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Unit 1 P5 M2

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P5 – Describe the influence of two contrasting economic environments on business activities within a selected organisation M2 – Compare the challenges to selected business activities within a selected organisation, in two different economic environments

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  • November 8, 2016
  • 4
  • 2015/2016
  • Essay
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Unit 1 The Business Environment
Pass criteria 5 Merit Criteria 3

P5 – Describe the influence of two contrasting economic environments on business
activities within a selected organisation
M2 – Compare the challenges to selected business activities within a selected
organisation, in two different economic environments
The economic environment is changing constantly. The economic environment is made up
of factors. These economic factors are: employment, income, inflation, interest rates,
productivity, and wealth. These economic factors can be effected by consumers, suppliers,
bankers and lenders, the government, and the monetary policy committee. These people all
make decisions that can affect the economic environment, although some affect it more
than others. The effects on the economic environment can cause a period of economic
growth or a period of recession.
Economic stability is liked by business people because it means that they can forecast what
is going to happen. For example, a shop needs to be able to forecast what is going to be
bought from the in order for them to keep efficiency; they don’t want to buy too much stock
resulting in it going out of date meaning it can’t be sold or they don’t want empty shelves
due to them not buying enough stock which could result in them paying employees to run a
shop where there is nothing to sell.
M&S is influenced by changing economic environments. When the economy changes M&S
have to respond to make sure that they can continue to grow as a company, this changes
can include them changing the way they run their stores (cost-cutting), changing their
suppliers and/or changing what sort of goods they sell.
What occurs when the economic environment changes?
Economic growth is when more goods are being produced and bought, resulting in rising
incomes. Recession is a period of economic decline, and is the opposite of economic growth.
A recession occurs when people become more cautious, customers cut back their spending
and manufacturers and sellers reduce their investments so do not produce as many goods
or do not buy as many goods. Economic growth and recessions both cause a ripple effect,
this is because when a big decision is made it effects everyone else and how they make their
decisions.
Inflation is when the average price of goods goes up in the economy. In the UK the average
price of goods is calculated using the consumer price index (CPI). CPI takes into account
price changes for consumer goods and services, such as transportation, food, and medical
care.1
Cost of credit fluctuates constantly. The cost of credit is the rate of interest so when you
borrow money the rate of interest is the money that you pay back on top of the money that
you borrowed. The cost of credit is set by the Monetary Policy Committee (MPC); they have
a very good understanding of the economy. The recession that hit the UK in 2008 resulted in
interest rates being decreased down to 0.5%.
Labour is the biggest cost for most businesses. Businesses want to ensure that they employ
the right people with the right skills. During an economic crisis it is much easier for

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