External Environment

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  • External Environment
    • Political Factors
      • If demand in the economy is low, governments will try to increase it. They will cut taxes to increase spending or reduce interest rates
      • They also try to reduce demand if it is too high through things such as raise taxes and interest rates.
      • They can influence the demand of a certain product, for example, to reduce carbon emissions they could put high  tax on high-emission cars.
    • Labour Supply
      • When less people are employed, there is a good supply of labour. They will not have to pay high wages, keeping costs low.
      • When more people are employed, the labour supply will be low. People may not have the skills needed and will need extra training- costs will be increased.
    • Incomes and Economic Factors
      • In a recession, businesses need to reduce costs (wage cuts or redundancies)Demand decreases as people have less money to spend.
      • In an economic boom, wages rise and more people are employed. There will be higher costs for wages, but also higher demand.
      • Price elasticity
    • Seasonal Demand and Supply
      • Weather and holidays- such as Christmas- produce variations in demand.
      • There can also be variations in supply (for example, strawberries)
    • Competition can reduce demand and increase costs
      • Perfect competition is where all firms compete on an equal basis (their products are pretty much identical with similar prices- but with high quality)
      • In an oligopoly, a small number of large firms dominate the market and charge similar prices (places a focus on marketing and brand image)
      • A monopoly is where one business has control over its marker and can set prices how it wants.
    • Interest Rates
      • A fall in interest rates means a decrease in cost of borrowing for businesses.
      • Interest rates effect the spending of consumers. High interest rates means that they have less spending money or save to take advantage of high returns. Low interest rates mean spending goes up.

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