Section 1, Chapter 4

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  • Chapter 4: External factors affecting business
    • confident investors are willing to put more money into businesses in return for shares, and companies themselves will spend to invest in their future
    • there are external factors that help to create a economic climate of optimism or pessimism
      • market conditions
        • market conditions are tough there are likely to be failures as businesses run out of cash
        • they may also be huge pressures placed on company workforces, as people are forced to chose between redundancy and real wage cuts
        • the recent recession saw a huge squeeze on people's real incomes, meaning that the pain was shared more fairly across the population
        • in the 2009 recession, people were worried whether they would be next for a redundancy notice
        • other important factors affecting market conditions
          • consumer taste and fashion
          • disruptive change, resulting from radical innovation or new technology
          • the competitive structure
      • competition
        • the tighter the economic and market condition, the greater the competitive pressures
        • competitive pressures stem from more than price, in most modern markets customers are looking for social experiences or product uniqueness to make them part with their cash
        • companies need to invest heavily in research and development and in the creativity of their workforce
      • changes in household incomes
        • affected by...
          • changes in the real incomes of the main breadwinners
          • the number within the household who work
          • the impact government decisions on taxation
        • index numbers and household incomes
          • economic and business data are often analysed using index numbers, an index means converting a series of data into figures that all relate to a base period where data is equal to 100
          • the advantage of index numbers is that you can see trends quickly
          • enable direct comparisons to be made between different data series
      • changes in interest rates
        • the interestrate is the price charged by a bank per year for lending  money or providing credit
        • individual banks decide for themselves the rate they will charge on their credit cards or over drafts they provide, but they are usually influenced by the interest rate that the Centra Bank charges high street banks for borrowing money
        • the level of interests very important as:
          • it effects consumer demand , especially for goods bought on credit, such as houses and cars
          • the interest charges affect the total operating costs (the higher the interest rate, the higher the costs of running overdraft, and therefore the lower the profit)
          • the higher the rate of interest, the less attractive it is for a firm to invest money in the future of the business
      • demographic factors
        • demographics looks at the make-up of the population
        • key populationvariables include:
          • age
          • gender
          • ethnicity
      • environmental issues
        • four factors
          • the immediate effect on the environmental actions businesses take, especially the impact on the local community
          • sustainability, that is making sure that the actions of your business will not rob future generations of the availability of key resources
          • global warming
          • fairtrade supplies, that is whether a business chooses to sign an agreement that all its raw materials will be bought through the fairtrade organisation
        • firms can choose how to react but their decision-making powers are limited


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