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
• real value of money borrowed reduces

Question 5

√ impact and X impact of high inflation on businesses

Answer 5

√ - debt finance is cheaper, as true value of debt is eroded
√ - encourages investment, as retained earnings lose value
√ - encourages customers to buy now rather than wait

X - cost of supply and wages increases
X - reduced global competitiveness as higher prices forced, in order for businesses to maintain profit margins
X - usually leads to interest rate rise
X - reduces purchasing power of money
----> less consumer disposable income
----> retained earnings lose value

Question 6

define boom

define recession

Answer 6

boom - a period of increased commercial activity in the economy, where key indicators (e.g. GDP will rise)

recession - a period of general decline in economic activity, and drop in consumer spending

Question 7

effect of boom on businesses

Answer 7

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

Question 8

effect of recession on businesses

Answer 8

opposite to boom

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

Question 9

define taxation

Answer 9

charge levied by a government to raise revenue

Question 10

define direct and indirect taxation

• both part of what policy

Answer 10

direct- tax on profits or income

indirect- tax on goods/services (VAT)

• fiscal policy

Question 11

effect of taxation on businesses

Answer 11

• 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 12

define fiscal policy

Answer 12

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

Question 13

define monetary policy

Answer 13

way government can control demand by increasing or decreasing interest rates

Question 14

define interest rates

Answer 14

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

Question 15

impact of increased interest rates on businesses

Answer 15

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

however
√ retained earnings can be saved and worth more
√ decreased business and consumer confidence may lead to higher barriers to entry

Question 16

rising interest rates lead to the ……… of inflation

Answer 16

rising interest rates leads to the slowing down of inflation

Question 17

define exchange rates

Answer 17

the price of one currency in the terms of another

Question 18

impact of strong exchange rates

Answer 18

• imports cheaper (can import goods or supplies at lower price)
—-> also repatriating profits worth less

• exports dearer (export products to countries at a higher price (in their market)
—> less globally competitive OR increase sales revenue

Question 19

define government spending

Answer 19

spending by the public sector on goods and services

e.g. on education, health care and defence

Question 20

impact of increased government spending

Answer 20

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

• capital spending on new infrastructure may benefit distribution

•increase skills of labour force, through education investments
—> increase productivity —> improve BoP —> appreciate exchange rate

•healthcare investment improves quality of life
—-> higher motivation –> more productive

• may attract increased competition

Question 21

define risk

define uncertainty

Answer 21

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 22

economic influences that are prone to uncertainty

Answer 22

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

Question 23

what is the macro economic environment

Answer 23

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 24

define legislation

Answer 24

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

Question 25

what areas does legislation affect businesses across

Answer 25

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

Question 26

define consumer protection

examples of laws

Answer 26

• 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 —> otherwise can get refund

Question 27

impacts of consumer protection

Answer 27

• 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 28

define employee protection

Answer 28

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 29

impacts of employee protection laws

Answer 29

• 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
• —> may increase conflict, feel pressured to hire wrong candidate to tick boxes
• increase cost in safety measures and training staff to meet these (short term)
• lower absenteeism and less injury compensation (long term)

Question 30

define competition policy

-examples of what isn’t allowed

Answer 30

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 31

impact of competition policy

Answer 31

• greater competition leads to a larger variety of better quality goods for consumers
• -> high comp leads to effective price competition (lower costs over time)
• ensures investment, innovation and potential growth in market

Question 32

who investigates and regulates competition policy

Answer 32

Competitions and Market Authority

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

Question 33

define environmental protection

examples of what it covers

Answer 33

laws that exist to protect the natural environment and its resources

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

Question 34

impact of environmental policy

Answer 34

• massive financial fines
• reputational damage (especially bad in consumerist markets)
• may remove your USP in the market
• 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 35

define competitive environment

Answer 35

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

Question 36

define a monopoly market

Answer 36

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

Question 37

define an oligopoly market

Answer 37

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

Question 38

define perfect competition in a market

Answer 38

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 39

pros and cons of operating in a monopoly market

Answer 39

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
• lack of strive for innovation, growth or efficiency in industry

Question 40

pros and cons of operating in a oligopoly market

Answer 40

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
• low levels of competition

cons;

• attract competitors who are attracted by potential large market share and growth
• high barriers needed to enter
• lack of strive for innovation or efficiency, as low comp