2.5 External Influences

Question 1

What is inflation

Answer 1

A general rise in prices over time

Question 2

How are interest rates measured

Answer 2

Through the consumer price index (CPI)

Question 3

What is the target inflation rate for the uk

Answer 3

2%

Question 4

What effect will increased inflation have on customers

Answer 4

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

Question 5

What effect will increased inflation have on businesses

Answer 5

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

Question 6

What affect will low inflation have on businesses

Answer 6

Businesses feel confident in a stable economic environment

They may look to invest and grow

Question 7

What are exchange rates

Answer 7

The value of one currency expressed in terms of another

Question 8

What is a pound appreciation

Answer 8

The currency is getting stronger or going up in value against another

Question 9

What’s a pound depreciation

Answer 9

Currency becomes weaker or decreases in value

Question 10

What does SPICED stand for

Answer 10

Strong
Pound
Imports
Cheap
Exports
Dear

Question 11

What does WPIDEC stand for

Answer 11

Weak
Pound
Imports
Dear
Exports
Cheap

Question 12

What are imports

Answer 12

Buy goods or services from a foreign country

Question 13

What are exports

Answer 13

Selling abroad

Question 14

What does the effect of exchange rates depend on

Answer 14

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

Question 15

What does imports cheap exports dear mean

Answer 15

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

Question 16

What does imports dear exports cheap mean

Answer 16

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

Question 17

What’s an interest rate

Answer 17

The reward for saving and cost of borrowing

Always expressed as a %

Question 18

What is likely to happen if interest rates are high

Answer 18

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

Question 19

What’s likely to happen if the interest rate is low

Answer 19

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

Question 20

What is taxation

Answer 20

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

Question 21

What’s corporation tax

Answer 21

Tax on businesses

Payed by ltd and plc

May have to increase prices to get more profit

Question 22

What’s income tax

Answer 22

Tax payed on income

Sole trader and partnership pay this as they’re unincorporated

Question 23

What’s direct taxation

Answer 23

Tax on income, wealth and profit

Eg income tax, national insurance contributions, corporation tax, capital gains tax

Question 24

What’s indirect taxation

Answer 24

Levied on spending by consumers on goods/ services

Eg VAT (20%), excise duties on fuel, alcohol, car tax, TV licence

Question 25

What’s the business cycle

Answer 25

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

Question 26

What’s economic uncertainty

Answer 26

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

Question 27

What’s legislation

Answer 27

Laws and regulations a business has to follow

Question 28

What’s consumer legislation and give examples

Answer 28

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

Question 29

How does consumer legislation affect businesses

Answer 29

- 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

Question 30

What’s employee legislation Eg?

Answer 30

Prevents exploitation of workers

Question 31

How does employee legislation impact a business

Answer 31

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

Question 32

What’s environmental protection Eg?

Answer 32

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

Question 33

How does environmental protection impact a business

Answer 33

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

Question 34

What’s competition policy Eg?

Answer 34

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

Question 35

Give an example of a monopoly, duopoly, oligopoly

Answer 35

Monopoly- train lines Duopoly- Pepsi, Coca-cola Oligopoly- uk grocery market

Question 36

What’s health and safety Eg?

Answer 36

Ensures businesses provide a safe and healthy workplace Eg

Question 37

How does health and safety affect businesses

Answer 37

Costs- to make things safe | Penalties- fines

Question 38

What are the factors affecting competitiveness in a market

Answer 38

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

Question 39

What’s the impact of competition on businesses

Answer 39

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

Question 40

How does the size of the market affect the level of competition

Answer 40

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 ```