2.5.1 Economic Influences Flashcards
Inflation - impact on business
Raise in general price level
Fall = deflation
Impact on business
Increased cost of products and services
Increased cost of materials
Suppliers likely to be in UK suffering from price rise
May not need to increase price to maintain profitability
Inflation - impact on labour wages
Rise = lowers real wage, increases demand for labour, lowers unemployment Lowers = raise real wage, reduces demand for labour, increases unemployment
Business benefits and problems - high inflation
Benefits to business of high inflation
Cut in real value of loans
Balance sheets look stronger
Business problems of high inflation
Cash flow squeezed - rising cost of materials
Forecasting uncertainty
May struggle - customer price consciousness - customers = price sensitive
Staff more wage conscious - cause labour turnover
Quick price changes = harder to track competitors pricing strategies
Effects of government policy - inflation
May feel threatened and worsening balance of payments
Too many imports sucked in
Taxes may increase
Strategies such as cutting stock or carrying 0 budgeting exercise
Exchange rates
SPICED
Appreciation = rise £ Depreciation = fall £ in comparison to other currencies
Change in IR = change in ER
Fall in IR = less saving and investment in the UK, less demand for £ so value depreciates
Interest rates
Cost of borrowing money
Increased = customer spending falls
High inflation = raise IR
Lower IT = encourage economic growth and fall in unemployment
Changes to interest rates effect on business
If IR rise cost of borrowing rise = cost of suppliers may increase
A fall - cost of debt falls - increase in profit
Government spending and taxation
Tax Income tax - less disposable income VAT - added to goods and services - increases prices Corporate tax - rise = less profit National insurance
Implications of gov/ Bank of England on business
Can control rate of interest and amount of money circulating
Can affect amount of borrowing
economic influences has knock on effect
Business cycle
Negative growth = recession
Positive growth = boom.
Recession -> Boom = recovery
Boom -> Recession = slump
Boom = high wages, high consumer spending
Recession - business looks for other markets, investments fall, low profits, redundancies
Slump - more redundancies, high unemployment, low consumer spending, factories closed
Recovery - increased production, wages rise, decline unemployemeny, consumers spend more
Changing buying habits
Normal goods - as income goes up so does demand
Inferior - as income up demand down
Luxury - as income up consumers may substitute for these types of goods, in recession demand drop s
Uncertainty
Can affect spending decisions
Take over - employees = uncertain
How to protect from uncertainty
May be involve in import and export and be affected by fluctuations in exchange rate
Could cause problems if there are a lot of fluctuations
Foreign exchange rate can be bought and sold in advance known as forward market
Worried about fluctuating interest rises so takeout long term fixed loan
