3.1 - What Is Business? - External Factors

Question 1

How important is it for businesses to consider environmental and fair trade issues?

Answer 1

It depends on:

Whether customers value it
- depends if customers look for this and are competitors doing same thing? This is important as fair trade means products are more expensive

About the owners visions

If customers are price sensitive, may not be important if customers are looking for cheaper products, may lead them to shopping elsewhere

Question 2

What are the 4 factors influencing the external environment, affecting costs and demand?

Answer 2

Competition

Market conditions

Incomes

Interest rates

Demographic factors

Environmental issues and fair trade

Question 3

What are demographics? What does this consist of? What effect can each have?

Answer 3

Size and makeup of population

Size

Age
- NHS&Care homes-greater demand for services to support old people
- Age related products
- More flats-more living there and less land used
- Increasing disposable incomes of older people reflected in higher demand for goods and services (e.g. holidays)
Gender

Ethnicity
(New restaurants, Diverse culture, New ranges in supermarkets)

Changes in population dynamics can occur slowly but can be significant for businesses

Question 4

What are two key demographic changes in the UK that impact many businesses? What impact do they have?

Answer 4

AGEING POPULATION

• Greater demand for services to support older people (eg/ healthcare)
• Increasing disposable income of older people reflected in higher demand for products and services (eg/ holidays)

CONTINUED HIGH NET MIGRATION (immigration higher than emigration)

• Higher costs of, but greater demand for, public services (eg/ schools - more capacity)
• Increase in size of labour force - potentially keeping wage rates low (lots of people to work)

Question 5

What are the external factors/influences affecting business?

Answer 5

MARKET CONDITIONS

• GDP
• Recession
• Economic growth/decline
• Normal/inferior goods
• Changing tastes and fashions
• Disruptive change

COMPETITION

• Market share
• Actions to stay ahead in competitive markets

Question 6

What is an interest rate? How is the interest rates set? What is the current rate?

Answer 6

The amount charged by a bank per year for lending money
Reward given for saving (affects savers and borrowers)

Banks decide own rates but this is influenced by interest rate set by Central Bank (Bank of England base rate)

Rates have been very low since 2008/9 recession - currently 0.1%

Question 7

Why are interest rates not set by the government?

Answer 7

To prevent political interference

Could have used lower rates as a way to win votes

Question 8

What does Official Bank Rates Graph usually change by?

Answer 8

By quarter increments

Question 9

Why did house prices go up?

Answer 9

Property prices used to be lower with high interest rates

Demand for houses went up after interest rates went down, so house prices went up

Question 10

What is the difference between a fixed rate of interest and a variable rate of interest?

Answer 10

Fixed rate - higher rates but never change (gives security and confidence)

Variable rate - tracks base rate (can go up and down)

Question 11

How do changes in interest rates affect demand in business?

Answer 11

If go down, people have more money so demand in businesses increases

Eg/ If rates go up we spend less and buy more inferior goods (businesses see increase in demand for inferior) as we become more price sensitive
If rates go down we have more disposable income so have more to spend and repayments are lower, meaning could be increase in demand for luxury businesses

Question 12

How would a lower interest rate help to revive the economy? (5)

Answer 12

Goods bought on credit (cars, house, electrical systems) see higher demand

Higher discretionary income (income after bills paid)

Greater spending on luxuries/non-essentials (loan repayments go down)

Less incentive to save

Firms invest more, higher demand for lorries, technology, machinery

“SPEND WAY OUT OF RECESSION”

Question 13

What is the difference between disposable and discretionary income?

Answer 13

Disposable - amount of net income a household or individual has available to invest, save or spend after income taxes

Discretionary - amount of income a household or individual has to invest, save or spend after taxes AND necessities (eg/ rent, clothing, food, bills etc) are paid

Question 14

How would a higher interest rate affect the demand and economy? (6) Which business would this be hardest for?

Answer 14

Goods bought on credit (cars, houses, electricals) see lower demand

Lower discretionary income (income after bills paid)

Lower spending on luxuries/non-essentials, down-trading (branded to non branded)

More incentive to save - older people

Firms invest less - less demand for lorries, technology, machinery

Firms face higher interest charges - profits are squeezed

Rise in interest rates is hardest for firms selling high value consumer durables (fridges, cars etc bought on credit)

Question 15

When interest rates are reduced, what are people more inclined and less inclined to do?

Answer 15

More inclined to borrow as cost is cheaper

Less inclined to save as reward is lower

Question 16

If inflation is high, what might the MPC do?

Answer 16

Increase interest rates to cut spending

Question 17

Who controls the use of interest rates to manage an economy?

Answer 17

Monetary policy

Question 18

What is the faith people have in the economy known as?

Answer 18

Consumer confidence

Question 19

Which organisation has the most influence over the interest rate?

Answer 19

Bank of England

Question 20

Why are consumers sometimes willing to pay interest rates as high as 25% to obtain items such as carpets or sofas?

Answer 20

People with bad credit history can only get these items by paying high rates

Some people are less educated in terms of finance, when buying something they may not think about what they’re paying, just want it

Question 21

What is demand?

Answer 21

Amount of goods/services consumers are willing and able to buy at a given price

Translates into revenues for businesses

Question 22

Why is the economic climate? How are the economic conditions measured?

Answer 22

All businesses operate within a market (markets are made up of sellers, consumers and competitors)
The conditions in market are very much connected to state of economy

Measured by Gross Domestic Product (GDP) - value of all goods and services sold in an economy in given period of time (quarterly/annually)

Question 23

On an economy tracker (graph) what does it mean if it goes below zero?

Answer 23

Economy shrank

Eg/ a recession in 2008/9

Question 24

What does it mean if economic growth is positive? What 4 things cause economic growth?

If there’s economic growth, do all markets/goods see an increase (normal/inferior goods)?

Answer 24

General expectation is that underlying market conditions will be positive, with size of the markets expanding

Consumer confidence
Job security
Higher employment
Real incomes rise

Not non-branded things (people switch to better things due to consumer confidence and job security)

Question 25

What is a normal good? What is an inferior good?

Answer 25

One whose demand increases as people’s incomes or economy rise
Eg/ restaraunt

Type of good for which demand declines as level of income of real GDP in economy increases
Occurs when a good has more costly substitutes that see increase in demand as society’s economy improves
Eg/ frozen pizzas

Question 26

What happens as a result of difficult economic conditions and why does this happen?

Answer 26

Underlying market conditions may also become tough for most businesses, some may even fall

• Unemployment may increase, workers may face wage cuts (eg/cut hours) or redundancy
• 2009 recession saw real incomes squeezed
• consumer confidence/job security decrease

Buy more inferior goods at this time

Question 27

What is a real income? What is real rise?

Answer 27

Taking out inflation factor (prices going up over time)

Extra money leftover after inflation

Question 28

What other factors affect market conditions? (3) What does this mean, provide some examples

Answer 28

Consumer tastes and fashion

• Allergies and free from foods
• Carrier bag manufacturing (eg/pay for 5p now)

Disruptive change
Radical innovation or technological change can mean old-established producers struggle to remain competitive in very different market conditions

Competitive structure
Market share of firms, barriers to entry (eg/expensive to open, depends how long people have been open in the market)
Who has power/dominates the market
Eg/ if Tesco bought out Aldi structure changes, market conditions change - perhaps making it even harder for a new small firm to enter the market

Question 29

If there are tighter economic and market conditions, why does this mean for competition? What can do businesses do to stay ahead in competitive markets?

Answer 29

The tighter the economic and market conditions, the greater the competitive pressures tend to be

To stay ahead:

• price cutting
• uniqueness/differentiation
• research and development - drive the business forward (through products)

Question 30

In response to changing economic climate, how could/did supermarkets respond to the economic downturn (8)? Would all supermarkets respond in the same way?

Answer 30

Promotions 
Loyalty schemes 
Differentiation 
Value goods - more choice in a range 
Advertising - spend money to bring money in 
Cost cutting - cutting hours 
Diversification - range of things clothes, food, toys, electronics 
Expansion

NO - they can’t eg/ Aldi not constant ranges - middle aisle - do incentives not loyalty cards

Question 31

Give examples of businesses that did well and who suffered during the 2008/9 recession.

Answer 31

WELL - Netflix

• gained 3 million members due to new streaming plan along with disc delivery service
• by adding variety of price plans and services became more notable for what they did, their customer service and eventually brand recognition
• Netflix came as response to dying but once profitable video rental store

NOT SO WELL - British Airways

• lost £401 million - worldwide recession
• it’s a luxury business with no cheaper alternative

Question 32

What is a recession and what does it mean for businesses?

Answer 32

A recession can be defined as two consecutive quarters of negative growth in GDP

Consumers tend toward saving rather than spending as they fear more difficult times ahead

This lack of spending means demand for most products falls therefore unless firms find ways either to cut costs or find new innovative ways of increasing demand, profits also fall

Launching new brands, products or services may be even riskier during difficult economic times

Question 33

In a recession what becomes important and why?

Answer 33

Cash flow becomes especially important as business can survive for many months without profit but can’t survive for month without cash

Question 34

Explain why cutting costs by reducing advertising spending may prove to be a poor strategy in the long term

Answer 34

Helps bring customers in and jogs memory of existing customers

Question 35

Explain why increasing price in order to compensate for falling sales may lead to a further fall in revenue

Answer 35

People might shop elsewhere to find cheaper products

Lose customers - should put prices down to attract customers

Question 36

Explain why it may be difficult to raise finance during difficult economic times

Answer 36

Investors might think they won’t get their money back - limited liability