2.5 - external influences

What does a business cycle show?

Shows fluctuations in the level of economic activity overtime

What are these following terms of a business cycle:

• Boom

• Recession

• Slump

• Recovery

• Consumer confidence

• Businesses confidence

Boom: A period of high levels of economic activity i.e. where GDP is high. This is at the peak of the business cycle.

Recession: The rate of economic growth starts to fall due to a downturn. Two consecutive quarters of negative economic growth i.e. 6 months of falling GDP.

Slump: A period of serious economic decline i.e. falling GDP.

Recovery: Signs that economic growth is starting to rise i.e. GDP is increasing.

Consumer confidence: The level of optimism a consumer has about the health of the economy and their own financial situation. This can have a direct impact on whether consumers are willing to spend or save their money.

Business confidence: The level of optimism a firm has about the health of the economy and the firm’s financial situation. This can have a direct impact on whether a firm decides to invest their money or not.

What is the term economic uncertainty?

The future outlook for the economy is unpredictable

How can firms prepare for economic uncertainty?

• Build up cash reserves when times are good

• Keep up to date with the economic climate

• Be prepared to take advantage of opportunities when they arise

What is the term inflation?

When the general price level of goods are rising

What us the impact of high / increasing inflation on businesses?

• Increased costs of production

• Increased labour costs

• Creates uncertainty

• International competitiveness

What is the impact oh high /increasing inflation on consumers?

• Reduced purchasing power

• Creates uncertainty

• Impacts consumers with fixed incomes

• Changes in spending patterns

What are exchange rates?

The price of one currency in terms of another currency

To remember the impact of the appreciation of a currency on businesses, the acronym SPICED can be used. What does SPICED stand for?

Strong

Pound

Imports

Chesper

Exports

Dearer

Is the currency depreciate then the acronym WPIDEC can be used

What does this acronym stand for?

Weak

Pound

Imports

Dearer

Exports

Cheaper

What is the impact of an appreciation on firms?

• Importing goods into the UK would be cheaper

• UK exports will appear more expensive in foreign markets

What is the impact of an appreciation on consumers?

• May import their goods from abroad

• Foreign consumers may be less inclined to but UK goods

• Price of holidays abroad would be cheaper

What 5 factors could the Impact of exchange rates depend on?

• Price elasticity of demand

• The size of the change of the exchange rate

• The firms customer loyalty

• The firms reliance in international trade

• Income of consumers

What are interest rates?

The cost of borrowing or the reward for saving

What is the term tax?

The process of imposing charges on individuals or businesses by the government

What are the impacts of increased taxes on businesses?

• Higher costs

• May move to lower tax countries

What is the impact of increased taxation on consumers?

• Reduced spending

• Increased prices

What is a subsidy?

A financial help provided to businesses by the government, which can be through the form of cash payments, tax reductions and loans

What are the benefits of legislation on businesses?

• Reduced cost in the long term

• It helps firms to avoid legal action and fines by complying with the legislation

• Improved reputation

• Helps attract better employees

• May build trust with consumers

What are the limitations of legislation?

• Increased cost of compliance

• Can take time to adapt to the legislation

• Business may fac elegal action if they fail to compltly to the legislation

What does a competitive environment refer to?

The degree of competition in the market and the buying and selling power of customers and suppliers within the market

What are the factors influencing competitiveness of a market

• The number and size of competition in the market

• The size of the market and the growth in the market

• Barriers to entry

• Levels of regulation

• Bargaining power of customers

• Bargaining power of suppliers

What is a competitive advantage?

A feature of a business that allows it to perform more successfully than others in the market

What are the strategies to help a firm become more competitive?

• Differentiate products

• Improve quality

• Increase productivity

• Strong branding

• Innovation

• Better customer service

• Invest in tech

• Keep costs down