2.5.1 Economic Influences Flashcards
What is economic influence?
Economic influence is when a business is affected in any way by economic factors e.g. inflation, exchange rates etc.
What is inflation?
How much higher or lower prices are compared with the same month a year earlier.
What is a Consumer Price Index?
CPI looks at the prices of hundreds of things we commonly spend money on.
How are businesses affected by changes in inflation?
-As inflation rises so does the cost of products and services.
-As costs go up due to inflation, business owners may need to increase their prices to maintain profitability, squeezing profit margins.
What is depreciation?
A fall in £pound.
What does SPICED stand for?
-Strong
-Pound
-Imports
-Cheaper
-Exports
-Dearer
What does WPIDEC stand for?
-Weak
-Pound
-Imports
-Dearer
-Exports
-Cheaper
What are interest rates?
Interest rates means the cost of borrowing money.
How do interest rates affect a business?
-If interest rates rise then the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase.
-A fall in interest rates means that the cost of lending falls which may lead to an increase in profits.
How is a business affected by changes in taxation?
-Lower taxes can result in more demand in the economy and lead to higher output and employment
-
What are the 4 main taxation’s for small businesses?
1.) Income taxes
2.) VAT
3.) Business rates
4.) NI
What are the 4 main taxation’s for large businesses?
1.) Corporation tax (20%)
2.) VAT (20%)
3.) Business rates
4.) NI contributions to employees
What are excise duties?
Excise duty has to be paid by customers on products that have negative effects on society.
How may government spending effect businesses?
Cut in government spending impacts on businesses that supply to public organisations.
What is appreciation?
There is a rise in the £pound against other currencies meaning the £pound can buy more foreign currency (strong pound.)
How can inflation be measure by CPI?
-Imagine a shopping basket of all products/services bought.
-Movement in consumer price index indices represent the changing cost of the shopping basket, this is how inflation is measured.
Interest rates - Cost of borrowing
-If interest rates on a loans are low then consumers may borrow money to buy; a car, sofa, holiday etc. = ^ demand.
-If interest rates go up then consumers will not borrow and so will save instead = bad forUK businesses that sell products/services that are heavily financed.
Taxation and VAT
-If the % of VAT goes up a business could pass this cost on to the consumer so it makes good more expensive to buy, or absorb the cost = shrunken profit margins.
What are the 4 factors of a business cycle?
1.) Boom
2.) Recession
3.) Slump
4.) Recovery
1.) Boom
-A country may enjoy a period high consumer spending.
-^ demand for goods/services.
-^ in work, lower unemployment + ^ wages.
-More people in work able to buy goods + services.
2.) Recession
-Countries experience falling levels of demand.
-Consumers seek to save their money in sated of save.
-Redundancies to lower costs and lower profits.
3.) Slump
-Consumer spending at it’slowest.
-Very little investment in businesses + high levels of unemployment as demand falls to it’s lowest.
4.) Recovery
-Demand levels start to improve.
-Unemployment starts to fall as businesses take on workers due to ^ demand.
-Consumers start to buy larger items again.
How does economic uncertainty affect the business environment?
-Uncertainty means that with a risk of unemployment, consumers delay the purchase of goods.
-Demand falls.
-Manufacturers are reluctant to expand = reduced supply.
