Understanding that businesses operate within an external environment
Learning objectives:
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Guidance:
Factors influencing costs and demand to include the effect of:
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external influences on costs and demand
A business needs to understand its costs in order to survive. Any factor that can influence costs will also result in a change in price and profit.
Key term: DEMAND - The amount of a product (good or service) that consumers are willing or able to buy at any given price over a period of time.
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There are several factors that can influence demand:
- Price
- Tastes and fashion
- Price of other goods (there are 2 ways this can happen)
Substitutes (a similar product to the one being sold) If the price of a substitute increases, then your product will seem better value for money and demand will increase. The opposite is also applicable.
Complements (products used alongside each other e.g. fish and chips/shampoo and conditioner) If demand for a complement increase, then demand for your product will also increase, and vice versa.
Successful marketing can lead to increase in demand as well a chance to increase prices. This is if a strong brand has been created. http://www.theguardian.com/media-network/media-network-blog/2013/jul/24/share-coke-teach-brands |
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Seasonal factors
The time of year can influence demand, think about porridge and ice cream. When will demand be at its highest? Businesses will try to overcome seasonal fluctuations in demand by providing a range of goods. Think about Topshop and H&M.
The time of year can influence demand, think about porridge and ice cream. When will demand be at its highest? Businesses will try to overcome seasonal fluctuations in demand by providing a range of goods. Think about Topshop and H&M.
Costs and demand are inextricably linked. A rise in costs is likely to lead to a rise in price which may lead to a fall in demand. A fall in costs could lead to a fall in price and potentially a rise in demand.
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Government action
To encourage demand, the government can subsidise a product which makes it cheaper for the consumer. If it wishes to reduce the demand of a product, this can be done through taxation e.g. Cigarettes are taxed heavily. The government can also launch its own advertising campaign to promote the purchase of particular products (5 a day) or discourage the purchase of them (cigarette packaging). The government can also introduce legislation to restrict the advertising or use of a product or to ban it together. |
competition
Competition between businesses can occur at national and international level (Apple and Samsung), local and national level (Sainsbury's and Asda) or in a single town (two local independent hairdressers).
It usually occurs between businesses offering the same product, but it can be broader. For example British Gas compete with companies offering other types of fuel or another example is The Guardian newspaper which will compete with other newspapers but also with other news sources such as the internet, television and radio.
The demand for a firm's goods and services will be influenced by the strategies of its competitors. If a competitor reduces their prices, introduces new products or runs a successful marketing campaign, then this will lead to a fall in demand for your products or services. The reverse will also apply if your competitors remain inactive.
Competition is generally good for the consumer as it leads to cheaper prices or improved quality as firms look to compete. This usually means firms will try to improve the:
There can be disadvantages of competition though:
It usually occurs between businesses offering the same product, but it can be broader. For example British Gas compete with companies offering other types of fuel or another example is The Guardian newspaper which will compete with other newspapers but also with other news sources such as the internet, television and radio.
The demand for a firm's goods and services will be influenced by the strategies of its competitors. If a competitor reduces their prices, introduces new products or runs a successful marketing campaign, then this will lead to a fall in demand for your products or services. The reverse will also apply if your competitors remain inactive.
Competition is generally good for the consumer as it leads to cheaper prices or improved quality as firms look to compete. This usually means firms will try to improve the:
- efficiency of their operations
- cost-effectiveness of their operations
- quality of goods or services they provide
There can be disadvantages of competition though:
- quality can be sacrificed in order to compete
- businesses may use unethical practices in order to keep costs down (e.g. Nike)
- the resources used to promote the business could be better spent on product development
- can force other competitors out of the market leading to redundancies and unemployment
- larger businesses can merge or takeover smaller ones leading to less choice or rising prices
income_and_interest_rates_powerpoint.pptx | |
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income_and_interest_rates.pptx | |
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incomes
Changing levels of income on business costs
If the economy grows and national minimum wage increases, then business costs will increase. This is because wages and salaries are a major element of business costs. If a business judges that it can maintain its profit margin and pass the increased costs on to customers, the price of goods may rise. Where a business judges that by increasing prices, demand may fall too much, it may keep its prices stable and reduce its profit margin.
Wages can be called 'sticky' in that there is usually severe resistance to any attempts to cut them. But during a recession when demand is falling, firms are closing and unemployment is rising, average incomes are likely to fall. A fall in incomes, while having a negative effect on demand, may enable firms to cut their wage bills because employees may be willing to work for less.
Effect of rising income on demand
As consumers' incomes increase, their overall demand for products is likely to rise and the pattern for different products is likely to change.
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As income rises, what will happen to demand for luxury goods?
As income rises, what will happen to demand for essential goods? As income rises, what will happen to demand for inferior products? Give 2 examples of each type of product. |
As demand for goods and services increases, businesses may need to employ more people to meet demand. The labour market is said to 'tighten' because less people are looking for work. This gives more bargaining power to existing workers and potential applicants meaning businesses may have to increase wages or offer higher wages to attract new staff. This could lead to increased costs and potential price increases which may affect demand and competitiveness.
Effect of falling income on demand
When demand falls, excess stock may lead to reduced prices and the business may need to
reduce output. This may lead to falling profits or even losses and potentially redundancies or business closures. Businesses producing inferior goods however, may prosper.
As demand falls, cost-saving strategies may be introduced. Businesses may cut their training budgets or consider rationalisation. This means reorganising a business to improve efficiency and might mean removing layers of management, closing certain sites or outsourcing work to cheaper countries.
reduce output. This may lead to falling profits or even losses and potentially redundancies or business closures. Businesses producing inferior goods however, may prosper.
As demand falls, cost-saving strategies may be introduced. Businesses may cut their training budgets or consider rationalisation. This means reorganising a business to improve efficiency and might mean removing layers of management, closing certain sites or outsourcing work to cheaper countries.
interest rates
Key term: INTEREST RATES: The cost of borrowing money and the return for lending money.
By influencing the cost of borrowing and the reward for lending, the government can influence spending in the economy and therefore the rate of inflation (the rate at which the general price level is rising), the level of employment, the rate of exchange (of pound sterling with other currencies) and the level of exports and imports.
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Effect of interest rates on business costs
Changes in interest rates affect business costs because interest payments are an element of most business's fixed costs. A fall in interest rates is likely to lead to a fall in business costs.
A fall in the interest payments on loans will have a beneficial impact on firms that are highly geared (a firm with extensive long-term loan commitments - a high proportion of capital employed in the form of long-term loans) because fixed costs for these firms will fall. This will reduce unit costs and make it easier to break even. This could lead to businesses reducing prices and becoming more competitive, or leaving prices the same and raising profit margins
Demand for products will tend to increase due to falling interest as it becomes less attractive to save money for consumers. This means businesses could expand production. As a consequence, more employees may be needed, leading to increased competition in the labour market - potentially creating skills shortages and an increase in wage costs.
A rise in interest rates is likely to lead to a rise in business costs.
This means interest payments on loans will increase (for highly geared firms) meaning fixed costs will rise. This increases unit costs and the level of sales needed to break even. Prices may have to rise leading to a fall in demand.
A fall in the interest payments on loans will have a beneficial impact on firms that are highly geared (a firm with extensive long-term loan commitments - a high proportion of capital employed in the form of long-term loans) because fixed costs for these firms will fall. This will reduce unit costs and make it easier to break even. This could lead to businesses reducing prices and becoming more competitive, or leaving prices the same and raising profit margins
Demand for products will tend to increase due to falling interest as it becomes less attractive to save money for consumers. This means businesses could expand production. As a consequence, more employees may be needed, leading to increased competition in the labour market - potentially creating skills shortages and an increase in wage costs.
A rise in interest rates is likely to lead to a rise in business costs.
This means interest payments on loans will increase (for highly geared firms) meaning fixed costs will rise. This increases unit costs and the level of sales needed to break even. Prices may have to rise leading to a fall in demand.
Effect of interest rates on demand
Changes in interest rates will affect demand as the cost of borrowing money will change, affecting people's ability to buy products, especially expensive products such as property, cars and white goods. It also affects their spending on other products as it affects discretionary income.
Key term: DISCRETIONARY INCOME - The amount of an individual's income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid.
Key term: CAPITAL GOODS - goods that are used in producing other goods, rather than being bought by consumers.
Key term: CAPITAL GOODS - goods that are used in producing other goods, rather than being bought by consumers.
A fall in interest rates is likely to lead to an increase in demand for consumer and capital goods.
- saving money is less attractive
- mortgage payments and other loan and credit payments will fall - leading to more discretionary income
- the cost of goods bought on credit will fall
- capital goods bought on credit will become cheaper so businesses will bring forward planned investment, meaning return on projects may exceed interest payments
A rise in interest rates is likely to lead in a fall in demand for goods and services.
- saving money becomes more attractive
- mortgage payments and other loan and credit payments rise
- cost of goods bought on credit will rise
- capital equipment becomes more expensive to buy on credit meaning return on investment won't be higher than interest payments
demographic factors
demographics_and_environment_powerpoint.pptx | |
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Question: What does a change in ethnic diversity mean for businesses?
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Key term: DEMOGRAPHICS - The characteristics of human populations and population groups; it includes analyses of a range of elements including migration trends, birth and death rates, trends in age, ethnicity and gender, levels of education, marital status and size of family.
Demographic effects on business costs
The number of people aged 65 and over who are working has doubled in the last 20 years. Research indicates that older workers generally have lower levels of labour turnover (stay in a job longer), have fewer accidents, are more punctual and have lower levels of absence from work due to short-term sickness than younger workers. This would suggest that employing older workers may enable forms to reduce their costs and improve their performance. B&Q is known to employ a significant proportion of older workers. Research suggests that businesses benefit most from a mixed-age workforce.
Why do you think this might be?
McDonald's employs over 1,000 workers aged 60 and over and reports 20% higher performance in outlets that employ those over 60 in a multi-generational workforce.
Why do you think this might be?
McDonald's employs over 1,000 workers aged 60 and over and reports 20% higher performance in outlets that employ those over 60 in a multi-generational workforce.
However, with pension ages being pushed back there is an expectation that most workers will work beyond their 65th birthday. This may lead to an increase in costs if older workers suffer from chronic illnesses that require them to be off work for longer. Their mental and physical fitness may also slow their work rate and therefore their productivity.
Question: What do you think the long-term effects are of raising the teacher retirement age to 68 are? Why did the government do this?
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The increase in the proportion of women in the workforce has been accompanied by more employment legislation to protect their rights and to promote equality of opportunity. Maternity leave and related maternity payments are one example of this, which over the last 40-50 years increased the general wage costs of business. Some businesses have introduced crèches to enable women to return to work sooner after giving birth - which leads to increased costs, but also benefits the businesses from having skilled workers back to work sooner.
Some commentators suggest that employing migrant workers from Eastern Europe helps businesses reduce costs and allows businesses to become more competitive. However, minimum wage regulations would make it difficult for legitimate employers to pay wages below these rates.
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Question: Why would some UK businesses rather employ migrant workers than UK workers? How would it reduce their costs?
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The effects of demographic factors on demand
Ageing population
Analysts suggest that over the next 10 years, two thirds of all retail spending will come from those aged 55 and over. The rising influence of this age group is likely to result in increased demand for the categories of goods and services they favour. These include health-related, DIY and home maintenance products, and, for the well-off, leisure cruises as these are favoured by this older group compared to clothing, beer and soft drinks which are favoured by a more youthful market. |
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Ethnically diverse population
Approximately 15% of the UK population was not born in the UK. Around 33% of migrants entering the UK move to London. Half of the babies born in London are now born to non-indigenous UK mothers. These demographic characteristics suggest that the pattern of demand for goods and services, particularly in London and other urban areas will be strongly influenced by the needs of these migrants. Immigration has led to the growth of products such as Indian and Eastern European food in UK supermarkets and specialist shops that cater for their needs e.g. Halal butchers.
Approximately 15% of the UK population was not born in the UK. Around 33% of migrants entering the UK move to London. Half of the babies born in London are now born to non-indigenous UK mothers. These demographic characteristics suggest that the pattern of demand for goods and services, particularly in London and other urban areas will be strongly influenced by the needs of these migrants. Immigration has led to the growth of products such as Indian and Eastern European food in UK supermarkets and specialist shops that cater for their needs e.g. Halal butchers.
Size of household
Households are getting smaller and the number of one-person households in England is forecast to increase, single parent households are forecast to continue to rise, and the number of one-child households is growing. This has lead to increasing demand for smaller pack sizes in relation to foodstuffs and household goods. It has also meant an increase in the building of flats rather than family houses.
Households are getting smaller and the number of one-person households in England is forecast to increase, single parent households are forecast to continue to rise, and the number of one-child households is growing. This has lead to increasing demand for smaller pack sizes in relation to foodstuffs and household goods. It has also meant an increase in the building of flats rather than family houses.
Geographical shifts
A shift in the geographical spread of the population to the south-east of England is leading to an increase in demand for housing and other goods and services in this area. E.g. an increase in the number of supermarkets. Businesses need to adapt to this change as it can be anticipated as it happens slowly.
A shift in the geographical spread of the population to the south-east of England is leading to an increase in demand for housing and other goods and services in this area. E.g. an increase in the number of supermarkets. Businesses need to adapt to this change as it can be anticipated as it happens slowly.
environmental issues and fair trade
Environmental sustainability and concern about environmental issues involves making decisions and taking actions that take into account the need to protect the natural world and preserve the capability of the environment to support all forms of life. Businesses can damage the environment through:
- damaging rainforests
- polluting and over-fishing of oceans, rivers and lakes
- polluting the atmosphere through the burning of fossil fuels
- damaging prime agricultural and cultivated land through the use of unsustainable farming practices
Consideration of environmental issues can be an opportunity in that it can lead to an improved reputation among customers leading to becoming more competitive and increasing demand, but it can also lead to increased costs and make a firm less competitive.
- damaging rainforests
- polluting and over-fishing of oceans, rivers and lakes
- polluting the atmosphere through the burning of fossil fuels
- damaging prime agricultural and cultivated land through the use of unsustainable farming practices
Consideration of environmental issues can be an opportunity in that it can lead to an improved reputation among customers leading to becoming more competitive and increasing demand, but it can also lead to increased costs and make a firm less competitive.
Environmental issues that affect costs
Should a business use low-cost production or environmentally responsible production? Finite resources such as coal and oil tend to be cheaper, but using them will deplete supplies and harm the environment. Renewable energy sources are better for the environment, but switching to these sources can be expensive.
Businesses must also consider the safe disposal of waste and by-products generated by production. It can be expensive to dispose of this waste but the alternative of switching to cleaner production can be even more expensive. Although governments can fine or tax firms for polluting, this can sometimes be cheaper than finding another way to dispose of waste.
In general, engaging in environmentally responsible production is likely to lead to an increase in costs. This may increase costs and reduce profits meaning the business passes the increased costs on to consumers in the form of increased prices. However, there are instances where being environmentally responsible can reduce costs e.g. becoming more energy efficient.
Businesses must also consider the safe disposal of waste and by-products generated by production. It can be expensive to dispose of this waste but the alternative of switching to cleaner production can be even more expensive. Although governments can fine or tax firms for polluting, this can sometimes be cheaper than finding another way to dispose of waste.
In general, engaging in environmentally responsible production is likely to lead to an increase in costs. This may increase costs and reduce profits meaning the business passes the increased costs on to consumers in the form of increased prices. However, there are instances where being environmentally responsible can reduce costs e.g. becoming more energy efficient.
Question: How has Gobie H2O managed to keep thier costs down in their production process?
Why do you think their business is successful? Do you think there will be a higher demand for their products compared to other plastic bottle manufacturers? |
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Environmental issues that affect demand
A good reputation in relation to environmental issues can act as a positive marketing tool that encourages consumers to choose one brand over another. As a result, many firms have spent time and money building up a 'green' image as an integral part of their marketing strategy. In addition to increased sales and potentially higher brand loyalty, they may be able to charge a higher price for their products. However, the quality must be as good as non-green products in order to attract additional demand.
It is not always the case that consumers will favour environmentally friendly or ethically sound businesses. Very cheap prices are attractive but can be the result of very low labour and production costs, which in turn may be due to operating in environmentally or ethically questionable circumstances - think about Nike and Primark.
It is not always the case that consumers will favour environmentally friendly or ethically sound businesses. Very cheap prices are attractive but can be the result of very low labour and production costs, which in turn may be due to operating in environmentally or ethically questionable circumstances - think about Nike and Primark.