Chapter 20 - Business and the Economic Environment

AQA business studies for A2 - Hodder Education notes on chapter 20

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Chapter 20 ­ Business and the economic
The economic environment and business strategy
A business strategy is simply the long term plans through which it seeks to attain its corporate
objectives. Factors such as interest and exchange rate, the business cycle, inflation and
unemployment combine to shape one aspect of the environment in which the business operates.
The business cycle
Business Cycle Unemployment State of Labour Market
Boom Type Skills surpluses
Slump Location Skill shortages
Skills in Surplus
Business Strategy:
Market dominance
Technological leadership
Inflation Interest Rates Exchange Rates
Rate of price increase Levels, relative to other Level and trend
Trend in price change nations Affect all firms but
Rate relative to that in Trend: rising/falling especially those trading
other countries overseas

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Stage of Business Key Features Likely reactions by businesses
Recovery or Increasing consumer Opportunity to charge higher
Upswing expenditure prices
Existing spare capacity used Rising number of business start
Production rises up's
Business confidence Businesses take decision to
strengthens invest in fixed assets
Investment increases. Businesses operate nearer to
full capacity.…read more

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Interest rates and consumer spending
Interest rates affect the level of spending by UK citizens. The level of their spending is dependent
upon interest rates for a number of reasons:
Consumers are more likely to take a decision to save during a period in which interest rates
are rising.
Changes in interest rates alter the cost of borrowing.
An increasing number of UK consumers have mortgages.
Britain's population is steadily ageing so people are more dependent on pensions.…read more

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Allow price to rise in foreign markets
Exporters could allow prices to fall in
reducing probable sales. Exporters overseas markets as a result of the
receive the same price in pounds for change rate change. They will receive
each overseas sale, but will sell less in the same amount in pounds from each
this situation. sale but should achieve higher sales.
Leave prices unchanged in overseas Increase their prices to maintain price
markets.…read more

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Economies continually change: some industries die and other emerge to replace
them. Structural unemployment occurs due to fundamental changes in the economy
whereby some industries close. Structural unemployment occurs for a number of
The adoption of new methods of production
Increasing competition from overseas
Rising income levels meaning demand for some products declines.…read more

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Cyclical unemployment might result in businesses suffering from falling sales. In the short term firms
may be able to add any surplus production to stocks.
Economic Growth
Economic growth in an increase in the value of goods and services produced by a nation's economy,
this links closely with the business cycle. If the rate of economic growth is negative for a continuous
6 months, then it is said to be a recession.
The benefits and drawbacks of economic growth for businesses.…read more

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Economies of Scale ­ the increased scale of production gives greater potential to benefit
from economies of scale. This is especially true if it's possible to implement a global strategy
whereby similar products can be sold to consumer across the world.
Developing different products for different markets ­ the increased scale of production and
access to large overseas markets such as China and India means that foreign companies can
produce cars that meet the needs of local consumers.…read more

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