How Does Economic Change Effect Businesses Flashcards
List some of the reasons why a business may need to borrow
- when starting up, they are likely to need to borrow just to pay for premises and equipment
- when expanding, businesses may need to fund things like market research or additional equipment
What is interest?
The reward for saving and the cost of borrowing
What are interest rates?
They specify the amount that has to be repaid by the borrower to the lender. Where there is a risk the lender won’t be repaid, the interest rate will be higher
What is working capital?
The finance needed by a business to cover production costs (e.g. rent and wages), until other payment is received
What will a low interest rate do to businesses?
- encourages investment, expansion and job creation
- homeowners will have lower mortgage repayments and so have more disposable income, which could see many businesses enjoying an increase in demand
What will high interest rates do to businesses?
- discourage investment, expansion and job creation
- lead to higher mortgage repayments, meaning consumers have less disposable income, causing a fall in demand
What does corporation tax do?
Take a % of annual profits
What are business rates?
They are paid by businesses to the local authorities. They pay for local authority services, but not all entrepreneurs see it that way
What is VAT?
Value added tax. Collected by businesses and takes 20% of the value of sales
What impact does VAT have on businesses?
- an increase will put prices up and reduce consumers spending power. If the product is discretionary, then this could lead to a fall in demand
- creates an administrative burden on the business, since they are responsible for its collection
List some of the products exempt form VAT
- Food eaten at home
- housing
- books and newspapers
- public transport
What is inflation?
A general increase in prices
What problems can accelerating inflation cause for businesses?
- uncertainty, as businesses can’t plan ahead
- demands for pay increases, as unless wages keep up with inflation, employees will be unhappy
- imports from economies with lower inflation will be more dear
What is income tax?
A tax levied on individual incomes. there is a personal allowance that is tax free, which generally rises in line with inflation each year
What are the impacts on businesses of cuts to government expenditure?
Those on welfare or working in the public sector will have less to spend, leading to a fall in demand. This could lead to:
- reduced output
- lack of investment
- redundancies
- downsizing
Lower quality products and services
