What Is A Business (External Enviroment)

Question 1

Interest rate

Answer 1

• The amount charged by a bank per year for lending money.

- the reward given for saving

Question 2

Interest rates were low because

Answer 2

• it was to discourage people from saving in order for them to spend more
• increase the chances of borrowing
• allow people to make big purchases on credit
• increase in inflation
• higher discretionary income

How do they link?

Question 3

They link because…

Answer 3

Lower interest rate leads to more borrowing

• This leads to more businesses
• more businesses leads to more people being employed
• which would lead to businesses becoming successful and making more profit.
• this increases consumer confidence and security w
• which leads to more spending and less saving.

Question 4

However…

Answer 4

• worry about inflation (increase in inflation) when consumers have more money to spend.
• Too much borrowing ( banks are lending too much)
• House price is increasing ( especially for first buyers - more money people have the higher the prices for houses)
• increase interest rates to slow down the economy and restrict credit.

Question 5

Fixed interest rates

Answer 5

A fixed interred rate is an interest rate on a liability e.g. loan or mortgage, that remains the same over a long or short period of time.

Question 6

Variable interest rate

Answer 6

A variable interest rate is a rate on a loan or security that fluctuates over time

Question 7

Disposable income

Answer 7

The amount of net income a house hold or individual has available to invest, save or spend after income taxes.

Question 8

Discretionary income

Answer 8

The amount of income that a household or individual has to invest, save or spend after taxes and necessities are paid.

Question 9

Real income

Answer 9

Refers to the income of an individual or group after taking into consideration the effect of inflation on purchasing power

E.g. if you receive a 3% Salary over the previous year and inflation for the year is 1% the. You real income is 2%
Whereas if inflation was higher than your income then you real income had fallen by %

Question 10

Demographics

Answer 10

Looks at the size and make up of the population

• Changes In population dynamics can occur slowly but can be significant for businesses.

Example: 2013-2050
Europe population will decline by -4%
Africa population will increase by 115% (Benefit for businesses that want to move to a larger market)

Question 11

Demographics

Answer 11

• size
• Age
• Gender
• Ethnicity

Question 12

Ageing population

Answer 12

• greater demand for services to support older people

- Increase of disposable income of older people reflected in higher demand for products and services

Question 13

Continued higher net migration

Answer 13

• Higher costs of (but greater demand) of public services

- Increase in size of labor force - potentially keeping wages lower

Question 14

Consumer confidence/job security

Answer 14

Customers are confident in their job therefore there is more chance of them spending and the decrease of fear in redundancy

Question 15

Economic growth

Answer 15

If the economic growth is positive, the general expectation is that the underlying market conditions will be positive, with the size of the markets expanding

Question 16

Higher employment

Answer 16

If more people have jobs then more people have money to spend on goods and services. (Spend on luxuries)

Question 17

Normal goods

Answer 17

A normal good is one whose demand increases as people’s income or the economy rise.

Question 18

Inferior goods

Answer 18

An inferior good is a type of good for which demand declines as the level of income or the real GDP in the economy increases.

Example:
As consumer income increases the demand in costly cars increases and demand for cheap cars will decrease therefore cheap cars are inferior goods.

Question 19

Difficult economic conditions

Answer 19

When economic conditions are difficult, underlying market conditions may also become tough for most businesses

Some may fail.

How can this happen?…

Question 20

How can this happen?

Answer 20

• Unemployment may increase(workers may face wage cuts or redundancy)
• Recession may happen
• Consumer confidence/job security may fall