External Environment

Question 1

what are the external environment factors

Answer 1

demographic, real income, competition, marker conditions, fairtrade/environment, interest rates

Question 2

what happens when inflation is high

Answer 2

-prices rise and things more expensive to buy
-customer incomes decline in real term
-demand goes down in short term
-employees ask for increase in wages due to struggle to buy expensive products
-leads to increased costs for businesses, needs to increase prices

Question 3

what are normal goods

Answer 3

as incomes decrease, demands increase

Question 4

what are inferior goods

Answer 4

are a substitute when people cant afford others, as incomes increase demand decreases, as incomes decrease demands increase

Question 5

how might firms react to less demand due to changes in consumer incomes

Answer 5

-cut costs to protect profit margins e.g. sells stock or reduces size of workforce

Question 6

what happens when theres an increase in interest rates

Answer 6

-consumers level of disposable income declines, spend less on goods
-demand goes down
-businesses have to encourage consumers to buy their products so they drop prices
-controls inflation

Question 7

who benefits from rising interest rates

Answer 7

Savers:
-more incentivised to save as they get bigger return
-stop buying larger purchases and save instead
-demand goes down for businesses
-businesses drop prices in long run
-controls inflation

Question 8

who is damaged by rising interest rates

Answer 8

Borrowers:
-ppl who already borrowed have increased payments, stop buying larger purchases as too expensive
-incomes fall in real terms
-spend less and borrow less for future purchases
-businesses have less demand so have to lower prices and also make people unemployed

Question 9

describe the business cycle

Answer 9

Boom- high levels of consumer spending/confidence/profits/investment, prices and costs rise faster, unemployment low as growth creates new jobs
Recession- falling levels of consumer spending/confidence/profits so cut back on investment, rising unemployment as they want to reduce costs
Slump- prolonged period of declining GDP, weak consumer spending/investment, business failures, rapidly rising unemployment, falling prices
Recovery- consumers begin to increase spending, little more confidence and starting to invest, takes time for unemployment to stop growing