Unit 2.4 - economic influence on business activity

Question 1

Explain the difference between inferior and luxury goods.

Answer 1

Nicer goods known as luxury goods whereas cheaper goods known as inferior goods

Question 2

Define normal goods.

Answer 2

Goods that consumers buy as they are necessities

Question 3

Name the stages of the economic cycle. (4)

Answer 3

Boom
Recovery
Recession
Slump

Question 4

Identify and describe the different taxes. ()

Answer 4

Income tax is charged on income, such as wages that have been earned​
Corporation tax is a charge on a company’s profits​
National Insurance contributions (NICs) are charges to cover healthcare, state pensions and employment-related benefits such as Jobseeker’s Allowance. Both employers and employees pay it​
Value-added tax (VAT) is a charge on sales of goods and services based on the value of the item sold. It is collected by businesses, which then pass it on to the government​
Council tax is a charge on property by local councils based on the property’s value and the number of people in a household. It is used to pay for local services, such as refuse collection and street lighting

Question 5

What can happen from an increase in income tax? (2)

Answer 5

Consumers have less money left over to spend on goods and services​
Businesses expect to sell less so will reduce the level of their investment

Question 6

What can happen from an increase in VAT? (2)

Answer 6

Consumers pay higher prices, which reduces their purchasing power​
Inflation occurs, which affects businesses’ costs

Question 7

Define unemployment.

Answer 7

People are unemployed when they don’t have a job. Most unemployed people are looking for work but for some reason they are unable to get a job

Question 8

How can people be made unemployed? (3)

Answer 8

Made redundant – people whose last job ended because there was no more work available or no further need for their role​
Dismissed – people whose last job ended because they broke their contract of employment, eg by engaging in misconduct​
A school, college or university leaver – people who have completed full-time education and are seeking work for the first time​

Question 9

How does unemployment affect consumers? (3)

Answer 9

Reduction in income if they become unemployed
Resulting in a fall in living standards
The stress of finding a new job if businesses are not recruiting and the social and emotional effects of being unemployed

Question 10

How does unemployment affect businesses? (2)

Answer 10

The fall in consumer incomes results in a fall in demand for their goods and services
Financial problems if they are a small business or a business with no or little savings/ retained profit

Question 11

How does unemployment affect government? (2)

Answer 11

A fall in revenue from Income Tax, VAT and Corporation Tax
Increase in welfare payments (less income and more outgoings)

Question 12

Define inflation.

Answer 12

A general and sustained increase in prices over time

Question 13

How are businesses impacted by inflation? (4)

Answer 13

Increased costs - materials
Lower disposable income - leads to less demand
Lead to higher wages
Goods more expensive compared to foreign goods

Question 14

Define interest rates.

Answer 14

The interest rate is the price of borrowing from or saving money in a bank, building society or other lender. The cost of borrowing or reward from saving

Question 15

Describe what happens when interest rates rise and when they fall.

Answer 15

As interest rates rise there is a greater incentive to save as the cost of borrowing is higher, therefore people are likely to spend less.
Whereas when interest rates fall the cost of borrowing is low and there is a disincentive to save, therefore people are likely to spend more

Question 16

What would happen to a firm that sells luxury goods and another that sells inferior goods when the interest rates rise?

Answer 16

When interest rates rise firms selling luxury goods are likely to see a fall in sales whereas firms selling inferior goods are likely to see an increase in sales

Question 17

What are the effects of increasing interest rates? (3)

Answer 17

People spend more on paying mortgages, so less money left over for spending on other goods and services​
People are less likely to borrow as the cost of loans has increased, so less spending​
Businesses borrow less for investment – too costly

Question 18

How does a fall in interest rates impact businesses and consumers? (3)

Answer 18

People spend less on paying mortgages, so more money left over for spending​
People are more likely to borrow as the cost of loans has fallen, so there is more spending​
Businesses borrow more for investment – greater chance of success