External Influences Flashcards
Demand
The amount of a good/service that customers are willing and able to buy at any given price.
Supply
The amount of a good/service that sellers are willing and able to sell at any given price.
As price increases, demand…
Decreases
As price increases, supply…
Increases
As price decreases, demand…
Increases
As price decreases, supply…
Decreases
Equilibrium price
The situation in a market where demand is equal to supply. In theory, customers can buy what they want and shops have no unsold stock.
Determinants of demand (x7)
Price
Wealth
Advertising & promotional offers
Government action
Demographic changes
Price of substitutes & complements
Taste & fashion
Determinants of supply (x5)
Price
Costs
Taxes
Subsidies
Price of other products
Changes to the equilibrium: As demand increases…
Price increases and quantity increases.
Price increases to avoid a shortage of supply.
Changes to the equilibrium: As supply increases…
Price decreases and quantity increases.
Price decreases to avoid an excess of supply.
Price elasticity of demand
Shows how responsive demand is to a change in price.
Inelastic demand
Quantity demanded is insensitive to a change in price.
There is a lack of substitutes.
They are necessities.
e.g Petrol
Elastic demand
Quantity demanded is sensitive to a change in price.
There are many substitutes.
They are luxuries.
e.g Abroad holidays
Factors that might make demand for a product inelastic (x4)
The number of substitutes available.
The degree of necessity.
Whether the good is subject to habitual consumption.
Peak and off-peak demand.
Excess
Supply is greater than demand.
Suppliers will lower the price to re-establish equilibrium.
Shortage
Supply is less than demand.
Suppliers will increase the price to re-establish equilibrium.
Competition
Rivalry amongst sellers.
Market
Any situation where buyers and sellers are in contact in order to establish price.
Non-physical markets: Online
Tangible products that we order and wait to be delivered.
Non-physical markets: Digital
Non-tangible products that we can download and use immediately.
Competitive market
A market in which there are a number of sellers.
Businesses in this market mainly compete upon price.
Low prices (usually).
Low barriers to entry.
e.g Farming
Monopoly
A market dominated by one seller.
CMA definition: A firm with more than 25% of the market share.
High prices (often but not always).
Low quality.
Poor service.
Lack of choice.
High barriers to entry.
e.g Tesco
Oligopoly
Where a market is dominated by a few firms.
Businesses may need to compete on non-price differences.
The products and prices in the market are similar.
High prices (similar to competitors).
High barriers to entry.
e.g The mobile phone network
Monopolistic competition
A market structure with many competing firms each of whom supplies a slightly differentiated product.
Compete on non-price differences.
Fair prices.
Low barriers to entry.
e.g Pubs
Market size
The collective value of goods/services that buyers purchase.
Market growth
The percentage change in the size of the market, measured over a specific period.
Market share
The percentage of total sales (by value) that a business has in a specified market.
Methods to increase market share (x6)
Enter another market.
Be aware of customer needs and meet them.
Sell more to existing customers.
Find out why old customers no longer use your products.
Use a variety of marketing techniques - pricing advertising and promotion.
Merge with a competitor.
Barriers to entry (definition)
The factors that could prevent a firm from entering and competing in a market.
Barriers to entry (examples) (x5)
Large start-up costs
Having the marketing budget to break customer loyalty
The inability to gain economies of scale
The possibility that existing businesses will start a price war
Legal restrictions (such as patents)
Patent
The right to be the only user or producer of a specified product or process.
Barriers to exit (definition)
The factors that could prevent a firm from leaving a market, even if it wanted to.
Barriers to exit (examples) (x4)
The difficulty of selling off capital
High redundancy costs
Contracts with suppliers
Leases with landlords
Overheads
Costs that are not directly related to the production of the product (e.g rent).
Market power
The ability of a firm to influence or control the terms and conditions on which goods are bought and sold.
Market dominance
A measure of market share compared to competitors.
Merger
Where 2 companies join together to form a new, larger business.
Acquisition / takeover
Where control of another company is achieved by buying a majority of its shares.
Benefits of external growth for the business (x4)
May gain new management with different skills and talents
Will result in an increase in revenue and therefore market share
May be able to meet customer needs more effectively with a combination of resources
May experience economies of scale
Disadvantages of external growth (x5)
May suffer from diseconomies of scale due to size (i.e communication problems) - BUSINESS / SHAREHOLDERS
May take on extra debt that the business could struggle to repay if the strategy isn’t successful - BUSINESS / SHAREHOLDERS
Could result in redundancies - EMPLOYEES
Could result in higher prices - CUSTOMERS
Could result in a dominant business dictating terms and conditions - SUPPLIERS
Organic / internal growth (definition)
Involves expansion from within a business.
Organic / internal growth (examples) (x8)
Opening new stores
Launching new products
Employing more workers
Increasing productive capacity (open a new factory)
Investing in new technology
Launching existing products into new markets
Franchise strategy
Lower prices
Advantages of internal growth (x3)
Less risk than external growth - using own resources, less risk of debt
Can be financed internally, through retained profit
The growth rate is more steady
Disadvantages of internal growth (x3)
Slow growth - this is a problem for shareholders because they want a return on their investment
Growth depends on the growth of the market (if the market is shrinking it may be harder to grow)
Hard to build market share if there is already a market leader - this is because they have a lot of market power
What does the CMA stand for?
Competition and markets authority
What does the CMA do? (x4)
Investigates mergers and acquisitions which could restrict competition
Investigates where there may be abuses of dominant positions
Brings criminal proceedings against individuals who commit the cartel offence
Enforces legislation to tackle practices that make it difficult for consumers to exercise choice
The cartel offence (definition, 3 types)
An agreement between businesses not to compete
Market sharing - Dividing a market so participants are sheltered from competition
Price fixing - When rival businesses agree what prices they’re going to charge
Bid rigging - When rival businesses agree (before placing bids) who will win and at what price
Sanctions that the CMA can apply (x4)
The business can be fined up to 10% of its global turnover (revenue)
Individuals can be prevented from becoming directors
Customers and competitors can sue the business
Individuals (e.g the director) can be fined
The impacts of regulation on business and its stakeholders (x7)
Encourages businesses to compete to gain customers (i.e by producing better quality products)
Results in more choice for customers
Results in better value for customers
Results in more businesses operating within a given market
Results in better terms for suppliers
Results in less abuse of dominant positions (i.e refusal to supply)
Can lead to fines, prosecutions and suspensions
STEEPLE
Social
Technological
Economical
Environmental
Political
Legal
Ethical
Used to scan the environment and anticipated advantages and threats.
GDP
Gross domestic product - The total value of output produced in the economy in a year (measures the size of the economy).
Economic growth
The annual percentage change in GDP.
What can the government do to facilitate economic growth? (x3)
Encourage investment in physical capital by offering subsidies or lowering taxation
Improve infrastructure through better transport links
Improve the quality of human capital by investing in education
Impacts of high GDP / growing economy (x3)
People are likely to have high incomes and high standards of living
People are likely to be earning more and spending more
Businesses are likely to be hiring and investing more
Standard of living
The amounts of goods and services that people are able to buy.
GDP can be measured in 3 ways:
Output
Expenditure
Income
Limitations of using GDP (x2)
Hidden economy - Unpaid work isn’t included
Inequality - Doesn’t show how income is split across a population
Inflation
Persistent general tendency of prices in the economy to rise.
Disinflation
When prices have a tendency to increase but at a slower rate.
Deflation
When prices have a tendency to decrease.
Why do prices go up (inflation)? (x2)
If the cost of producing and supplying a product increases.
If demand increases.
Inflation causes… (x5)
Demand pull
Cost push
Makes UK exports uncompetitive
Can reduce investment
Creates uncertainty
‘In real terms’
Earnings (wages, revenue or profit) adjusted for the effects of price rises. Price rises reduce the purchasing power of earnings.
Exchange rate
The value of one currency in terms of another.
Import
A transaction involving money leaving the economy.
Export
A transaction involving money entering the economy.
SPICED
Strong
Pound
Imports
Cheap
Exports
Dear
How to respond to a fluctuating pound - SHORT TERM (x3)
Do nothing - accept lower mark-up
Cut other costs such as advertising
Employ zero-hours workers
How to respond to a fluctuating pound - LONG TERM (x3)
Increase prices
Change to domestic suppliers
Focus on selling abroad
Factors that lead to an increase in the demand for pounds (x3)
Foreign investment in the UK
Demand for UK exports
Hot money flows
Interest rates
The reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed.
Impacts of low interest rates on businesses (x3)
Loan repayments will decrease
Spending will increase
Customers are more likely to spend - increased sales
Impacts of high interest rates on businesses (x3)
Loan repayments will increase
Spending will decrease
Customers are less likely to spend - decreased sales
Impacts of low interest rates on borrowers (x3)
More likely to borrow
Spending will increase
More disposable income - demand increases
Impacts of high interest rates on borrowers (x3)
Less likely to borrow
Spending will decrease
Less disposable income - demand decreases
Impacts of low interest rates on savers (x2)
Less likely to save money
Spending will increase
Impacts of high interest rates on savers (x2)
More likely to save money
Spending will decrease
If interest rates are high, the pound will be…
Strong because sterling is in high demand due to increased hot money.
A decrease in UK interest rates causes… (x4 - chain of events)
Lower return on UK saving accounts
‘Hot money flows’ decrease because of lower interest rates
Decreased demand for £ sterling
Decrease in value of £ sterling
Unemployment
A situation in which people who are willing and able to work are not able to find employment.
Disadvantages of unemployment (x3)
Waste of human resources
Bad for society social problems and benefits have to be paid for
Bad for the individual - damages self-esteem, alcohol/drug abuse, crime - doesn’t help the individual get back into work and May cost the government more money
Balance of trade
Difference between the value of exports and imports
Balance of trade surplus
When exports exceed imports
Balance of trade deficit
When imports exceed exports
Balance of trade calculation
Exports - imports
Achieving a trade surplus (x4)
Weak pound - imports more expensive
Low inflation - more foreign investment, UK exports are more competitive
Low interest rates - weaker pound, more loans for businesses
More subsidies - reduces prices
How can exports be increased and imports be decreased? (x7)
Trade barriers (reduces imports)
Good quality / unique products (increases exports)
Low / stable inflation (increases exports)
Weak pound
Policies to encourage start-ups (especially with export potential)
Promote passport to export programme
Subsidies (e.g to farmers)
Indirect taxes
Taxes on expenditure / spending. They are paid to the tax authorities, not by the consumer, but indirectly by the suppliers of the goods or services.
Direct taxes
Taxes on income and profits, paid directly by the bearer to the tax authorities.
Income tax
A tax taken out of a person’s income. In the UK, income tax is progressive (i.e those earning more pay a higher proportion of their income in tax).
National insurance
This is taken as a contribution towards the state pension and treatment under the NHS (employer also contributes).
Corporation tax
A tax on profits made by companies.
Purpose of taxation (x3)
Raises large amounts of revenue for the government to spend on public services such as education and health care.
To control economic activity (i.e through stamp duty to control house prices).
To influence expenditure on certain items.
Subsidy
A benefit given to an individual, business or institution, usually by the government.
What is another name for a subsidy?
Grant
Benefits of subsidies (x8)
Increases the output sold
Reduces the marginal cost of supply
Products are sold at a lower market price —> controls inflation
Prevents the long-term decline of industries
Moderates supply and demand
To encourage consumption of goods with positive externalities
Boost demand during recessions
Helps business survival during the start-up periods
Monetary policy
Manipulation of the level of demand in the economy using the rate of interest.
This is controlled by the Monetary Policy Committee (The Bank of England).
Fiscal policy
Economic policy used to influence the level of spending in an economy.
It is conducted by the government through taxation and public spending.
Affects the level of demand, more government spending will result in an increase in demand.
Government controlled and led by the Chancellor of the Exchequer.
Multiplier effect
The effect of changes in economic activity in one sector on other sectors: if one business / organisation experiences a rise or fall in demand for its products, this has a knock on effect on businesses / organisations supplying it.
Supply-side policies
Aim to improve the economy’s overall productive capacity (they act on the ‘supply side’ rather than demand).
Impacts of supply-side policies (x2)
Increase the output of an economy
This should lead to an economy where employees are skilled and incentivised to work, and businesses able to invest.
Examples of supply-side policies (x3)
Improving employee skills
Cutting corporation tax
Reducing welfare benefits
The business cycle
The observed pattern of increases and decreases in economic growth (measured by % change in GDP) over time.
Which businesses can benefit from a recession/slump? (x3)
Discount / budget stores selling inferior goods
DIY stores
People buying scrap gold
How will a business respond to a recession / slump? (x7)
Redundancies
Increased promotional activity or cutbacks
Cutbacks on production
Less stock holding
Lower prices
Offer discounts
Use a cheaper supplier
How can a business use the business cycle to its advantage during a recession / slump? (x5)
Business premises - expanding ready for a recovery
Products on sale - switch to selling inferior products
Purchase assets (e,g land and buildings) - cheaper to buy, could lower the cost of future expansion or be sold
Buy shares - share prices are low, these could be sold when the share prices recover
Employ more staff - staff are cheaper and there are more people looking for work
Examples of technological factors (x6)
- Computer hardware
- Computer software
- Internet connectivity
- Wireless charging
- Automation
- Devices such as tablets
Computer hardware
Includes the physical parts of a computer.
Computer software
Consists of all the instructions that tell the hardware how to perform a task (commonly known as programs or apps).
Technological factors
Variables which relate to the existence, availability and development of technology.
How do technological factors affect business? (x2)
Automation - Businesses can reduce costs by replacing human production lines with entirely machine ones.
Internet connectivity - Allows businesses to communicate with a wider range of customers.
Advantages of technological factors (x7)
- Systems are usually faster and more efficient
- Communication is easier
- In the long run, costs may be reduced due to efficiencies
- Remote working is possible
- Reduces the need for physical storage space
- Offers convenience for customers
- May offer employees the opportunity to learn new skills
Disadvantages of technological factors (x6)
- High initial cost
- May lead to job losses
- Not always reliable
- Staff will need to be trained (cost implication)
- The business will need to spend time and money developing processes to keep data safe
- May cause demotivation as workers resist change in the workplace
Benefits of ethical behaviour (x4)
- Attract new and better quality employees
- Encourage investment
- Attract new customers to the business
- Result in increased sales and profits
Disadvantages of ethical trading (x5)
- Increased costs
- Less competitive on price
- Could lead to less output (i.e staff can’t work beyond a certain number of hours)
- Lower shareholder returns
- Difficulty in finding suppliers
Demographics
Characteristics of human population groups (e.g size of population).
Changes in society:
- Demographics (e.g age, gender, size)
- Attitudes, beliefs and habits (e.g smoking attitudes)
Examples of attitudes, beliefs and habits (x6)
- Social habits (i.e eating out more or less)
- Changes in employment patterns (i.e the increase in part-time working)
- The changing role of women (i.e more women being in the workforce)
- Education (i.e from 2015, young people have been required to stay in some form of education)
- The grey pound (i.e retired people having greater wealth through the combination of property, pensions and savings)
- Increased flexible working, including working from home
National minimum wage
The minimum pay per hour workers of school leaving age are entitled to by law and is reviewed yearly by the government. The rate for each group in the UK is different.
National living wage
A new minimum wage rate for those aged 23 and over. Exactly the same thing as national minimum wage with a different name.
Impacts of not complying with laws related to pay: (x3)
- Fine
- Businesses will have to reimburse any underpayments
- Bad publicity
Consumer rights act
- Goods must fit their description
- Goods and services must be of satisfactory quality
- Goods must be fit for the purpose specified
What rights does a customer have within 30 days?
- Repair
- Exchange
- Refund
What rights does a customer have after 30 days?
- Repair
- Exchange
- Partial refund
How long does a customer have to complain about goods?
Up to 6 years if the product is expected to last that long.
Impacts of failing to comply with the Consumer Rights Act:
- May be prone to major fines if they’re within reason
- Reimbursement (replace / repair / refund)
- Poor reputation
- Compensation
- Wasting time
How can a business endeavour to avoid breaching the Consumer Rights Act?
- Abide by the rules of the law
- Offer staff training for better quality products
- Change or check description to ensure accuracy
- Quality control / assurance
- Testing if it’s fit for purpose
Intellectual property
Intangible property that’s the results of creativity (i.e a song melody).
Trademark
A company can register a trademark for its business name, slogans, logos, and other items that essentially brand the product or company / indicate the source of the good.
Copywright
Legal protection against copying from authors, composers, artists (automatic, don’t need to apply).
Features of a trademark: (x4)
- Needs to be registered
- Needs to be renewed every 10 years
- Needs to be used
- It’s an identifier
Features of copywright: (x4)
- Automatic protection
- Can last up to 70+ years after death
- Doesn’t need to be used
- Protects work from being used without authorisation
Planning permission
A law which requires approval from a local authority before construction can take place.
Planning permission is needed if you want to: (x3)
- Build something new
- Make a major change to your building (e.g building an extension)
- Change the use of your building
If a business fails to gain planning permission and their retrospective application fails…
They will be forced to demolish the building at their own cost.
Anti-money laundering (AML)
Activities financial institutions perform to achieve compliance with legal requirements to actively monitor for and report suspicious activities.
