External environment

Question 1

What influence business? (4)

Answer 1

1. Economic factors
   - consumers income
   - levels of interest rate
2. Environmental and social factors
   - preference in environmentally friendly goods
   - growth in popularity of fair trade goods
3. Demographic factors
   - migration
   - changes in birth/death rates
4. Market factors
   - changes in power of competition
   - growth in sales within a market

Question 2

External environment -

Answer 2

• comprises those external forces that can influence business’s activities

Question 3

Positive effects of changes (5)

Answer 3

1. Products becomes fashionable/popular
2. Major competitor leaves the market
3. Number of consumers in the country increases
4. Interest rates fall => cheaper to borrow money
5. Consumers have steadily rising incomes

Question 4

Negative effects of changes (4)

Answer 4

1. Consumers demand environmentally friendly products -> higher costs
2. New businesses enter the market
3. A market is over supplied
4. More people become unemployed -> lower consumer income

Question 5

Market conditions -

Answer 5

• refers to the number of features of a market such as the level of sales, the rate at which they are changing and the number and strength of competitors

Question 6

Demand -

Answer 6

• amount of a particular good/service that consumers or organisations want, and can afford, to buy at given prices

Question 7

Market conditions (3)

Answer 7

Good would include:
1. Rising prices/rising sales
2. Competition that is not too strong
3. Shortage of supply of products

Question 8

Other factors (4)

Answer 8

1. Some markets are vulnerable to large changes in demand - fashion/technology
2. Existing suppliers joining together -> large and more competitive businesses
3. Consumers becoming more price - conscious, putting suppliers under pressure
4. Launch of new product that makes existing products obsolete

Question 9

Incomes (4)

Answer 9

1. As income rises the sales rise
2. Rise in GDP will increase the income levels
3. With GDP decreasing the level of unemployment will rise and more benefits paid than wages
4. If GDP rises then wages rises -> higher costs of production

Question 10

Real income -

Answer 10

• income that is adjusted for the rate of inflation to show changes in purchasing power

Question 11

Level of demand based on interest (4)

Answer 11

1. High interest rates encourage to save, low to borrow
2. Goods purchased on credit depend on interest rate
3. High interest -> high mortgage -> low income
4. People depend on pensions and savings

Question 12

Rising interest rates (3)

Answer 12

1. Costs on servicing existing loans might increase
2. Cost of imported goods might fall
3. Demand on products fall

Question 13

Falling interest rates (3)

Answer 13

1. Cost of servicing existing loans might decrease
2. Cost of imported products might rise
3. Demand on goods rises

Question 14

Rising base rate

Answer 14

-> rising exchange rate of pound

Question 15

Income elasticity of demand -

Answer 15

• shows the correlation between quantity demanded and customer income

Question 16

Inferior products -

Answer 16

• income rises customers switch to cheaper/other products
  -> demand rises at low income

Question 17

GDP -

Answer 17

• the value of country’s output over a period of time

Question 18

Recession -

Answer 18

• period of falling GDP for 2 consecutive quarters

Question 19

Recovery/uprising (5)

Answer 19

1. Increasing consumer expenditure
2. Existing spare capacity used
3. Production rises
4. Businesses confidence strengthens
5. Investment increases

Question 20

Boom (4)

Answer 20

1. Rate of inflation increases
2. Shortage in supply of materials and component
3. Some firms unable to satisfy demand
4. High profits but hit by rising costs

Question 21

Recession (5)

Answer 21

1. Government reduces interest rates
2. Firms reduce production due to demand fall
3. Spare capacity increases
4. Business confidence declines and investment is cut
5. Profits fall

Question 22

Slump (4)

Answer 22

1. Increasing number of bankruptcies and insolvency
2. Government lowers interest rates further
3. High levels of unemployment
4. Low levels of business confidence and consumer spending

Question 23

Exchange rate -

Answer 23

• is the price of one currency expressed in terms of another

Question 24

Currency -

Answer 24

• the system of money in general use in a particular country
• the value of a currency can rise and fall against other currencies

Question 25

Consumer/business confidence -

Answer 25

• measures how optimistic/pessimistic consumers/businesses are about the state of economy

Question 26

Inflation -

Answer 26

• an increase in average price levels