EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Section 5 Understanding the economic context

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall ‘The British economy is a collection of business transactions that takes place throughout the country, throughout the year.’ What exactly does this mean? What is the economy?

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Demand is the amount of a product that customers are willing to buy and able to afford. A demand curve shows the level of demand over a range of prices. As the price rises, demand falls (and vice versa). Demand

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Supply of a product is also related to price. A supply curve shows how supply changes over a range of prices. As prices rise, supply also rises. A single supplier in a market is known as a monopoly. What happens if supply is greater (or less) than demand? Supply

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Prices of commodities Commodities are basic products such as: –metals, e.g. steel, copper, aluminium –clothing materials, e.g. cotton, wool –food, e.g. coffee, cocoa, sugar. One supplier’s goods are very similar to another’s – and easily interchangeable.

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Prices of commodities Increases in commodity prices may cause business costs to increase. Small businesses may find it particularly hard to pass these cost increases on in the form of higher prices. Why?

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall The interest rate is the annual percentage charge made for borrowing money. Interest payments act as a cost to businesses. Changes in interest rates within the economy can affect businesses in a number of ways! Interest rates

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Effects of a rise in interest rates Households with mortgages cut back on spending to meet higher repayments, leading to a fall in demand for goods and services. Firms with existing borrowing face increased overheads, leading to a squeeze in profits. Firms are discouraged from carrying out new investments as new borrowing becomes more expensive. They may even cut back on staff.

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Effects of a fall in interest rates Households with mortgages experience a fall in repayments, leading to an increase in demand for goods and services. Firms with existing borrowing see overheads reduced, leading to a boost in profits. Firms are encouraged to invest in new projects as new loans become cheaper. They may take on new staff.

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall The exchange rate measures the value of one currency – e.g. the £ – in terms of how much it will buy of another, e.g. the $. If £1 = $1.30, then: –multiply to convert £s into $s (£100 = $130) –divide to convert $s into £s ($100 = £77). Exchange rates

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Does a strong £ matter? A strong £ means that its value is rising against foreign currencies. A strong £ makes it cheaper to buy imported goods: good for UK consumers and UK firms buying foreign raw materials. A strong £ makes imports more price competitive in the UK: bad for UK firms that have to compete with them. A strong £ makes it more costly to buy UK- made goods abroad: also bad for UK firms.

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall What if the £ is weak? A weak £ means that its value is falling against foreign currencies. A weak £ makes it cheaper for foreign customers to buy UK goods: good for UK firms. A weak £ makes it more expensive to buy imported goods: bad for consumers but good for UK firms competing against them. A weak £ makes imported raw materials more expensive: bad for UK firms that import their raw materials.

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall The rate of economic growth varies over time. As the growth rate varies, so do the levels of demand and unemployment within the economy. These changes are part of the business cycle. The effects of the business cycle on small businesses can be significant. Changes in economic activity

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Recession and small businesses A recession means a downturn in economic activity. A fall in consumer spending often leads to a fall in business sales and production. Small businesses will have fewer resources to rely on and are likely to be hit harder than larger firms. The extent of the impact will depend on: –what the business produces –how well prepared it is.

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Stakeholders Stakeholders are the people or groups with an interest in the performance of an organisation and the way it is run. Primary stakeholders are seen by the business as fundamental to its success or failure. Secondary stakeholders include other people or groups who may also feel that they are involved in the firm’s success – whether or not management agrees!

EDEXCEL BUSINESS for GCSE © 2009 Ian Marcousé and Naomi Birchall Now make sure you understand… Bank of England bank rate booming economy chancellor of the exchequer commodity consumer spending economic growth European Union exchange rate exports interest rate forecast foreign exchange markets liquidation market monopoly primary stakeholder recession secondary stakeholder stakeholder wholesale