Theme 2 Topic 5
Economic Influences
The Economic Environment
The state of the economy is an important external influence on business success:
When the economy is doing well, consumers are more confident and more likely to spend money
Confident investors are willing to put more money into businesses by buying shares
Businesses benefit from increased consumer spending and are more prepared to invest in new
buildings, machinery and technology
When the economy is struggling the opposite occurs with both consumers and businesses cutting
back in spending
The Business Cycle
The Business Cycle – shows the different stages that the UK economy has
gone through over time
GDP – Gross Domestic Product is a measure of total economic activity
Recession – 2 consecutive quarters of negative economic growth
When the economy is growing, business and consumer confidence rises leading to increased spending
During a recession, economic growth is negative – many firms become insolvent due to lack of demand and
unemployment rises
Boom Slump
Unemployment very low High unemployment
Demand high Low business confidence
Prices high Low consumer confidence = low demand
Need more staff – higher wages, higher Low interest rates – government tries to
prices stimulate business
Recovery
Unemployment falling
Confidence improving
Demand increases
Prices rise
Inflation
Inflation – the increase in general prices in an economy
Measures the rate at which average prices are rising
Measured by the Consumer Prices Index (CPI)
High Rates of Inflation
Leads to increased costs for business
- May force them to increase prices, leading to a loss of sales
Could keep prices the same but suffer from lower profit margins
Menu Costs – when firms have to constantly reprint menus due to rising costs
Economic Influences
The Economic Environment
The state of the economy is an important external influence on business success:
When the economy is doing well, consumers are more confident and more likely to spend money
Confident investors are willing to put more money into businesses by buying shares
Businesses benefit from increased consumer spending and are more prepared to invest in new
buildings, machinery and technology
When the economy is struggling the opposite occurs with both consumers and businesses cutting
back in spending
The Business Cycle
The Business Cycle – shows the different stages that the UK economy has
gone through over time
GDP – Gross Domestic Product is a measure of total economic activity
Recession – 2 consecutive quarters of negative economic growth
When the economy is growing, business and consumer confidence rises leading to increased spending
During a recession, economic growth is negative – many firms become insolvent due to lack of demand and
unemployment rises
Boom Slump
Unemployment very low High unemployment
Demand high Low business confidence
Prices high Low consumer confidence = low demand
Need more staff – higher wages, higher Low interest rates – government tries to
prices stimulate business
Recovery
Unemployment falling
Confidence improving
Demand increases
Prices rise
Inflation
Inflation – the increase in general prices in an economy
Measures the rate at which average prices are rising
Measured by the Consumer Prices Index (CPI)
High Rates of Inflation
Leads to increased costs for business
- May force them to increase prices, leading to a loss of sales
Could keep prices the same but suffer from lower profit margins
Menu Costs – when firms have to constantly reprint menus due to rising costs
