Unit 1: External Environment

Question 1

What are the elements of a business’s external environment may affect its costs and demand (sales) (5):

Answer 1

Market conditions / competition
Incomes
Interest rates
Demographic factors
Environmental issues and fair trade

Question 2

define external environment

Answer 2

forces outside the business in which it has no control over

Question 3

define demand

Answer 3

The amount of a good or service consumers want and can afford at a given price

Question 4

define market condition

Answer 4

Features of a market such as level of sales and growth and number and strength of competitors

Question 5

define income

Answer 5

The amount of money earned by individuals within the economy.

• typically as GDP increases, wages also increase

Question 6

define gross domestic product (GDP):

Answer 6

Measures the value of a country’s total output of goods and services.

• Measures economic growth. When this is higher, incomes will be higher.

Question 7

define real incomes:

Answer 7

Income that is adjusted for the rate of inflation.

Therefore it’s accurately reflecting changes in purchasing power of customers.

Question 8

define interest rates:

Answer 8

The cost of borrowing money or the reward for saving

Question 9

define economic factors

Answer 9

Financial elements in the country

Question 10

define demographic factors

Answer 10

the makeup of a population in a country

Question 11

define market factors

Answer 11

looking at the trading condition for a particular good or service

Question 12

environmental and social factors

Answer 12

being considered sustainable and ethical

Question 13

what are demographic factors of the external environment

Answer 13

The number of consumers in a country increases (P)
Increase in the rate of unemployment

Question 14

what are economic factors of the external environment

Answer 14

interest rates fall, making borrowing cheaper and saving less attractive
Consumer incomes nationally increase

Question 15

what are environmental/social factors of the external environment

Answer 15

customers demand environmentally friendly products, which increases costs
a product becomes more fashionable

Question 16

what are market factors of the external environment

Answer 16

a major competitor leaves the market
market is oversupplied with products, forcing prices down
A new competitor enters the market

Question 17

list 6 conditions which have an adverse effect on a business

Answer 17

Number / size / power / supply of competitors
Fashion and technology - fast changes in demand
Tastes and preferences
Suppliers joining together
Consumers income
Innovation

Question 18

How can competition affect both a businesses sales and costs? (3)

Answer 18

More likely there is to be a business charging a lower price
More likely to be a business offering a good with more benefits
Businesses may need to find new ways to compete other then price which will push up their costs

Question 19

what are the three types of good?

Answer 19

necessity
inferior
luxury

Question 20

define a necessity good

Answer 20

consume more as your income rise

Question 21

define a luxury good

Answer 21

consume more as your income rise

Question 22

define a inferior good

Answer 22

consume less as your income rise

Question 23

what are necessity and luxury goods classified as?

Answer 23

they’re both classified as normal

Question 24

define elastic

Answer 24

Products for which demand is influenced by income levels

Question 25

define inelastic

Answer 25

Products for which demand is not influenced much by income levels

Question 26

list 5 elastic goods

Answer 26

Jewellery
Luxury electrical items
Restaurant meals
Long-haul holidays
Household furniture

Question 27

list 5 inelastic goods

Answer 27

Bread, milk and other basic foods
Cigarettes and tobacco
Petrol
Water
Lottery tickets

Question 28

what is the equation used to calculate income elasticity of demand?

Answer 28

% change in quantity demanded
___________________________
% change in income

Question 29

what does income elasticity of demand measure?

Answer 29

Measures the impact that a change in income has on quantity demanded of a good

Question 30

draw the number line for the different types of goods

Answer 30

less than 0 = inferior goods
0 = perfectly inelastic
more than 0 = normal good
0-1 = necessity good
more than 1 = luxury good

Question 31

what 3 things do rising interest rates cause?

Answer 31

cost of loans increase - less investments
Costs of imported goods may fall
Demand for goods may fall (savings increased)

Question 32

what 3 things do falling interest rates cause?

Answer 32

Loans become cheaper, more investment
Costs of imported goods may increase
Demand for goods may increase (less savings)

Question 33

How has the UK population changed in the last 50 years?

Answer 33

Population is growing
Migration
Better healthcare, longer life expectancy - aging population
Females career building and delaying starting a family

Question 34

Environmental issues - How do businesses pollute?

Answer 34

Emission of gas in production process
Pollution when transporting goods and services
Dumping waste
Destroying natural environments to build factories
Building homes on greenfield sites