2.5

Question 1

What is inflation?

Answer 1

A sustained increase in the average price level in the economy.

Question 2

How inflation can affect a business?

Answer 2

Makes businesses less likely to invest
Costs of supplies and wages may rise > reduced profitability or higher price/lower sales
Imports from countries with lower rates of inflation may take sales away from uk businesses
Repaying loans is easier if inflation is high
Higher interest rates mean higher credit charges & mortgage payments > consumers will spend less

Question 3

What is an exchange rate?

Answer 3

The price of one currency expressed in terms of another

Question 4

What are interest rates?

Answer 4

The price of borrowed money.

Question 5

Impact of increased interest rates on businesses?

Answer 5

Less likely to borrow money to spend
Investment may be slow
Consumers are less likely to borrow money so sales may fall
Mortgage payments will increase so less disposable income for consumers > fall in demand

Question 6

Impact of decreased interest rates on businesses?

Answer 6

Investment may increase; businesses may expand.
Cost of borrowing is low > more start ups
Consumer spending may increase > cheaper to borrow money
Mortgage repayments may decrease > more disposable income > increased demand

Question 7

What is direct taxation?

Answer 7

Taxes levied directly on earnings.

E.g. income tax, national tax, corporation tax

Question 8

What is indirect taxation?

Answer 8

Levied directly on expenditure.

E.g. VAT, insurance tax, car tax

Question 9

What is GDP?

Answer 9

It measures the total value of all goods and services produced within an economy over a given time period -usually one year. It represents total income.

Question 10

What is the business cycle?

Answer 10

It describes the fluctuations in the levels of rates of growth of GDP over a period of time.

Question 11

What is an economic boom?

How will it affect businesses?

Answer 11

A time of rapid growth and expansion in the economy.

Sales of goods and services will increase.
Unemployment will be low & consumers will have more income
Sales of inferior goods may fall
Prices may rise if demand exceeds supply
Costs may rise as business resources become scarce
Will likely cause inflation > causes problems for business

Question 12

What is an economic downturn?

How will it affect businesses?

Answer 12

The boom slows and the rate of growth decreases

Sales of goods and services will fall/grow slowly
Unemployment will begin to rise > consumers will decrease spending
Investment slows as growth slows
Costs and prices may rise more slowly; inflation will ease

Question 13

What is a recession?

How will it affect businesses?

Answer 13

When there are at least two consecutive quarters of negative growth

Sales of goods & services will fall
Unemployment is high
Some business will fail or cut production
Sales of inferior goods will increase
Prices may fall and inflation may slow; supply exceeds demand
Costs may also fall as resources become more plentiful

Question 14

What is a recovery period?

How will it affect businesses?

Answer 14

Positive growth returns, slowly at first then picking up pace.

Sales revenue for products will begin to rise and output will increase
Unemployment begins to fall > consumers spend more
Investment begins to increase as confidence returns
May be inflation (early signs)

Question 15

What is economic forecasting?

Answer 15

The process of predicting future economic variables and events

Question 16

What is a contingency plan?

Answer 16

A plan devised in advance to cope with a range of possible situations

Question 17

What is the trade descriptions act?

Answer 17

It makes it a criminal offence for a trader to make misleading or inaccurate claims about a product or service.

Question 18

What is the sale of goods act?

What must all goods sold be?

Answer 18

It prevents businesses from misleading consumers by claiming qualities the good do not possess.

All goods sold must be
• as described
•fit for purpose
•of a satisfactory quality

Question 19

What is the consumer protection act?

Answer 19

It is designed to help protect the consumer from the products that do not reach a reasonable level of safety.

Question 20

What is the consumer rights act?

Answer 20

It updates and includes the sale of goods act and other legislation as well as hovering new areas e.g. digital content.

Question 21

What is regulation? What

Answer 21

It refers to the government rules that set standards for organisations. These standards protect consumers, employees and the environment.

Question 22

What is the competition and markets authority (CMA)?

Answer 22

It protects consumers and promotes competition. It has legal powers to investigate cartels and dominant firms; it can stop mergers from taking place and force firms to split into smaller units.

Question 23

What is a cartel?

Answer 23

Agreements between two or more firms to fix prices or carve up markets or reduce output. They reduce competition and drive up prices. Illegal in most developed economies.

Question 24

What is direct competition?

Answer 24

When another business has the same product or service e.g Costa and Starbucks

Question 25

What is indirect competition?

Answer 25

When another business has a product in a different category but could be used as a substitute e.g. pubs such as Wetherspoons also serve coffee throughout the day

Question 26

Strategies for competing?

Answer 26

Price
Quality
Innovation
Brand appeal
Customer service
Reliability 
Reputation

Question 27

Business approaches for competition?

Answer 27

Product differentiation and USP’s
Market orientation
The marking mix
Developing technologies
Increasing efficiency 
Employee development - training