2.5 External Influences

Question 1

What are interest rates??

Answer 1

Reward for saving & the cost of borrowing expressed as % of money saved/borrowed

Question 2

What are 3 likely results of higher interest rates??

Answer 2

• Businesses less willing to borrow money
• Customers less likely to purchase with credit (lower sales)
• Less likely to make capital investments when retained profit is more profitable in saving schemes

Question 3

What are exchange rates??

Answer 3

Value of one currency expressed in terms of another

Question 4

What are 3 reasons that exchange rates fluctuate??

Answer 4

• Changing demand for a currency
• Economic growth
• Changes to interest rates

Question 5

What’s SPICED??

Answer 5

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 6

What are 2 effects of the strong pound and the weak pound??

Answer 6

Strong pound:
Sales fall (Abroad businesses cheaper)
Business costs fall (supplier from overseas become cheaper)

Weak pound:
Sales rise (cheaper than overseas comp)
Businesses may seek domestic suppliers as suppliers from overseas are expensive

Question 7

What’s inflation??

Answer 7

General rise in prices in the economy

Question 8

What’s the CPI??

Answer 8

Consumer Price Index
Measures monthly changes in the prices of products & compares these to earlier periods

Question 9

What are the 2 main causes of inflation??

Answer 9

• Demand pull (excessive demand so businesses raise prices for high profit margins)
• Cost push (costs rising)

Question 10

What are 3 problems caused by inflation??

Answer 10

• Increased costs (utilities, suppliers & workers demand high wages for cost of living)
• Consumers change spending habits (Deters from making significant purchases & buying with credit)
• International competitiveness (If inflation doesn’t happen in other countries, UK businesses may lose sales to them)

Question 11

What’s the difference between direct and indirect taxes??

Answer 11

Direct = Levied in income ( Corporation & income tax)
Indirect = Levied on spending (VAT)

Question 12

What are 2 negatives and 2 positive impacts of an increase in taxation??

Answer 12

• \revenue falls (less disposable income & more expensive products)
• Costs rise (operating costs rise tariffs rise on imported products)

+ Increased investment spending (e.g. on roads) can encourage businesses to invest & lead to economic growth
+ Increased public sector spending (e.g. public health) can increase productivity

Question 13

What’s the business cycle??

Answer 13

Describes the upturns & downturns of country’s Gross Domestic Product (GDP) over time

Question 14

What are some of the impacts on businesses during a boom and recession??

Answer 14

Boom = Higher revenue, pay high wages, expansion
Recession = Less spending, easy to recruit, businesses delay spending

Question 15

What is competitiveness??

Answer 15

The ability of a business to deliver better value to customers than competitors

Question 16

What is perfect competition??

Answer 16

Many firms producing identical products.
There’s easy entrance & exit from the market

Question 17

What’s monopolistic competition??

Answer 17

Numerous firms selling similar but differentiated products

Question 18

What’s an oligopoly??

Answer 18

Few dominant firms control large portion of the market

Question 19

What’s a monopoly??

Answer 19

Single firm with dominant position in the market

Question 20

What are the barriers to entry (what restricts competition)??

Answer 20

• Product differentiation
• Access to raw materials and distribution channels
• Retaliation by established products

Question 21

What is Porter’s five forces model??

Answer 21

A method of analysing the competitive environment!
- Competitive rivalry
- Supplier power
- Buyer power
- Threat of substitution
- Threat of new entry