased costs of promotion
Improved efficiency ( to reduce average costs)
Increased innovation
Wider product ranges
Higher levels of competition can sometimes lead to some businesses acting unethically
How does the size of the market affect the level of competition
The level of competition is likely to be less in smaller markets but this isn’t always the case. Small markets may have a limited population therefore any two businesses can have significant rivalry.
Small businesses can also access global markets owing to online sales
Large markets have: A wider customer base Less volatility than small markets More regulation and scrutiny Potential for international competition
Small markets have: Less competition Opportunities for expansion Easier to build loyal customer relationships Threat of new entrants Few economies of scale
