3.1 - What Is Business? - External Factors Flashcards
How important is it for businesses to consider environmental and fair trade issues?
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
What are the 4 factors influencing the external environment, affecting costs and demand?
Competition
Market conditions
Incomes
Interest rates
Demographic factors
Environmental issues and fair trade
What are demographics? What does this consist of? What effect can each have?
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
What are two key demographic changes in the UK that impact many businesses? What impact do they have?
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)
What are the external factors/influences affecting business?
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
What is an interest rate? How is the interest rates set? What is the current rate?
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%
Why are interest rates not set by the government?
To prevent political interference
Could have used lower rates as a way to win votes
What does Official Bank Rates Graph usually change by?
By quarter increments
Why did house prices go up?
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
What is the difference between a fixed rate of interest and a variable rate of interest?
Fixed rate - higher rates but never change (gives security and confidence)
Variable rate - tracks base rate (can go up and down)
How do changes in interest rates affect demand in business?
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
How would a lower interest rate help to revive the economy? (5)
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”
What is the difference between disposable and discretionary income?
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
How would a higher interest rate affect the demand and economy? (6) Which business would this be hardest for?
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)
When interest rates are reduced, what are people more inclined and less inclined to do?
More inclined to borrow as cost is cheaper
Less inclined to save as reward is lower
If inflation is high, what might the MPC do?
Increase interest rates to cut spending
Who controls the use of interest rates to manage an economy?
Monetary policy
What is the faith people have in the economy known as?
Consumer confidence
Which organisation has the most influence over the interest rate?
Bank of England
Why are consumers sometimes willing to pay interest rates as high as 25% to obtain items such as carpets or sofas?
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
What is demand?
Amount of goods/services consumers are willing and able to buy at a given price
Translates into revenues for businesses
Why is the economic climate? How are the economic conditions measured?
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)
On an economy tracker (graph) what does it mean if it goes below zero?
Economy shrank
Eg/ a recession in 2008/9
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)?
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)
