Theme 2-2.5

• Economic influence- a business is affected by economic factors e.g- inflation, exchange rates
• economic influence: Effects on a business:

  • Inflation-general increase in price
  • shows how much higher or lower prices are compared how much higher or lower prices are compared to earlier months
• economic influence: effects on the business -

  • Measures inflation by CPI (consumer price index)
  • measures CPI on a basket of goods
  • expressed as a %
  • basket of goods reflects shopping trends
• economic influence: effects the business?

  • How it effects the business?
  • increase in inflation, increases cost(materials)
  • as cost go up ,business may need to out prices up to maintain profit
  • can effect profit margins
• Exchange rates


  A price of one currency in exchange for another (can fluctuate on a daily basis, reaction to demand)
• Appreciation


  • A rise in the pound against other currency
  • Get more for the pound
  • Strong pound
  • Cheaper exports, more expensive imports
• Depreciation


  • Fall in the pound
  • Get less for the pound
  • Weak pound
  • Bad for businesses that rely on imports as they may put prices up
• Interest rates and the Bank of England


  • Cost of borrowing, reward for saving
  • Inflation is a factor to changing interest rates
  • Cost push - price of raw materials, may increase interest rates
  • Demand pull - people are buying more
• Cost of borrowing


  • Low interest rates will encourage more interest rate based products
  • High interest rates will encourage people to borrow less and save more instead of spending
• Taxation


  • Variety of taxes paid by businesses and citizens
  • Increase in tax will reduce the profitability as they will have increased cost
• VAT


  • Reducing VAT can stimulate demand
  • Standard rate VAT - most goods and services
  • Reduced rate VAT - some goods and services
  • Zero rate VAT - few goods and services
• UK taxation for small businesses


  • Income tax is taken off the employees wage
  • National insurance is taken off the salary
  • A business would have to pay business rates and business tax
• UK taxation for larger businesses


  • Corporation tax (20%)
  • VAT (20%), pay business rate on premises
  • Income tax and national insurance paid by employee and employer
  • Higher costs due to higher taxation
• Excise duty


  Tax on products which are viewed as having a negative effect on human life
• Government spending


  All tax is collected and divided up into different departments for spending publicly
• Cuts in government spending


  Can cause a slump in the economy
• Increase in government spending


  Can cause an increase in the economy
• Boom - increase consumer spending, feel wealthier, increase demand, inflation increase, high employment, low benefits
• Recession - low consumer spending, decrease in demand, decrease in interest rates
• Legislation


  Set of laws suggested by the government and made official by parliament
• Effects of legislation on business


  • Consumer protection laws
  • Employee protection
  • Equality act 2010
  • Environmental protection act
  • Competition policy
  • Health and safety at work act
• Consumer protection laws


  • Protect the consumer when buying products
  • Legal rights which help the consumer: broken or damaged products have to taken back, unusable products have to taken back, not what is advertised has to been taken back
  • The effect on a business is they must not give false or misleading information about products
• Employee protection


  • These acts ensure workers get paid when sick or on leave
  • Ensure employees are not discriminated against and gets a fair wage
  • Details of termination must be given in the contract
  • Having a minimum wage will increase costing may impact profit margins
  • Failure to meet these will result in fine or prosecution
  • Pension act 2008: employers must put employees on an automatic enrolement for pensions, once eligible staff are entered a payment must be made by employer, business can get fined of they don't pay in for pensions
• Equality act 2010


  • Protects employees from discrimination
  • Business has to comply with laws
• Environmental protection act


  • The act helps control the pollution produced by businesses
• Competition policy


  • CMA (competition and market authority) investigate mergers and promote competition for the benefit of consumers
• Health and safety at work act


  • Workplace hazards
  • Employer duties-prevent accidents
• Impacts of legislation on business cost


  • Compulsory with laws on recruitment, employment, and consumers
  • Adds to cost as there needs to be training, PPE , paying minimum wage
• Impact of legislation on business training needs


  • Employees need up to date training to be legally complainant
  • The owner will not face fines or prison
• Impact of legislation on business recruitment


  • Businesses need to recruit while complying with the equality act
  • Offer equal pay and promotions
• Competition


  More than one seller seeks to sell goods or services to a consumer
• Nature of business ownership


  • Competition will impact the decision on whether to become a ltd or plc
  • If a business wants to expand it will need to raise finance
  • Whether more fund will be raised as a plc or ltd
• Nature of product or service provided


  • Competition may change the nature of product
  • Highly competitive markets mean businesses need to adapt and develop a new product range
• Pricing strategies used


  • Different pricing strategies have to be used to attract consumers
  • Competitive pricing is used to take the price factor out for consumers
• Marketing methods used


  • Campaigns need to be eye catching
  • Could result in higher costs
• The impact on businesses of being in a competitive market


  • Forces prices decreasing, results in a falling profit margin
  • Highly competitive markets need to keep up with rivals products
  • Increase spending on adverts and branding to retain competitive advantage