Schedule 8

Question 1

What is inflation?

Answer 1

The general rise in prices in an economy over time

Question 2

What is the consumer price index?

Answer 2

Measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation

Question 3

What are the problems caused by inflation?

Answer 3

Increased costs as:
- workers often demand higher wages
- suppliers increase the cost of raw materials and components
- utilities such as electricity become more expensive

High repayments on loans:
- interest rates usually rise as the Bank of England uses the base rate (the interest rate set by the Bank of England for lending to other banks) as a tool to control inflation, making new and variable rate (interest rate that may be changed in response to economic conditions.

Consumers change spending habits
- deters consumers from making significant purchases

International competitiveness:
where domestic inflation rates are higher than those in other countries.

Uncertainty:
Occurs when businesses cannot predicted prices even in short term

Question 4

What is the exchange rate?

Answer 4

The value of one currency expressed in terms of another

Question 5

Why do exchange rates fluctuate?

Answer 5

• changing demand for a currency
• economic growth
• changes to interest rates

Question 6

What is the impact on an exporting business of an increase in the value of the pound against other currencies (appreciation)?

Answer 6

Sales are likely to fall as products become more expensive when compared to overseas competitors, in order to remain competitive exporting businesses may need to lower prices and accept lower profit margins.

Question 7

What is the impact on an importing business of an increase in the value of the pound against other currencies (appreciation)?

Answer 7

Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically produced

Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profit

Question 8

What is the impact on an exporting business of a decrease in the value of the pound against other currencies (depreciation)?

Answer 8

Sales are likely to rise as products become cheaper when compared to overseas competitors

Businesses may choose to increase selling prices to increase profit margins

Question 9

What is the impact on an importing business of a decrease in the value of the pound against other currencies (depreciation)?

Answer 9

Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically - produced

Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Question 10

What is an interest rate?

Answer 10

A percentage reward offered for saving money and the percentage charged for borrowing money

Question 11

What is the impact of interest rates rising?

Answer 11

Businesses will have to pay more on new or variable rate of borrowing, which will increase their costs

Therefore:

Businesses may be less willing to make capital investments (purchase of physical assets) when their retained profit may be more profitably invested into savings schemes

Customers are less likely to purchase goods on credit when interest rates are high leading to fall in sales

Exporting businesses may seek demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency and make their products comparably more expensive abroad

Question 12

What are direct taxes?

Answer 12

Taxes levied on income e.g. income tax and corporation tax

Question 13

What are indirect tax’s?

Answer 13

Levied on spending e.g. VAT

Question 14

What are the impact of an increase in taxation on revenue?

Answer 14

Revenue may fall as:

Increased income tax will reduce the disposable income of customers and demand for products may fall

Increased VAT will make products more expensive and customers may switch to alternative products

Question 15

What are the impact of an increase in taxation on costs?

Answer 15

Operating costs will rise as a result of increased taxes such as VAT and National insurance contributions

So:
Higher costs may be offset by charging higher prices

Higher prices may lead to lower sales and profit may fall

Import costs are increased when customs duties aren’t raised (tax on imported goods)

Question 16

What are the impact of an increase in taxation on business decisions?

Answer 16

Business spending and investment may be affected by increases in corporation tax as less profit will be retained to cover future expenses and make plans for business expansion

Operational decisions may be affected by increases in business rates and taxes related to employing workers
Businesses may choose to forego business improvement or relocation, or employ fewer workers as a result of increased costs

In some cases businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation
Move the business to a low-tax location
Change production methods to reduce the use of highly-taxed components

Question 17

What does the business cycle contain?

Answer 17

A description of the upturns and downturns in the level of a country’s economic active (GDP) overtime

Question 18

When does a recession occur?

Answer 18

When an economy experiences two consecutive quarters (6 months) or more of negative economic growth

Question 19

What is a boom?

Answer 19

A period of time where an economy experiences increasing/high rates of economic growth

Question 20

What are the stages of the economy cycle?

Answer 20

Expansion, boom, downturn, recession, depression, recovery, expansion

Question 21

What are the characteristics of a recession?

Answer 21

Increasing/high unemployment

Low confidence for firms/households

Low inflation or deflation

Increase in gov expenditure

Question 22

Impact of recession on businesses?

Answer 22

Customers have less disposable income and are likely to reduce spending or post pone spending decisions, leading to lower revenue

Businesses may find it relatively easy to recruit workers from a larger pool of candidates

Businesses may delay spending decisions and focus on reducing risk and survival

Production levels are likely to be reduced

Businesses often stockpile products

Increased spending on welfare benefits and spending on infrastructure projects to inject demand into the economy may benefit some businesses

Question 23

What are the characteristics of a boom?

Answer 23

Decreasing unemployment and increasing job vacancies

High confidence and more risky decisions taken

Increasing rate of inflation

An improvement in the government budget as tax revenues rise and government expenditure falls

Question 24

What are the impacts on a businesses of a boom?

Answer 24

Customers disposable income increases leading to higher sales revenue

Recruitment and staff retention may become more challenging and businesses may need to pay higher wages

Businesses look to expand and maximise profits

Profit levels are likely to increase

Product or market development strategies are more likely.

Interest rates are likely to rise and the higher cost of

borrowing will increase the risk of capital investment

Lower government spending may impact on business growth plans

Public sector pay controls may cause Industrial unrest and affect business operations

Question 25

When does economic uncertainty occur?

Answer 25

When it is difficult to forecast the supply and demand in an economy Businesses will find planning difficult and are likely to be reluctant to make significant decisions, especially with regards to capital expenditure

Question 26

What may cause economic uncertainty to occur?

Answer 26

Fluctuation exchange rate Economic growth uncertainty Turbulence in the price of key commodities such as oil

Question 27

How can businesses always be prepared for economic uncertainty?

Answer 27

By: Building up cash reserves when times are good Keeping informed about the economic climate Being ready to take advantage of opportunities when they arise

Question 28

What is legislation?

Answer 28

Laws and regulations passed by governments

Question 29

What are the 5 areas of legislation that have significant impacts on businesses?

Answer 29

- consumer protection - employee protection - environmental protection - competition policy - health and safety

Question 30

What are The goals consumer protection laws

Answer 30

Consumer protection legislation makes sure products are safe and of a reasonable quality Meeting the requirements of each of the above laws results in increased business expenditure, which may reduce profitability Consumer protection legislation aims to provide a level playing field for businesses, ensuring that no business can gain an unfair advantage over rivals by taking shortcuts or by making false claims about its products

Question 31

What areas does the consumer protection laws cover?

Answer 31

The safety of products The standard and quality of products The rights of customers if they are unhappy with their purchase The product information that must be given to customers

Question 32

What are the effects on businesses of employee protection laws?

Answer 32

Employee protection legislation aims to prevent the exploitation of workers Changing working practises Potential penalties and rewards Compliance costs Higher labour costs

Question 33

What areas do employee protection legislation cover?

Answer 33

Pay and working conditions Equality of employment rights for marginalised groups (e.g. those with disabilities) to avoid discrimination The right to belong to a trade union and take industrial action Contracts and termination of employment

Question 34

What are the effects on businesses of environmental protection laws?

Answer 34

Environmental legislation aims to hold businesses responsible for their environmental impact. Businesses that fail to adhere to these laws may be fined or forced to cease commercial activity until they resolve problems they have caused

Question 35

What areas of legislation do environmental protection laws cover?

Answer 35

Pollution Destruction of wildlife Traffic congestion Air quality Resource depletion

Question 36

What are the effects on businesses of competition policy laws

Answer 36

Competition legislation aims to protect the interests of both consumer and businesses by restricting anti-competitive practices. Where the competition and markets authority judges that a business has acted or may potentially act in an anti-competitive manner it may take steps as preventing a merger or instructing a business to dispose of subsidiary (a company controlled by another country) in order to correct the market

Question 37

What areas do competition policy laws cover?

Answer 37

Abuse of market power so as to limit monopoly power Anti competitive acquisition activity (when one company purchases most or all of another company’s shares to gain control of that company Cartel activity and collusion

Question 38

What are the effects on businesses of health and safety legislation?

Answer 38

Health and safety legislation requires businesses to operate in a way that protects the physical and mental wellbeing of its employees and contractors, as well as its customers Fines can occur if these are breached

Question 39

What areas do health and safety legislation cover?

Answer 39

The provision of adequate breaks and rest periods Temperature and noise levels The provision of safety equipment Hygienic, safe and sanitary conditions Preventing stress

Question 40

What procedures will need to be implemented to maintain healthy and safe business premises and working conditions?

Answer 40

Staff training and supervision Changes to working hours and rest provisions Arrangement of manuals, signage and safety documentation Purchase and maintenance of safety equipment Drawing up and implementing code of practice

Question 41

What does the competitive environment concern?

Answer 41

The degree to which a business is affected by rivals that operate in the same market The threat competition presents to businesses operating in a market will determine how quickly the business responds (the greater the threat, the quicker the response required and vice versa)

Question 42

What is the market size?

Answer 42

Essentially the number of customers and sellers in a particular market

Question 43

What may businesses entering niche market struggle to do?

Answer 43

Businesses entering niche markets may struggle to support a high volume of goods due to limited demand as the market size is small For these businesses, the specialised knowledge or skills required may well limit the competition and the higher costs of production may well put off new businesses from launching

Question 44

What problems may businesses entering mass markets face?

Answer 44

Businesses entering large markets may face more competition from established businesses, higher costs of promotion, and challenges in deciding their pricing strategy.