PEST - Political Flashcards
The Political Environment
Government have a significant role to play in creating the right conditions for businesses to succeed.
Government policy has a direct or indirect impact upon firms and theri decisions
Government policy might include
- new legislation to encourage competition
- fiscal and monetary policy
- trade deals
- labour laws
Main aims of the Government
Low and stable inflation
Low levels of unemployment
Economic growth (GDP)
A balanced budget
Economic stability
One of the key roles of any government is to create the conditions for economic and political stability
Businesses need to plan ahead into the future when considering significant investments and periods of instability make planning very difficult
During periods of instability and a less predictable period of economic or political activity, business are likely to delay investment and this is harmful to economic growth.
Benefits of stability
Job creation
Business confidence
Higher consumer spending
Economic growth
Higher tax revenues
Business Start-Ups
Government seek to promote enterprise within the economy as this creates new jobs and wealth, generates new tax revenue streams and also increases levels of competition within the market.
Government assistance for new businesses start ups can take many forms including :
- tax breaks and financial assistance
- Government backed online help and advice
- Government recognised industry awards
- Grants
Stable legal environment
It is the responsibility of the government to create a legal framework within which business can operate and grow.
Competition needs to be fair; the rule for law and clear property rights must apply.
Property rights - Patents
Business need to be able to prove that their ideas have original features and acknowledge that the ideas belong to them.
Benefits
Holding a patent encourages businesses to invest money into reseach and development
Successfully patents can protect you against rival businesses copying your ideas and allow you to generate higher levels of profits
A patent holder can license its idea to others for the generational fee
Competition Laws
Government regulation tries to ensure that competition exists within a market and that individual firms do not become so large that they are able to exploit consumers through limiting choice and the charging of higher prices.
Government and market power
Government seek to prevent the devlopment of monopolies if they are concudere not to be in the best interests of the consumer.
The UK govement enpower the Competition and market authority (CMA) to investigate and assess any industry that they believe to be acting against consumer interests
The takeover and merger of firms is also investigated by the CMA if it is feared that they might become too large and exploit market power.
Deregulation of markets
Another way in which the government can open up markets to become more competitive is through deregulation.
This involves the removal of rules and regulations that prevented competition. The ideas is that more competition results in prices, choice and efficiency is improved for the consumer
However, increased competition meant some companies collapsed with large scale job loss. Job security was now reduced as demand was now subject to being competitive.
Why do governments legislate
Environmental Legislation - Without restrictions, businesses would be encouraged to behave in a manner that was harmful to the environment
Government legislation is sometimes encouraged through the actions of pressure groups and their lobbying of MPs to modify specific examples of business behaviour. This impact of such activity can be significant and can cause businesses to have to rethink their objectives and strategies.
The effects of taxation
Lower rates of taxation help to encourage economic growth as consumers have more disposable income that they spend in shops and businesses.
During a period of very strong economic growth, governments are likely to raise taxes to try to suppress demand and prevent large raises in the rate of inflation.
The government and subsidies
Subsidies are a sum of money granted by the government to help an industry or business keep costs and therefore prices are low and so encourage consumption
Examples
Solar panel installation
Car scrappage
Help to buy scheme
Monetary Policy
Monetary policy involves the use of interest rates and the manipulation of the money supply to influence levels of consumer spending and aggregate demand in an economy.
The main aim is to create a stable economy and maintain low rates of inflation
Controlled by the Bank of England.
Business and monetary policy
If interest rates rise then consumers have to use up more of their disposable income to repay the mortgage as the interest payments on the mortgage will rise.
This means consumers have less money available to spend
Businesses will also experience a risk in their costs as they are likely to hold loans. This combined with drop in demand for their goods and services could mean lower profit.
