Paper 1- Theme 2.5- External Influences Flashcards
define economic influences
how the changes in a country’s economy affect a business
in terms of
- inflation
- exchange rates
- taxation and government spending
- the business cycle
define inflation
general increase in the general price level
how is inflation calculated
using the Consumer Prices Index
-measured by the annual % change in consumer pricing of the most commonly purchased goods
how does inflation changes affect businesses
- increase price of supply and wages
- increases price of product
- can become less globally competitive
however. ….. - real value of money borrowed reduces
impact of high inflation on businesses
- 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
effect of boom on businesses
- higher consumer spending (rise in demand)
- low unemployment (lower pool of labour)
- business confidence higher, more likely to make investment
effect of recession on businesses
opposite to boom
- less disposable income and consumer spending
- higher unemployment
- less business confidence
define taxation
m
define direct and indirect taxation
• both part of what policy
direct- tax on profits or income
indirect- tax on goods/services (VAT)
• fiscal policy
effect of taxation on businesses
- 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)
define fiscal policy
way government can control demand by increasing or decreasing taxes or government spending
define monetary policy
way government can control demand by increasing or decreasing interest rates
define interest rates
- the reward a central bank sets for saving and cost set for borrowing
impact of increased interest rates on businesses
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
define exchange rates
the price of one currency in the terms of another
impact of strong exchange rates
- imports cheaper (can import goods or supplies at lower price)
- exports dearer (export products to countries at a higher price (in their market)
define government spending
spending by the public sector on goods and services
e.g. on education, health care and defence
impact of increased government spending
• 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
define risk
define uncertainty
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
economic influences that are prone to uncertainty
- exchange rate changes
- interest rate fluctuations
- rate of economic growth
- price of oil and energy
what is the macro economic environment
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
define legislation
laws passed by the parliament in the UK that affect businesses, ensure they behave in the right way
what areas does legislation affect businesses across
- consumer protection
- employee protection & health and safety
- environmental protection
- competition policy
define consumer protection
examples of laws
- 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
impacts of consumer protection
- 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)
define employee protection
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
impacts of employee protection laws
- 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)
define competition policy
-examples of what isn’t allowed
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
impact of competition policy
- greater competition leads to a larger variety of better quality goods for consumers
- -> high comp leads to effective price competition (lower costs over time)
who investigates and regulates competition policy
Competitions and Market Authority
- investigate anti-competitive practices and can bring criminal proceedings upon those found guilty
define environmental protection
examples of what it covers
laws that exist to protect the natural environment and its resources
e. g. emissions and use of hazardous substances
- waste disposal
- sustainability
impact of environmental policy
- 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
define competitive environment
the market structure in which the businesses compete, and how fiercely rival businesses compete with competitor’s products in this market
define a monopoly market
market with one dominant firm that has at least 25% market share
define an oligopoly market
market with a few large competitors that share a large % of the market between them
define perfect competition in a market
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
pros and cons of operating in a monopoly market
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
pros and cons of operating in a oligopoly market
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
