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Summary International A level CIE chapter 1 Economic influences
A summary of the external economic influences on the business environment fully explained in colour with examples and easy explanations
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External Economic influences on business ac2vity7.1 Government support for business ac5vity
1. Government assistance for entrepreneurs
Most governments provide special assistance for entrepreneurs and other
owners of small businesses, include:
v Offering loan guarantee schemes – government-funded schemes that
guarantee the repayment of a certain percentage of a bank loan should
the new enterprise fail.
v Providing information, advice and training schemes for entrepreneurs
through government industry departments and local colleges.
v Financing - building of small workshops, which are let to entrepreneurs
and small businesses at low rents.
v Reducing the paperwork and legal formalities needed to set up a new
business.
v Cutting the rate of profits tax (corporation tax) for new and small
businesses. This allows them to retain more profits in the business for
expansion.
2. Government assistance for all businesses
It is also common for governments to intervene in industry in ways that will
support both small and large businesses, include:
v subsidies to help keep prices down
v subsidies to stop a loss-making business failing and protect employment
v grants to relocate to particular areas with high unemployment
v financial support for consumers to buy products that will increase
national output.
Advantages of Subsidies Disadvantages of Subsidies
Avoid rising unemployment due to failing Raised taxes or cut spending on other
businesses programs to fund it
Keeps suppliers in business Act as a disincentive for efficiency
If business fails consumers may switch to Consumers buy subsidised goods at a lower
imports which makes balance of payments price than of unsubsidised goods distorting the
worse market
, 7.2 How governments deal with market failure
v Free markets should operate efficiently to match demand and supply at
equilibrium prices.
v One major criticism is that free markets do not take all costs into
consideration when setting prices.
v E.G. - the costs to the environment of some production methods will not
be included
v This will lead to an inefficient allocation of resources. Failure to allocate
resources effectively is referred to as market failure.
1. Examples of market failure
Example 1: External costs
v Pollution resulting from manufacturing is an external cost.
v When a business makes a product, it must pay for the costs of the land,
capital, labour and materials - private costs.
v Other consequences of production – air pollution, carbon emissions,
noise pollution and the dumping of waste
v Unless the business is forced to pay, the costs will be borne by the rest of
society.
v In these cases, the market fails to include the external cost of production
in the price of the product.
v If the price charged to consumers included all the costs of production
(external as well as private), then fewer products would be demanded
and produced.
v As the price charged does not include the external costs, too much of the
product will be demanded and too much produced.
Example 2: Monopoly producers
v When a market is dominated by one supplier, a monopoly is said to exist.
v The business will be interested in making as much profit as possible.
v The easiest way of achieving this is to restrict output and raise prices.
v As the monopolist can prevent competitors from entering the market,
this strategy leads to under- provision of products compared with
demand.
2. Correcting or controlling market failure
, Examples of market Stakeholder most affected Possible reac=on and
failure government interven=on
• Consumers may be forced • The business may take action
to buy environmentally to reduce external costs if
damaging goods if there are bad publicity leads to lasting
no alternatives. damage
• Government and local • Government can impose
authorities will be forced to fines on polluting businesses
External costs – pollution
take the issue seriously by
from manufacturing
voters and pressure groups.
process
• Workers will be worried
about the health effects of
pollution and job security if
the business is closed
down.
• Consumers may receive bad • Industrial organisations could
customer service get members to pay for
• Government will worry industry-wide training, which
about international would benefit all businesses
Labour training – competitiveness of the in the industry.
inadequate provision of industry if there are • Government could pay for
skills training insufficient skilled workers. more training courses at
• Shareholders may see colleges funded from general
future profits fall as output taxation.
will be below potential.
• Consumers are affected by • Consumers could use the
lack of choice, restricted internet for consumer goods,
supplies and high prices. allowing them to choose
• Government is concerned from a wider range of
Monopoly producers – as prices are high and suppliers.
restriction of output of important industries lack • Governments use
goods to keep prices high competitiveness. competition laws.
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