2.5.1. Economic Influences

Question 1

Inflation

Answer 1

If consumers are used to prices rising , firms may be able to increase selling prices to protect profit margins. Inflation has major effect when:
1.Rates are significantly above 2%
2.Prices are rising faster than av. earnings
3.When UK inflation higher than that in most other countries

Effects of inflation on businesses:
-Firm with long term fixed precise contact may find if costs rises rapidly, fixed price doesn’t cover high level of costs, damaging profitability
-Firms with long term burrowing find real value of money to repay lower filling a period of high inflation
-May lose competitiveness against foreign rivals whose costs likely to be rising more slowly.

Question 2

Exchange rates

Answer 2

Exchange rates is value of one currency expressed in terms of another.
SPICED(strong pound,imports cheaper,exports dearer)
1.If £ appreciates ie. £1was $1.60 but now buys $1.80 then:
-Impact on exports:Uk exports get pricier so sales volumes fall
-Impact on imports:Imports to Uk get cheaper, making it harder for auk firms to compete.

Question 3

Interest rates

Answer 3

Amount charged by a lender per year for burrowing money. Most adjust their rates in line with Bank of England.
Effects on businesses:
1.Consumer have less money to spend due to payment on mortgages and burrowing increases. Reduces demand.
2.Amount paid on interest on burrowing by business will rise, pushing up costs.
3.Consumers less likely to burrow to buy, so product often bought on credit(sofas, cars) will see demand fall as credit will cost more.
4.Businesses less likely to invest as opportunity costs of investment(keeping money on bank to earn interest with no risk) will be greater.

Question 4

Taxation and gov. Spending

Answer 4

Increased income tax reduces the disposable income of customers and demand for most products likely to fall.
Government funds public spending through taxation or public sector burrowing.

Question 5

Business cycle

Answer 5

Economic growth isn’t linear process
Effects on businesses:
1.If economy flows, consumers will reduce spending
2.In boom period, consumer demand rises rapidly
3.Changes in consumer income are due to changes in wages or level of unemployment.
4.Consumers buy cheaper substitutes, luxury goods aren’t bought as much etc.

Question 6

Effect of economic uncertainty

Answer 6

Prepare for economic uncertainty by building up cash reserves when business is good. Want to ensure money they dined will be recovered and generate a profit. Hence why difficult to sales forecast.