3.2.3 - The economic environment

• What is inflation?


  A sustained rise in general price levels
• How do interest rates affect businesses and consumers?

  They represent a reward for saving or cost of borrowing
• What happens when interest rates are low or decreasing?

  Encourage business to invest and consumer spending
• What does a higher interest rate mean for borrowers?

  More money paid back for a loan
• How does a higher savings rate affect consumers?

  More interest paid into accounts for deposits
• What are the aspects of the economic climate?

  • Supply and demand
  • Interest rate changes
  • Consumer and business spending
  • Levels of employment and unemployment
• What is the definition of the economic climate?

  The general situation affecting well-being in a country
• How do high or rising interest rates directly affect businesses?

  Business loans become more expensive
• What is the indirect effect of high interest rates on consumers?

  Consumers spend less due to borrowing costs
• What are the effects of an improving economic climate?

  • Rising levels of employment
  • Increased production
  • Higher consumer spending and incomes
• What is unemployment?

  Being available for work but not having a job
• What are the benefits of high employment for a country?

  Higher income levels and increased spending
• What is staff turnover?

  The amount of people leaving a business
• What is disposable income?

  Money left after paying bills
• How does unemployment affect mental health?

  It can lead to a lack of motivation
• What happens to demand for luxury items when income rises?

  Demand for luxury items increases
• What is the relationship between income and consumer spending?

  • Lower incomes lead to less spending
  • Higher incomes lead to more spending
  • Increased consumer income raises demand
• What is GDP?

  Total value of goods and services produced
• How does an increase in consumer spending affect businesses?

  Businesses can increase prices and profits
• What is the relationship between supply and demand?

  • Supply is the amount available
  • Demand is the amount wanted
  • Prices depend on supply and demand
• What is market price influenced by?

  Supply and demand patterns
• What happens to prices of popular products?

  Prices increase due to high demand
• What is the equilibrium in the context of supply and demand?

  Where supply meets demand at a price
• What is the commodities market?

  Raw materials being traded
• How do price changes occur in the commodities market?

  Due to changes in supply and demand patterns
• How does an economic downturn affect national income?

  National income decreases when GDP decreases
• What is the effect of increased consumer spending on government revenue?

  Tax revenue increases as spending rises
• What is the definition of national income?

  Value of goods and services produced in the economy
• How does consumer spending affect suppliers?

  Suppliers need more raw materials as sales increase
• What happens to wages when there is a staff shortage?

  Wages may increase due to demand for workers
• What is the goods market?

  Everyday products are traded, e.g eggs, CDs, books
• How do businesses respond to increased consumer demand?

  They may increase prices and hire more employees
• What is the impact of seasonal demand on product pricing?

  Prices may drop for off-season products
• How is the economy measured?

  GDP
• Interest rates can be...

  • cost of borrowing
  • rewards for saving
• what does fluctuating mean?

  rise and fall irregularly in numbers or amount
• Advantages of high employment

  • incomes will be higher, so spending on goods and services will increase
  • workers will be more motivated due to job secuirty - productivity levels will increase
• Disadvantages of high unemployment

  • fewer workers will be available resulting in job vacancies difficult to fill
  • increased staff turnovewr as its easy for workers ro get jobs - increasing recruitment and training costs
• one way a rise in unemployment might affect a business

  those unemployed will not have money to spend on goods and services - demand for goods and services decreases
• explain one economic influence on consumer spending

  inflation - consumers will spend less