3.1.3 Understanding that businesses operate within an external environment Flashcards
State the components of the external environment:
- Market conditions and competition
- Incomes
- Interest rates
- Demographic factors (eg trend, behaviours of people)
- Environmental issues
State the different areas of the external environment that affect a business
- Natural disasters
- Interest rates
- Availability of materials
- Recession
- Price of materials
Explain how a business’s external environment affects the business itself
- It can have a direct impact on their mission statement, aims, and objectives
- It affects a firms costs and the demand for a product
- Firms would increase the price in order to restore lost profit margins
- Any factor that has the effect of increasing costs of a business could ultimately result in an increase in the price of a product set by the business
What are market conditions that affect costs and demand?
- Political Factors
- Labour supply
- Incomes and Economic Factors
- Seasonal Demand and Supply
How do political factors affect costs and demand?
1) If demand in the economy is too low, governments try to increase it. They cut taxes so people have more to spend, and increase their spending in the economy, for example by raising benefits. Central banks (e.g. the Bank of England) reduce interest rates to cut mortgage payments and increase disposable income.
2) Governments try to reduce demand if it’s too high. They raise taxes so people have less money to spend, and cut government spending. Central banks increase interest rates to raise the cost of borrowing, reduce disposable income and reduce demand.
How does labour supply affect costs and demand?
1) When unemployment rates are high, there’s a good supply of labour. Businesses can hire staff easily and won’t have to pay high wages, which means costs can be kept low. People in work will be extra productive to protect their job.
2) A low rate of unemployment could mean that there is a shortage of labour. The people available for employment might not have the skills needed for the role, so will need training. This can increase costs for a business
How does income and economic factors affect costs and demand?
1) The state of the economy affects demand and costs. In a recession, businesses need to reduce costs, e.g. with wage cuts or redundancies to decrease labour costs.
Lower incomes mean people have less money to spend on products, so demand decreases.
2) In an economic boom, wages rise and more people are employed. This may lead to greater costs, due to the increased wages. On the other hand, higher incomes mean that people have more money to spend, increasing demand for products. The increased demand leads to increased production costs in supplying more products.
Explain how seasonal demand and supply affects costs and demand
1) There are variations in demand and supply throughout the year. This is called seasonality.
2) Weather and holidays such as Christmas produce variations in demand. For example, Christmas creates high demand for toys. Hot weather creates demand for ice lollies, paddling pools and air conditioning units.
3) They can also cause variations in supply - for example, more strawberries are available in summer, which would reduce costs for a shop selling strawberries.
4) It’s impossible to avoid seasonality. Businesses must have strategies to deal with it. After Christmas, demand for retail goods drops, so shops cut prices (the January sales) to boost demand, and get rid of stock.
5) Food producers can cope with seasonality in supply by preserving food - e.g. by canning or freeze-drying.
This meets demand even when the food is not in season.
Explain how competition can affect costs and demand
When a competitor enters the market or launches a new product, the demand for a rival business’s product is likely to decrease as people will buy the competitor’s product. The rival business is likely to increase its marketing costs or spend more on improving or diversifying its products in response to the competition. Alternatively, the rival might try to cut its costs to keep the price of its product lower than the competitor’s to increase demand.
Explain how interest rates affect consumer spending
Interest rates affect consumer spending. High interest rates mean 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 (the money left over after essential payments like tax), and so market demand goes down.
People might also decide to save more to take advantage of the interest earned on their savings, reducing demand. Low interest rates mean consumers have more disposable income and there is less reward for saving, so demand goes up.
Explain what demographic change means to a business
1) The structure of a population changes over time in terms of age, sex and race - this is demographic change.
2) Demographic change is important to businesses because it has an impact on the demand for products.
Different demographics of consumers tend to buy different things, so businesses need to adapt the amount and type of products they are producing.
3) Demographic changes can mean that certain types of business are more in demand.
This might allow existing businesses to expand, or new businesses to be set up.
How can the UK respond to their ageing population?
- The UK has an ageing population so businesses have started to target the growing elderly market in order to increase demand for their products. E.g. banks have started offering special rates on retirement accounts and software developers are making brain-training games directed at older people.
The ageing population in the UK has also led to an increased demand for doctors and nurses, which has increased the costs of the NHS (through more treatments and more staff).
Explain how the ageing population and immigration affect supply of workers available
1) An ageing population means that a smaller percentage of the population are of working age - this may result in the supply of workers decreasing. Businesses might have to increase wages to attract workers, which will result in increased costs.
2) Immigration levels also impact the supply of workers. If lots of working aged people are migrating into the country, then the supply of workers will increase. This can drive wages down and decrease business costs.
How do businesses pollute the environment?
1) Businesses pollute the environment through production processes, through traffic pollution caused by transporting raw materials and finished goods, through dumping waste in waterways and seas, and through burying or burning waste. Packaging creates a large amount of landfill waste and many businesses use up resources in an unsustainable way.
How does environmental legislation affect business costs?
2) Government legislation forces businesses to deal with some environmental issues (e.g. levels of pollution).
Businesses may need to put in place controls and measures to make sure they are meeting pollution targets, which costs the business money. However, if they don’t put controls in place and fail to meet government targets, they will incur large fines.
