Economic influences, Legislation and competitive environment (paper 3)

Question 1

What do interest rates tell you

Answer 1

They tell you the cost of borrowing or the return on savings

Question 2

Changes in interest rates affect what

Answer 2

• Businesses costs if it has a loan or mortgage

- Consumer spending

Question 3

What does High interest rates mean for consumers

Answer 3

Means most consumers have less money to spend

• People with existing borrowing (like mortgages) have to pay more money back in interest, so they have less disposable income
• People are also more likely to save to take advantage of the interest earned on their savings, reducing demand

Low interest rates is the opposite

Question 4

What products will interest rates have the biggest effect on

Answer 4

Products that often require borrowing like cars, houses etc

Question 5

What’s inflation

Answer 5

Overall increase in the price of goods and services within an economy

Question 6

What are the two different types of inflation

Answer 6

• Demand-pull

- Cost-push

Question 7

What’s demand-pull inflation

Answer 7

When there’s too much demand (more than the economy can supply)

• happens when there’s an increase in disposable income so people buy more, and businesses can’t supply goods quickly enough, so increase their prices

Question 8

What’s cost-push inflation

Answer 8

When rising costs push up prices

Question 9

What’s the rate of inflation

Answer 9

Percentage change in price of goods and services within an economy, in one year compared to the previous year

Question 10

Describe the process of a wage-price spiral

Answer 10

• A business expects its suppliers to put their prices up
• Therefore, the business puts their prices up to cover expected increase in costs
• Rising prices cause people to demand higher wages
• Causing prices to rise more due to increased labour costs
• As wages increase, disposable income increases, demand rises, causing prices to go up more
• This wage-price spiral is a big cause for cost-push inflation

Question 11

How does inflation in the uk effect globally

Answer 11

• When inflation in the UK is high it makes exports expensive abroad, and UK businesses become less competitive globally
• When inflation in the UK is low, UK businesses have a competitive advantage globally

Question 12

What’s deflation

Answer 12

Overall decrease in the price of goods and services within an economy

Question 13

How does deflation occur (opposite of inflation)

Answer 13

Not enough demand, so businesses reduce their prices

Question 14

What’s the result of deflation

Answer 14

A fall in productivity as businesses won’t keep supplying the market with goods that nobody wants. Lower productivity means firms don’t need as many workers, therefore deflation often leads to unemployment

Question 15

What can be used as a measure of inflation

Answer 15

Consumer price index

Average value of basket / base value of basket X100

Question 16

What products will suffer most from inflation

Answer 16

Premium goods, as customers will look for cheaper goods

Question 17

Why might periods of high inflation be a good time to expand

Answer 17

If interest rates are lower than inflation, it’s cheap for them to borrow money to invest in new premises and machinery

• interest they’d earn on their savings would be less than the amount prices would have gone up by in the same time, so makes sense to spend rather than save

Question 18

Why do businesses compare UK and foreign interest rates

Answer 18

When UK interest rate is high or fluctuating, firms tend to expand into countries with low, stable interest rates as it’s cheaper to borrow money for expansion there

Question 19

Why’s it hard to plan when inflation rates are high

Answer 19

Because it needs stable prices to make accurate forecasts

Question 20

What’s an exchange rate

Answer 20

The value of once currency in terms of another currency

Question 21

If £1 has moved from being worth $1.20 to $1.60 how would you describe this

Answer 21

The pounds has appreciated or strengthened against the dollar

• If the amount of dollars decrease to the pound then the pound has depreciated or weakened against the dollar

Question 22

When the exchange rate increases (e.g. the pound appreciates against the dollar) what happens to exports and imports

Answer 22

• UK exports become more expensive abroad, which is bad for UK exporters as their products become less competitively priced abroad. Meaning exporters may have to decrease their prices which will decrease their profits
• Increase in exchange rates is good for UK importers as imports become cheaper, meaning higher profitability

Question 23

When the exchange rate decreases (e.g. the pound depreciates against the dollar) what happens to exports and imports

Answer 23

• UK exports become cheaper for other countries. Good for UK exporters as their products become more competitively priced abroad, so may be cheaper than similar products offered by businesses in other countries.
• UK imports become dearer. UK importers may change suppliers so that they buy from UK suppliers instead. Or may increase prices, to cover costs of buying from their suppliers

Question 24

Using an exchange rate of €1.41 to £1, convert £47 into euros

Answer 24

£47 x 1.41= €66.27

Question 25

Using an exchange rate of €1.41 to £1, convert €320 into pounds

Answer 25

320 / 1.41= £226.95

Question 26

Exchange rates can be compared using what

Answer 26

A currency index

Question 27

What’s the formula for currency index number

Answer 27

Exchange rate / base exchange rate X100

Question 28

Changes in government spending affect firms within the economy controlled by that government

How

Answer 28

• Change in government expenditure on welfare benefits affects the economy, as people who receive benefits will instantly have more (or less) money to spend, therefore businesses may see demand for their products go up (or down)
• Government spending on infrastructure like roads will have a slow effect on the economy as it improves supply routes making them cheaper and quicker. Also, increase customer access to businesses, therefore increase demand

Question 29

How can income tax affect the economy

Answer 29

Income tax, taxes individuals on their income

• High tax rates for individuals reduce consumers disposable income, so people tend to spend less therefore businesses make less sales
• Low tax rates encourage people to spend, so businesses make bigger profits

Question 30

Businesses are taxed on their profits

What taxes do sold traders and partnerships pay and what taxes do Limited companies pay

Answer 30

• Sole traders and partnerships pay income tax
• Limited companies pay corporation tax

These are direct taxes

Question 31

High tax rates for businesses mean what

Answer 31

Profit after taxes are reduced

Question 32

A business cycle diagram shows changes in the economy

What are the 4 stages in a business cycle

Answer 32

1) Boom
2) Recession
3) Slump
4) Recovery

Question 33

Describe a boom in a business cycle diagram

Answer 33

• GDP is high
• Production reaches maximum capacity, there are shortages and price increases
• Shortages of skilled labour means wages rise

Question 34

Describe a recession in a business cycle diagram

Answer 34

• Incomes start to go down
• Demand goes down
• Business confidence is reduced

Question 35

Describe a slump in a business cycle diagram

Answer 35

• GDP is low
• Businesses close factories, and there’s a lot of redundancies
• Unemployment is high
• Lot of Businesses go bankrupt

Question 36

Describe a recovery in a business cycle diagram

Answer 36

• Production increases
• Employment increases
• People have more disposable income

Question 37

How would businesses react to booms

Answer 37

• Raise prices, as this increases profitability and slows down demand
• Long lasting boom, businesses invest in production facilities to increase capacity

Question 38

How would businesses react to recessions

Answer 38

• Make workers redundant to save wage costs
• Increase capacity utilisation
• During a local recession, businesses can market their goods elsewhere in the country, a local shop can market their goods online. In a national recession, businesses can market their goods overseas

Question 39

How would businesses react to a slump

Answer 39

• Relocate abroad

Question 40

How would businesses react to recovery

Answer 40

• Opportunity for growth

Question 41

What’s a microeconomy

Answer 41

A part of the economy that consists only of the individual consumers and firms that make up a specific market

Question 42

What’s a macroeconomy

Answer 42

The economy as a whole (including all businesses and consumers)

Question 43

The business environment can be effected by microeconomic and macroeconomic uncertainty

What are examples of microeconomic uncertainty

Answer 43

• New competitor entering the market can lead to uncertainty over the number of customers the original business will have in future
• Shortage in raw material lead to uncertainty for a business that needs it, as their suppliers might change their prices affecting the business’ costs

Question 44

What are examples of macroeconomic uncertainty

Answer 44

• Change in government may lead to uncertainty over the availability of government spending in the future
• Decision of a country leaving a trade agreement (trading bloc) leaves uncertainty over future exchange rates and trading

Question 45

Examples of consumer protection

Answer 45

• Good customer service
• Good quality products
• Not overpriced
• Clear and accurate information about the products

Question 46

How does consumer legislation affect businesses

Answer 46

• Increase in costs due to improving safety and quality of the product
• Dealing with customer complaints before they turn to the legal system
• Quality control

Question 47

Without consumer and employee legislation what could the business do

Answer 47

Exploit the employees or consumers

E.g. pay low wages, poor quality products

Question 48

Examples of employee protection

Answer 48

• Employment Contracts, telling you hours of work, pay etc
• Legal discrimination (better suited to a job) rather than unfair discrimination (race, gender, disability)
• No unfair dismissals such as being dis,issues because of pregnancy
• Equal pay

Question 49

How does employee legislation affect businesses

Answer 49

• Compliance costs (expenses incurred in meeting requirements of employment)
• High labour costs (increase minimum wage)
• Penalties if the law is not followed (fines, reputation damaged)

Question 50

Examples of environmental protection

Answer 50

• Pollution
• Destruction of habitats
• Traffic congestion

Question 51

How does environmental legislation affect businesses

Answer 51

• Finance (might be a long term investment such as renewable energy as it’s more efficient therefore more sales)
• Human resources (staff recruited and trained to deal with increasing government regulations)

Question 52

What does the government have to monitor in monopolies that try and reduce competition

Some practices might include:

Answer 52

• Increasing prices
• Restricting consumer choice
• Raise barriers to entry by spending huge amounts of money on advertising for example. Or lower its prices temporarily making it difficult for a new business to get established

Question 53

Positive and negative affects of the competition policy on businesses

Answer 53

Positives= Competition policy encourages competition therefore will;

• Encourage innovation
• Encourage efficiency
• More businesses in the market

Negatives= Competition policy acts as a constraint on their activities as it slows processes down and costs money

Question 54

Determinants of competitiveness

Answer 54

• Number and size of businesses in the market (monopoly, oligopoly or perfect competition)
• Extent of barriers to entry (high marketing costs of one business so others have to compete with that, emphasise place and promotion)
• Extent to which products can be differentiated, products which are similar focus on price to get a competitive advantage and products that are different focus on place and promotion

Question 55

Impact on businesses of a competitive environment

Answer 55

• Price (competitive pricing)
• Profit (profit available in a highly competitive environment has to be shared between greater number of players)
• Communication with customers (under pressure to meet customer needs)
• Innovation (USP aids survival in a competitive market)
• Marketing (more money spent on it)

Question 56

Define barriers to entry

Answer 56

Factors which make it difficult or impossible for businesses to enter a market and compete with existing producers

Question 57

What’s a monopoly and an oligopoly

Answer 57

Monopoly= a market dominated by a single business

Oligopoly= a market dominated by a few large businesses