Chapter 2: The Relationship Between Businesses And The Economic Environment

Question 1

What is the use of PESTLE?

Answer 1

PESTLE analysis enables all the different influences in the general business environment to be classified into six categories.

Question 2

What does PESTLE stand for?

Answer 2

Political Factors
Economic Factors
Social Factors
Technological Factors
Legal Factors
Environmental Factors

Question 3

What is a business cycle?

Answer 3

The business cycle is the regular pattern of increasing and decreasing demand and output within an economy or of growth in gross domestic product (GDP) over time.

Question 4

What causes a business cycle?

Answer 4

Changes in business confidence
Periods of inventory building
Irregular patterns of expenditure

Question 5

What are the characteristics of the business cycle?

Answer 5

Boom
Recession
Slump
Recovery

Question 6

What is a boom?

Answer 6

A boom is when high levels of consumer demand, business confidence, profits, investment and business growth at the same time as rising costs, increasing prices and full capacity.

Question 7

What is a recession?

Answer 7

A recession is when falling levels of consumer demand, output, profit and business confidence; little investment, spare capacity, business closures and rising levels of unemployment.

Question 8

What is a slump?

Answer 8

A slump is when very low levels of consumer demand, investment and business confidence, an increasing number of businesses failing and high unemployment.

Question 9

What is a recovery?

Answer 9

A recovery is when there is a slowly rising level of consumer demand, rising investment, increasing business confidence, higher profits, more business start ups and falling levels of unemployment.

Question 10

What is economic growth?

Answer 10

Economic Growth means an increase in the level of economic activity or GDP. It provides favorable trading conditions and new business opportunities.

Question 11

How can economic growth effect a business?

Answer 11

Effects of economic growth depend on whether the rate of growth is rapid , slowing down or actually decreasing, which reflects the various phases of the business cycle.

Question 12

Name the possible effects caused by economic growth

Answer 12

Impact on sales
Impact on profits
Impact on investment
Impact on employment

Question 13

What are interest rates?

Answer 13

Interest rates are the cost of borrowing money and the return for lending money. They also measure the opportunity cost, to both individuals and firms, of spending money rather than saving it and receiving interest.

Question 14

What are the implications of changes to interest rates?

Answer 14

A fall in interest rates is likely to lead to:
-an increase in demand
-a fall in costs and a rise in profits
-a fall in exchange rates
If interest rates rise, the opposite effects will occur

Question 15

What are exchange rates?

Answer 15

Exchange rates are the price of one country’s currency in terms of another.

Question 16

What type of businesses are affected by changes in exchange rates?

Answer 16

Exchange rates affect businesses in different ways depending upon whether they are:

• Businesses that export their goods to other countries
• Businesses that sell their goods in the UK, competing against foreign imports.
• Businesses that purchase imported raw materials.

Question 17

What other factors influence export sales and import purchases?

Answer 17

Reputation
Quality
After-sales service
Reliability 
Design
Desirability of the product
Overall packaging provided 
Payment Terms

Question 18

What is inflation?

Answer 18

Inflation is an increase in the general level of prices within an economy.

Question 19

What are the effects of inflation on business?

Answer 19

• If interest rates are less than rate of inflation, borrowing is encouraged
• As inflation rises, so do property prices and the price of inventories
• Firms find it easier to increase their prices when inflation is present because cost increases can be passed on to the consumer more easily
• Higher price may mean lower sales

Question 20

What is unemployment?

Answer 20

Unemployment is a measure of the number of jobless people who want to work, are available to work, and are actively seeking employment.

Question 21

Name the implications of high unemployment for a business

Answer 21

Consumer income fall leading to lower sales
Workers have less bargaining power
Demand falls, cost-saving strategies may be introduced
Lower demand is likely to lead to cutbacks or delays

Question 22

Benefit of globalisation

Answer 22

Has enabled financial and investment markets to operate internationally, largely as a result of deregulation and improved communications.

Question 23

What is the result of increased globalisation?

Answer 23

Modern communication and rapid spread of information technology helps a business to organise their activities
Increased trade, made easier by international agreements to lower tariff and non-tariff barriers

Question 24

What is an emerging market?

Answer 24

An emerging is an international area that has the potential to grow and develop in terms of productive capacity, market opportunities and competitive advantage.

Question 25

What are the implications brought upon by emerging markets?

Answer 25

Their population size makes them potential major new markets
They offer market opportunities
They may be lower production costs
There will be new competition from firms in these countries