© boardworks ltd 2009 1 of 40 icons key: for more detailed instructions, see the getting started...

© Boardworks Ltd 20091 of 40

Icons key: For more detailed instructions, see the Getting Started presentation

Teacher’s notes included in the Notes PageFlash activity

Web addresses

Extension activities

Sound Printable activity SpreadsheetVideo

External InfluencesUnit 4: The Economic Environment

Le

arn

ing

ob

jec

tiv

es


Learning objectives

How do economic conditions affect the profits of a business?

What laws must businesses follow to protect the environment?

Inflation, interest & Exchange rates


External influences

Every business wants to achieve its aims and objectives to make a profit. It will try to do this by organizing what it can influence internally: employees, resources, quality etc.

These external influences change from time to time and a business must be able to adapt to them.

business competition

economic conditions

environmental constraints

internal influences

However, a business is also affected by external influences which it cannot control:


The types of competition

There are two types of competition: direct and indirect.

Direct competition includes businesses that sell similar products, e.g. Ford competes with Peugeot and Toyota.

Indirect competition includes businesses that sell slightly different products, e.g. Burger King competes with Starbucks.

Businesses that sell totally different products are also in indirect competition, e.g. Rimmel competes with iTunes and Topshop for the money which teenage girls spend.

Give an example of two businesses in direct competition and two in indirect competition.


Types of competitors

The competitors a business competes with are not always the same. There are three types of competitor:

local competitors

national competitors

multinational competitors.

A multinational business has operations in more than one country. It adapts its products for each particular market.

Can you name any multinational businesses?

How has ICT made it easier for businesses to compete for customers around the world?


The economy

An economy is the system within a country which influences the production, distribution and consumption of products, and the supply of money.

A minister must manage the economy by taking advice from the Central Bank and Economists and Business people.

Peru’s economy affects every Peruvian business and citizen. It is therefore very important that the government organizes the economy properly.


Economic conditions

The economy is affected by three areas:

Businesses and customers can be affected when changes are made to interest rates, prices or exchange rates.

interest rates

prices

exchange rates.

Changes to the economy can make it difficult for a business to plan ahead and for customers to plan when to spend or save.


Interest rates

The base interest rates of Peru are set by its central bank: the of Banco Central who issue the banknotes.

The base interest rate is the fee the Bank charges its customers, usually other banks, for borrowing money. It determines how much extra must be repaid on top of the original sum in a loan.

However, customers (including businesses) can be charged higher interest rates than the base interest rate because other banks and credit cards set their own rates.

Do businesses prefer high or low interest rates?


The effects of interest rates


Fluctuating interest rates


Inflation

Prices can increase or decrease over time. When prices are generally rising, this is called inflation.

Businesses will then put up their prices to compensate for inflation, but it can lower their sales.

What would happen if the opposite of inflation: deflation, occurred?

Inflation can cause major problems for smaller businesses because raw materials (produced in the UK) become more expensive to buy.

Staff will also demand pay rises which creates even more cost.


Case study: crude oil price increase


How inflation can affect businesses


Exchange rates

The exchange rate is what one currency is worth in another currency. In the UK it is how much one British pound, called sterling, is worth in a different currency.

For example, if you were going to the USA you would need some US dollars. If the exchange rate was $1.93 to £1 and you exchanged £45, you would receive $86.85 as 1.93 x 45 = 86.85.

Would a US tourist visiting the UK want the US dollar to be stronger or weaker than sterling?

On holidays abroad, it determines how much a tourist’s money is worth. A strong currency is worth a lot – good for tourists; a weak currency is worth little – bad for tourists.


Exchange rates

Businesses are affected by exchange rates all the time as many of them sell to, or are supplied by, businesses abroad.

When a business in the UK exports (sells products overseas), it expects to be paid in pounds sterling.

Would a business that exports prefer a strong or a weak British pound?

If a UK business imports (buys products from abroad), it will have to pay for the products in the currencies of those countries.


Exchange rates

The exchange rate alters because of international supply and demand.

If more people are buying pounds than selling them, this creates a demand for sterling and increases their value.

If more people are selling Soles than buying them, the exchange rate will go down, making the pound weaker.


Exchange rates: good or bad?


Environmental constraints

Business activity can damage the environment.

What kinds of problems can excessive pollution and wastage cause to the environment?

The UK government is trying to reduce pollution and wastage by introducing laws to minimize the negative impacts and by setting specific targets that must be met.


recycling and composting

consuming less energy

using fewer resources

reducing waste

disposing of waste properly.

Wasting resources

Some of the resources that a business uses end up as waste.It makes sense for a business to reduce the amount of waste it produces for financial and environmental reasons by:

Design a poster to encourage businesses to reduce the amount of wastage they produce.


Pollution

Unless it is carefully controlled, business activity can cause a variety of environmental problems, such as:

air pollution

noise pollution

water pollution.


Environmental laws

Now aim for SUSTAINABLE lifestyles and business

Why?

What is a good definition of Sustainability


External influences


Question time

1.Give three tactics a business might use to steal customers from its competitors

2.Explain what the difference is between direct and indirect competition and give three examples of each.

3.Why do businesses which are exporters dislike it when the sterling exchange rate is very strong?

4.Who suffers when interest rates increase?5.Why does inflation create extra costs for a business?


Who wants to be an A* student?


Glossary

© boardworks ltd 2009 1 of 40 icons key: for more detailed instructions, see the getting started...

Documents