2.5

Question 1

Definition of inflation and how its measured

Answer 1

Inflation is the general rise in prices in an economy over time
The Consumer Price Index (CPI) measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation

Question 2

Why are increased costs a negative consequence of inflation

Answer 2

Workers often demand higher wages to compensate for the increase in the cost of living
Suppliers increase the cost of raw materials and components
Utilities such as electricity become more expensive

Question 3

Why are higher repayments of loans a negative consequence of inflation

Answer 3

Interest rates usually rise as the Bank of England uses the base rate as a tool to control inflation making new and variable rate borrowing more expensive

Question 4

Why are consumers change spending habits a negative consequence of inflation

Answer 4

Deters consumers from making significant purchases and they may reduce demand for usual lower priced wants too e.g cinema tickets
Purchasing on credit becomes more expensive

Question 5

Why is international competitiveness reduces a negative consequence of inflation

Answer 5

Where domestic inflation rates are higher than those in other countries:
UK businesses are less likely to be competitive and lose sales
Imports of overseas competitors are likely to cheaper than domestic goods

Question 6

Why is uncertainty a negative consequence of inflation

Answer 6

Occurs when businesses cannot predict prices even in the short term
Survival may need to become the key business objective until stability returns
Spending and contract decisions are likely to be delayed

Question 7

What are exchange rates and why do they fluctuate

Answer 7

The exchange rate is the value of one currency expressed in terms of another
Exchange rates fluctuate for a range of reasons including
Changing demand for a currency
Economic growth
Changes to interest rates

Question 8

Impact on exporting and importing businesses of An Increase in the Value of the £ Against Other Currencies
(Appreciation)

Answer 8

The Impact on Exporting Businesses

Sales are likely to fall as products become more expensive when compared to overseas competitors

In order to remain competitive exporting businesses may need to lower prices and accept lower profit margins

The Impact on Importing businesses

Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced

Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits

Question 9

Impact on importing and exporting businesses of A Decrease in the Value of the £ Against Other Currencies
(Depreciation)

Answer 9

The Impact on Exporting businesses

Sales are likely to rise as products become cheaper when compared to overseas competitors

Businesses may choose to increase selling prices to increase profit margins

The Impact on importing businesses

Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically-produced

Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Question 10

Interest rates definition

Answer 10

The interest rate is a percentage reward offered for saving money and the percentage charged for borrowing money

Question 11

Impact of a rise in inflation

Answer 11

If interest rates rise businesses will have to pay more on new or variable rate borrowing which will increase their costs
Businesses may be less willing to make capital investments when their retained profit may be more profitably invested into savings schemes
Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales
Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency and make their products comparably more expensive abroad

Question 12

Difference between indirect and direct taxes

Answer 12

Direct taxes are levied on income e.g. Income tax and Corporation Tax
Indirect taxes are levied on spending e.g Value added tax (e.g. VAT)

Question 13

Impact of an increase in taxation on revenue

Answer 13

Revenue may fall for many businesses
Increased income tax will reduce the disposable income of customers and demand for products may fall
Increased VAT will make products more expensive and customers may switch to alternative products

Question 14

Impact of an increase in taxation on Costs

Answer 14

Operating costs will rise as a result of increased taxes such as VAT and National Insurance contributions
Higher costs may be offset by charging higher prices
Higher prices may lead to lower sales and profit may fall

Import costs are increased when customs duties are raised

Question 15

Impact of an increase in taxation on Business Decisions

Answer 15

Business spending and investment may be affected by increases in Corporation tax as less profit will be retained to cover future expenses and make plans for business expansion

Operational decisions may be affected by increases in business rates and taxes related to employing workers
Businesses may choose to forego business improvement or relocation, or employ fewer workers as a result of increased costs

In some cases businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation
Move the business to a low-tax location
Change production methods to reduce the use of highly-taxed components

Question 16

4 characteristics of a recession

Answer 16

Increasing/high unemployment
Low confidence for firms/households
Low inflation or deflation
Increase in Gov expenditure

Question 17

4 characteristics of a boom

Answer 17

Decreasing unemployment and increasing job vacancies
High confidence and more risky decisions taken
Increase rate of inflation
An improvement in the government expenditure falls

Question 18

What is economic uncertainty
what is the likely consequence of it for a business
What are likely causes of economic uncertainty

Answer 18

Economic uncertainty occurs when it is difficult to forecast the level of supply and demand in an economy

Businesses will find planning difficult and are likely to be reluctant to make significant decisions especially with regards to capital expenditure

Economic uncertainty may occur as a result of
Fluctuating exchange rate
Economic growth uncertainty
Turbulence in the price of key commodities such as oil

Question 19

How can a business prepare for economic uncertainty

Answer 19

Building up cash reserves when times are good
Keeping informed about the economic climate
Being ready to take advantage of opportunities when they arise

Question 20

What is legislation and what are the 5 areas of legislation that have significant impacts on businesses

Answer 20

Legislation refers to laws and regulations passed by governments that require businesses and individuals to conduct their behaviour in a particular manner
There are five areas of legislation that have significant impacts on businesses
Consumer protection
Employee protection
Environmental protection
Competition policy
Health and Safety

Question 21

What are consumer protection laws and the effects on businesses

Answer 21

Consumer protection legislation aims to ensure that consumers are treated fairly by the companies with which they interact
Legislation covers areas including
The safety of products
The standard and quality of products
The rights of customers if they are unhappy with their purchase
The product information that must be given to customers

Meeting the requirements of each of the above laws results in increased business expenditure, which may reduce profitability
Consumer protection legislation aims to provide a level playing field for businesses ensuring that no business can gain an unfair advantage over rivals by taking shortcuts or by making false claims about its products

Question 22

What are employee protection laws and the effects on businesses

Answer 22

Employee protection legislation aims to prevent the exploitation of workers
Legislation covers areas including
Pay and working conditions
Equality of employment rights for marginalised groups (e.g. those with disabilities) to avoid discrimination
The right to belong to a trade union and take industrial action
Contracts and termination of employment

Business may have to Change working practices
Face potential penalties and rewards
Pay compliance costs eg frequent training
Have higher labour costs eg minimum wage and safety equipment

Question 23

What are environmental protection laws and the effects on businesses

Answer 23

Environmental legislation aims to hold businesses responsible for their environmental impact
Legislation covers areas including
Pollution
Destruction of wildlife
Traffic congestion
Air quality
Resource depletion

Businesses that fail to adhere to these laws may be fined or forced to cease commercial activity until they resolve problems they have caused

Question 24

What are competition policy laws and the effects on businesses

Answer 24

Competition legislation aims to protect the interests of both consumers and businesses by restricting anti-competitive practices
Legislation covers areas including
Abuse of market power so as to limit monopoly power
Anti-competitive acquisition activity
Cartel activity and collusion

Where the Competition and Markets Authority judges that a business has acted or may potentially act in an anti-competitive manner it may take steps such as preventing a merger or instructing a business to dispose of subsidiaries in order to correct the market

Question 25

What are health and safety legislation and the effects on businesses

Answer 25

Health and safety legislation requires businesses to operate in a way that protects the physical and mental wellbeing of its employees and contractors as well as its customers
Legislation covers areas including
The provision of adequate breaks and rest periods
Temperature and noise levels
The provision of safety equipment
Hygienic, safe and sanitary conditions
Preventing stress

Implementation of procedures and equipment required to maintain healthy and safe business premises and working conditions are likely to incur financial and time costs
Staff training and supervision
Changes to working hours and rest provisions
Arrangement of manuals, signage and safety documentation
Purchase and maintenance of safety equipment
Drawing up and implementing code of practice

Serious health and safety breaches can lead to fines or investigation by the Health and Safety Executive and in some cases can lead to prosecution

Question 26

What is the degree and nature of competition

Answer 26

The competitive environment concerns the degree to which a business is affected by rivals that operate in the same market (more fully discussed in 1.1.1 The Market)
The threat competition presents to businesses operating in a market will determine how quickly the business responds
The greater the threat, the quicker the response required - and vice versa

Question 27

What does market size mean and consequences of being in niche and mass markets

Answer 27

Market size is essentially the number of customers and sellers in a particular market
Businesses entering niche markets may struggle to support a high volume of goods due to limited demand as the market size is small
For these businesses, the specialised knowledge or skills required may well limit the competition and the higher costs of production may well put off new businesses from launching
Businesses entering large markets may face more competition from established businesses, higher costs of promotion, and challenges in deciding their pricing strategy