Paper 1- Theme 2.5- External Influences

Question 1

define economic influences

Answer 1

how the changes in a country’s economy affect a business

in terms of

• inflation
• exchange rates
• taxation and government spending
• the business cycle

Question 2

define inflation

Answer 2

general increase in the general price level

Question 3

how is inflation calculated

Answer 3

using the Consumer Prices Index

-measured by the annual % change in consumer pricing of the most commonly purchased goods

Question 4

how does inflation changes affect businesses

Answer 4

• increase price of supply and wages
• increases price of product
• can become less globally competitive
  however. ….. - real value of money borrowed reduces

Question 5

impact of high inflation on businesses

Answer 5

• debt finance is cheaper, as true value of debt is eroded
• cost of supply and wages increases
• reduced global competitiveness as higher prices forced, in order for businesses to maintain profit margins
• usually leads to interest rate rise

Question 6

effect of boom on businesses

Answer 6

• higher consumer spending (rise in demand)
• low unemployment (lower pool of labour)
• business confidence higher, more likely to make investment

Question 7

effect of recession on businesses

Answer 7

opposite to boom

• less disposable income and consumer spending
• higher unemployment
• less business confidence

Question 8

define taxation

Answer 8

m

Question 9

define direct and indirect taxation

• both part of what policy

Answer 9

direct- tax on profits or income

indirect- tax on goods/services (VAT)

• fiscal policy

Question 10

effect of taxation on businesses

Answer 10

• higher corporation tax leaves businesses with lower net profits
• higher income tax reduces consumer spending
• higher VAT reduces profit margin or increases price of product (depends whether businesses absorb the tax increase)

Question 11

define fiscal policy

Answer 11

way government can control demand by increasing or decreasing taxes or government spending

Question 12

define monetary policy

Answer 12

way government can control demand by increasing or decreasing interest rates

Question 13

define interest rates

Answer 13

• the reward a central bank sets for saving and cost set for borrowing

Question 14

impact of increased interest rates on businesses

Answer 14

businesses are DISADVANTAGED

• less consumer borrowing, more saving so less spending
• amount consumed must pay on loans and credit cards increases so less spending
• costs of repayment rise, so less business borrowing, so investment reduced

Question 15

define exchange rates

Answer 15

the price of one currency in the terms of another

Question 16

impact of strong exchange rates

Answer 16

• imports cheaper (can import goods or supplies at lower price)
• exports dearer (export products to countries at a higher price (in their market)

Question 17

define government spending

Answer 17

spending by the public sector on goods and services

e.g. on education, health care and defence

Question 18

impact of increased government spending

Answer 18

• increased spending may leave to increased taxes (to levy it)
–> reduces consumer spending and company profit margins

• capital spending on new infrastructure may benefit distribution

Question 19

define risk

define uncertainty

Answer 19

risk is calculated probability that a situation will not pan out as predicted

uncertainty is when businesses are unable to predict external shocks or future events

Question 20

economic influences that are prone to uncertainty

Answer 20

• exchange rate changes
• interest rate fluctuations
• rate of economic growth
• price of oil and energy

Question 21

what is the macro economic environment

Answer 21

trends in GDP, inflation, interest rates and exchange rates

• to ensure predicting the economic environment with certainty, businesses look at these trends and make prediction based off them

Question 22

define legislation

Answer 22

laws passed by the parliament in the UK that affect businesses, ensure they behave in the right way

Question 23

what areas does legislation affect businesses across

Answer 23

• consumer protection
• employee protection & health and safety
• environmental protection
• competition policy

Question 24

define consumer protection

examples of laws

Answer 24

• laws that exist to ensure businesses act fairly towards and don’t exploit customers
• Trade Descriptions Act - goods must perform the way advertised, no misinformation
• Sale and Supply of Goods Act - goods must be fit for purpose and be of satisfactory quality

Question 25

impacts of consumer protection

Answer 25

• increased costs in compliance (ensuring adequate quality) (ensuring promotion is legal)
• cost of dealing with returns, refunds and complaints
• must train and monitor staff to ensure they aren’t giving out false information
• must pay fines if mislead customers (damage brand rep)

Question 26

define employee protection

Answer 26

laws that exist to protect employees from discrimination, unfair treatment or harm

• Equal Pay Act 1990 - pay employees same for same amount of work
• Equality Act 2010 - businesses cant discriminate in recruiting or promoting
• National minimum wage
• Health and Safety Act 1974 - firms must put plans in place to minimise risk to H or S

Question 27

impacts of employee protection laws

Answer 27

• increased staff motivation and morale (Taylor- higher pay = greater motivation)
• increased staff retention due to better job security
• increase cost in paying wages and recruitment
• increase cost in safety measures and training staff to meet these (short term)
• lower absenteeism and less injury compensation (long term)

Question 28

define competition policy

-examples of what isn’t allowed

Answer 28

laws that exist to ensure competition is fair
- prevent large firms from restricting competition or abusing their dominant position

e.g.
NO
- price fixing / collusion
- predatory pricing
- forcing competitors to pay higher prices than customers

Question 29

impact of competition policy

Answer 29

• greater competition leads to a larger variety of better quality goods for consumers
• -> high comp leads to effective price competition (lower costs over time)

Question 30

who investigates and regulates competition policy

Answer 30

Competitions and Market Authority

• investigate anti-competitive practices and can bring criminal proceedings upon those found guilty

Question 31

define environmental protection

examples of what it covers

Answer 31

laws that exist to protect the natural environment and its resources

e. g. emissions and use of hazardous substances
- waste disposal
- sustainability

Question 32

impact of environmental policy

Answer 32

• massive financial fines
• reputational damage (especially bad in consumerist markets)
• leads to benefits to environment and society

e. g. VW had to pay almost €30 bn in fines and lawsuits
- because of them lying about the excessive emissions levels in their cars

Question 33

define competitive environment

Answer 33

the market structure in which the businesses compete, and how fiercely rival businesses compete with competitor’s products in this market

Question 34

define a monopoly market

Answer 34

market with one dominant firm that has at least 25% market share

Question 35

define an oligopoly market

Answer 35

market with a few large competitors that share a large % of the market between them

Question 36

define perfect competition in a market

Answer 36

market where there are many small firms competing within a fair market with low share and all selling homogenous products

• price takers
• low barriers to entry

Question 37

pros and cons of operating in a monopoly market

Answer 37

pros;

• can charge higher prices
• EoS
• resources available to develop technology quickly
• huge barrier to entry for anyone trying to enter market

cons;
- scrutinised by media and the Competitions and Market Authority

Question 38

pros and cons of operating in a oligopoly market

Answer 38

pros;

• large customer bases so fewer risks of products or services failing
• business will have sufficient funds to sustain product differentiation and ways to add value

cons;
- attract competitors who are attracted by potential large market share and growth