Economic influence on business Flashcards
What is economic climate?
The UK and other economies are made up of millions of consumers, many thousands of businesses as well as national and local government. All these people and organisations take decisions on what to buy, sell, produce, import from other seas, where to work etc. All together the actions and decisions taken by these individuals and organisations decide what is to be produced, bought and sold.
The economic climate refers to the state of an economy
*Producing an increasing or decreasing quantity of goods and services
*Providing consumers with falling or rising incomes
*Experiencing a rise or fall in the amount that consumers can spend on goods and service
*Providing more or fewer jobs for people.
Rise in these factors improve economic environment.
Four main factors that can affect the actives of businesses
*Unemployment
*Consumer income
*Interest rates
*Tax rates
Reduction of unemployment can have two significant effects on business:
The possibility of higher scales- as most people have jobs so consumer spending will rise as they have more money than if in receipt of benefits.
Increased employment costs- some types of labour, especially skilled workers, may become scarce. As a result wage rates can rise as businesses compete to employ available workers.
Increases in employment levels:
Employees- If unemployment is rising, employees may not get pay increases as the business isn’t selling as made products so don’t have the money to give increases
Suppliers- May suffer from a fall in sales which will reduce their profits. Equally, sales and profits may rise if unemployment falls and customers place larger orders.
The effects of changes in consumer income on businesses
*If consumers receive higher incomes they are likely to spend more and businesses sale will rise. This is particularly true if they receive an increase in their disposable income.
*Disposable income is the income received by consumers after the deduction of taxes such as income tax
*If consumers incomes fail, so will their spending and sales of the business.
As with unemployment, changes in levels of income can affect business stakeholders:
*The UK government- a rise in consumer incomes means the government revenue more revenue from taxation
*Employees- If consumers income rise they will spend more and this can make employees jobs more secure as businesses need them to supply their products.
Interest rates
Interest rates are the price of borrowed money, expressed as a percentage.
Consumers and changes in interest rates
*Consumers may decide not to save as they do not get any extra money for saving.
*Consumers will be more likely to spend more as they can avail of cheap credit and have to pay less back
Rising interest rates:
Businesses may likely reduce protection to match sales
Business will suffer failing sales as consumers save more of their income
Business may postpone expansion plans such as opening new shops.
Falling interest rates
Rising sales, especially of luxury and non essential products
Production of goods and services will rise, possibly increasing consumer income
Business may need to employ additional workers helping to increase consumer spending.
Taxation
*Income tax
*Value added tax (VAT)
*Corporation tax
Income tax
This type of tax is paid on incomes received by individuals and some types of business (many sole traders and partnerships)
Value added tax
*VAT is a tax on spending which is paid by individuals and businesses in the UK. It is added onto the price of goods and services
*Most goods and services sold in the UK have VAT added rate at a rate of 20%
*However some goods have lower rates of VAT such as car safety seats for children at 5% and some goods and services are expect from VAT such as food
Corporation tax
*This tax is paid by private and public companies in the UK on their profits. Most companies currently pay corporation tax at a rate of 19% of their profits.
*However there are a number of allowances they can claim to reduce the amount of tax they pay.
Changes in rates of taxation
Increases in taxation tend to worsen the economic climate. Higher taxes reduce the ability of businesses and individuals to spend money on other things.m which can reduce sales.
This is particularly true for businesses that sell non essential products such as foreign holidays
Reduction in taxation can strengthen the economic climate as employees may find it easier to get jobs, shareholders may enjoy higher profits and supplies may receive additional orders.
Inflation
When inflation is low, prices of profits are low but then the prices of products go up as inflation rises.
Higher rates of inflation can cause major problems as it can uncertainly affect businesses as to the future level of sales. Goods and services produced overseas may become relatively cheaper.
