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  2.  
  3. PEARSON (PEARSON)
  4.  
  5. Business
  6.  
  7. Unit 2 - Managing business activities

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Summary Economic Influences
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Describes the economic environment, the business cycle, inflation, deflation, interest rates, exchange rates, the effect of economic uncertainty on the business environment, and the competitive environment

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  • September 28, 2020
  • 4
  • 2019/2020
  • Summary

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Theme 2 Topic 5
Economic Influences
The Economic Environment
The state of the economy is an important external influence on business success:

 When the economy is doing well, consumers are more confident and more likely to spend money
 Confident investors are willing to put more money into businesses by buying shares
 Businesses benefit from increased consumer spending and are more prepared to invest in new
buildings, machinery and technology
 When the economy is struggling the opposite occurs with both consumers and businesses cutting
back in spending



The Business Cycle
The Business Cycle – shows the different stages that the UK economy has
gone through over time

GDP – Gross Domestic Product is a measure of total economic activity

Recession – 2 consecutive quarters of negative economic growth

When the economy is growing, business and consumer confidence rises leading to increased spending

During a recession, economic growth is negative – many firms become insolvent due to lack of demand and
unemployment rises

Boom Slump
 Unemployment very low  High unemployment
 Demand high  Low business confidence
 Prices high  Low consumer confidence = low demand
 Need more staff – higher wages, higher  Low interest rates – government tries to
prices stimulate business

Recovery

 Unemployment falling
 Confidence improving
 Demand increases
 Prices rise



Inflation
Inflation – the increase in general prices in an economy

 Measures the rate at which average prices are rising
 Measured by the Consumer Prices Index (CPI)

High Rates of Inflation

 Leads to increased costs for business
- May force them to increase prices, leading to a loss of sales
 Could keep prices the same but suffer from lower profit margins
 Menu Costs – when firms have to constantly reprint menus due to rising costs

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