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2.5.1 Economic influences - Coggle Diagram
2.5.1 Economic influences
Inflation
the percentage rate at which average prices rise during a year within the whole UK economy
If inflation is falling, this doesn't mean prices are getting cheaper. They are rising at a slower rate.
Deflation: where average prices are falling - rare in UK and is signified by a negative rate of inflation
if consumers are used to increasing prices, the firm may increase their prices to protect profit margins
Circumstances in which inflation has major effects
when rates in inflation are significantly above 2%
when prices are rising faster than average earnings
when UK inflation is higher than that in most other countries
good to link this with profit margins and gross profit margin to see if direct costs are rising faster than prices
Effects of inflation on businesses
firms with long-term fixed price contracts may find if costs rise, while the contract is still being completed, the fixed price may not cover their now higher total costs = damaging profitability
firms with long term borrowings will find the real value of money they repay to be lower following a period of high inflation - as inflation has effects of reducing the real value of money
If inflation is higher in UK than in other countries, UK firms may loose competitiveness against foreign rivals whose costs will rise slowly - would allow foreign firms to charge lower prices
Exchange rates
will affect UK businesses that export their products/services and UK businesses that buy materials/other supplies abroad
the value of one currency expressed in terms of another
Link: will pay a key role in any business operating on a global scale (Theme 4)
Effects of exchange rates on businesses
£ appreciates
UK exports get pricier so sales volume falls
imports to UK get cheaper, making it harder for UK firms to compete
£ depreciates
UK exports get cheaper so sales volumes increases
imports to UK get more expensive so UK firms can compete more effectively
SPICED
Strong Pound Imports Cheaper Exports Dearer
Interest rates
The amount charged by a lender per year for borrowing money. This is expressed as a percentage of the amount of money outstanding
lenders will often charge different interest rates but will adjust in line to the base rate set by the Bank of England
Effects of interest rates on businesses (increase)
consumers likely to have less money to spend, as payments on mortgages/other borrowings will increase - likely to reduce demand
amount paid in interest on any borrowing by business will rise - pushing up costs
consumers are less likely to 'borrow to buy' so products that are often bought on credit e.g cars will see a fall in demand, as credit will cost more
businesses less likely to invest as opportunity cost of investment (keeping the money in the bank to earn interest with no risk) will be greater
Taxation and government spending
effects of taxation and government spending
to help reduce the level of unemployment
government spending up: Extra spending on infrastructure, health and other services with big workforces
government puts taxes down: reduce income tax to enable families to keep and spend more of the money they earn
to cut the growth rate of the economy when it is rising too fast
cut spending on health, education and defence, to take a bit of spending from the economy
increase income tax to force people to think harder and more carefully about what they buy
to improve the competitiveness of British firms
extra spending on education
cut company taxations (Corporate tax)
to cut the rate of imports, especially consumer goods
cut benefits (e.g. state pension) to reduce people's ability to buy exports
to increase VAT on all goods other than food and drink
The Business cycle
pattern of economic growth in the UK tends to follow a pattern where strong growth (boom) is followed by periods of recession, where the economy actually contracts
Effects of the business cycle on businesses
if economy slows, consumer will reduce spending
during boom period, consumer demand rises rapidly
changes in consumer' incomes are a result of changes in wages or even changes in level of unemployment
basically its dependent on YED (Theme 1)
inferior good
Incomes increase
demand decreases
consumers stop buying cheaper alternatives and trade up now that they have more disposable income
incomes decrease
demand increases
consumers switch to these to save money
normal goods
incomes increase
demand increases at the same rate as incomes or a little slower
increasingly affluent consumers are now able to buy a bit more of this product
incomes decrease
demand decrease at the same rate as incomes or a little slower
as consumers tighten their budgets they will cut back on these products (but not a lot)
luxury goods
incomes increase
demand increases at a faster rate than incomes
most of consumers' extra income will be spent on this
incomes decrease
demand decreases at a faster rate
these will be the first to be cut down on spending when tightening consumers' budgets
Effect of economic uncertainty
links with sales forecasting + 1.5.1 'anticipating risks and uncertainty'
economic forecasting
process of predicting future economic variable and events, able to know factors such as minimum wage increasing in the future
contingency planning
preparing for a course of action which could be used to respond to unexpected developments.
planning the 'what if scenario' (i.e. ready for events such as inflation and exchange rate changes, or even planning action is rapid unexpected changes occur in their biggest market)