2.5.1 Economic influences Flashcards
What effect do changing economic variables have on businesses?
They can present significant opportunities and threats to the businesses’ activities and they need to respond to changing economic variables to maximize chances of success
define inflation
a general rise in prices in an economy over time
what 2 ways can inflation be calculated?
-consumer price index
-retail price index
How does the consumer price index measure inflation?
measures monthly changes in the price of goods and compares them to earlier periods calculating the rate of inflation
How does the retail price index measure inflation?
it calculates the percentage change in the cost of a basket of retail goods
What are the 2 causes of inflation?
-Too much demand so it pulls up prices
-cost pushing (prices increase because costs do)
What 3 problems may be caused by inflation?
-Increased cost
-Higher loan repayment
-consumers change spending habits
How is increased cost a problem for the business?
-supplies increase the cost of raw materials
-utilities like electricity increase
-workers demand higher wages to compensate for the cost of living
Their overall profit margin will decrease so the business is at risk of not breaking even or having very low margins of safety and levels of profit
How is higher loan repayments a problem for businesses?
Bank of England raises interest prices
This is a problem because the business will be unable to innovate products if their money is tied up in repaying loans
How is consumers changing spending habits a problem for businesses?
customers stop making unnecessary purchases and may reduce demand for ‘wants’
This is a problem because businesses will only be able to sell products that are a necessity which decreases their overall profit made
Give a benefit of inflation to a business
the rising prices, leads to growing revenue which will lead to higher gross profit
Define disinflation
when inflation falls prices are still rising just more slowly
-better for business
Define exchange rate
the value of one currency expressed in terms of another
Give 3 reasons why exchange rates may fluctuate
-changing demand for a currency
-economic growth
-changes to interest rates
define appreciation
Increase in the value of the pound against other currencies
What impact does appreciation have on exporting businesses
-sales likely to fall as products become more expensive compared to oversea comp
What impact does appreciation have on an importing businesses
-costs likely to fall as suppliers overseas become cheaper compared to those domestically produced
define depreciation
decrease in the value of the pound against other currencies
What impact does depreciation have on exporting businesses
-sales likely to rise as products become cheaper compared to overseas
What impact does depreciation have on an importing businesses
-costs likely to rise as suppliers from over seas become more expensive compared to those domestically produced
What does spiced stand for?
What does this mean for the uk?
Stronger pound imports cheaper exports dearer
This means theres more foreign competition as its hard for the Uk to sell overseas but its cheaper to import raw materials
Define interest rate
a % reward offered for saving and a % charged for borrowing money
Who sets the interest rate?
the bank of england- this is usually used as a benchmark for others
How can an increase in interest rates benefit a business?
(give 2 ways)
Businesses can have a higher return on their savings which may allow them to innovate and meet specific demands
It can also increase their revenue as customers may be willing to spend more due to an increase in their reward for saving
Give a disadvantage to a business of interest rates increasing
they will have to pay more on a new or variable rate borrowing, which will increase their cost
What can an increase in interest make a business be less willing to do
They may be less willing to make capital investments (purchase of physical assets) as their retained profit will be more profitable in saving schemes
How can low interest rates benefit a business
When interest rates are low saving is less attractive and people make more use of credit cards
-This leads to increased levels of demand for goods and services which will increase business sales as customers have more disposable income
What is taxation?
Where the government collects monetary contributions from individuals and businesses for the overall benefit of the nation
What is the difference between direct tax and indirect tax?
direct tax- passes from the payor straight to the government (eg corporation tax)
indirect tax- passes from payor to supplier to government (eg VAT on prods)
How can an increase in tax impact a business’s revenue?
-Revenue may fall as people will have less disposable income so demand may fall
-customers may use alternative products as increased VAT makes products more expensive
How can an increase in tax impact a business’s costs?
-operating costs will rise as a result of increased taxes
-higher costs may cause the business to increase prices which may cause sales to fall and profit to decrease
How can an increase in tax impact a business’s decisions?
-Business spending and investment to improve products may be affected by an increase in corporation tax as they may retain profit for future expenses
How may a business benefit from an increase in tax?
Economic Stability: If tax increases are used to reduce national debt they can contribute to overall economic stability.
A stable economy can create a more favorable environment for business growth and investment.
How may a business benefit from a decrease in tax?
Lower taxes can directly increase a business’s net income allowing for higher profit margins
How does increased government spending benefit businesses
Businesses may become more willing to invest themselves, leading to greater economic activity
How does increased government spending disadvantage businesses
Gov spending is usually funded by increases in tax
This may cause people to budget if revenues are not raised as they will have less disposable income
What is the business cycle?
The fluctuations in economic activity that an economy experiences over time
What are the 4 stages in the business cycle?
-Expansion
-peak/boom
-recession
-trough
What happens in the expansion stage?
(what are businesses likely to do and what are consumers likely to do?)
-Theres increasing economic activity, rising GDP, and growing employment
-Businesses are likely to invest in production and widen their portfolio
-Consumer spending increases therefore demand rises and it leads to higher production levels
What happens in the peak/boom stage?
(what may be a concern?)
-Economy reaches its highest level of activity
Employment, production and sales are at max
BUT inflation may become a concern
Give an advantage and a disadvantage of a business being in the peak/boom stage
A- increased sales and rev as customers have disposable income
D- interest rates likely to increase the cost for the bus to borrow.
What happens in the recession stage?
-Economic growth is declining, GPD falls, unemployment rises and consumer spending decreases
Give an advantage and a disadvantage of a business being in the recession stage
A- It’s easy to recruit workers
D- decreased revenue as customers have less disposable income
What happens in the trough stage?
It is the lowest point of the business cycle where economic activity and GDP is at their lowest
BUT the economy may begin to recover leading back to the expansion stage
When does economic uncertainty occur?
(what will businesses find hard?)
When it’s difficult to forecast the level of demand and supply in an economy
-Businesses will find it hard to plan and they are likely to be reluctant to make decisions
How can businesses be prepared for economic uncertainty
(2 ways)
-consider the 4ps
Price- decrease
product- delivers
place- ecommerce
promotion- advertise
-build up cash reserves
What may businesses do in uncertainty relating to:
structure
investment
HRM
May de-layer the organisational structure
May invest in less
May make redundancies, and give staff fewer hours
