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Topic 1.5: The economic context
Chapter 27: The impact of the business cycle
Gisborne’s is a small firm which supplies spare parts for diggers used in construction and road
building. It buys stocks from major manufacturers and then sells them to businesses that own diggers.
Twelve months ago, the firm was doing well and had achieved the highest sales ever in its four year
history. It had expanded the number of parts it kept in stock to cope with higher sales and taken on
an extra member of staff. It had also moved to larger premises, taking out a large loan to pay for
the move.
However, the past twelve months have been very bad for Gisborne’s. The level of economic activity
has fallen dramatically and the economy has gone into recession. As the business cycle has
changed, economic growth has fallen by 2 per cent. The construction industry has been particularly
badly affected with sales falling by 25 per cent. This means that there are now a lot of diggers lying
idle in builder’s yards that do not need any replacement parts. The only good thing is that
construction companies have stopped buying new diggers. They have been making do with the
diggers they already own. Older machines break down more frequently and so need more parts.
Even so, Gisborne’s has seen its sales fall by 20 per cent.
1.
Explain what is meant by the business cycle.
(3)
Indicative content

Fluctuations in business activity

Different elements – growth, downturn, recession, recovery

Demand change – less buying means a fall in economic activity

Consumer confidence changes during different times in the cycle

Economic activity changes over time – sometimes it is rising and at other times it slows down.
Mark scheme
Up to 3 marks for explanation. For example, ‘The business cycle shows the fluctuations in the level
of economic activity over a period of time. (1 mark) Most economies go through periods when
the economy is growing, to be followed by times when the level of economic activity slows
down. (1 mark) Conditions are different at different stages. For example, in a growth period
consumer spending is rising and confidence is high, but in a downturn consumer spending is
falling and confidence is low’. (1 mark)
2.
Explain the likely impact that the change in the level of economic activity over the past 12
months is having on Gisborne’s. In your answer, analyse the likely impact on revenues, costs and
profits.
(6)
Indicative content

Revenue high 12 months ago but sales have now fallen

Still have customers, as parts are still needed

Costs increased as a result of larger premises, loans, more staff and stock

Profits falling
© Pearson Education Ltd 2009
Edexcel GCSE Business Studies
page 1
Topic 1.5: The economic context
Mark scheme
The marks will be awarded for the links made in the analysis. The question asks for the effect on
revenues, costs and profits to be considered. It is expected that some reference should be
made to economic activity with the analysis showing the links between the change in activity
and the effect on the different aspects of the business. For example, ‘The slowdown in economic
activity means that the amount of buying and selling in the economy goes down (1 mark). Sales
at Gisborne’s were at a peak 12 months ago, but fell by 20% cent over the period because of
the slowdown. Sales revenue will have fallen as a result. (1 mark) The fall in sales was reduced to
some extent by demand for spare parts. (1 mark) Fixed costs increased as the business moved to
larger premises, including paying interest on a loan. (1 mark) Variable costs also increased as the
business built up stock. (1 mark) Lower sales revenue and higher costs will have led to fall in
profit.’ (1 mark)
3.
Explain how making a worker redundant might help Gisborne’s during a slowdown.
(3)
Indicative content

Reduce costs/overheads via wages

Reduce taxes to government (NICs)

Improves cash flow

Offsets cuts in revenue

May help to limit the loss the company might make or help to maintain profit levels

Money saved on wages can be used to help pay other essential costs
Mark scheme
Up to 3 marks for explanation. For example, ‘Making a worker redundant could contribute to
reducing the cost of paying wages and National Insurance contributions. (1 mark) If costs fall
then the business can use the money it would have paid in wage costs to pay off its loan. (1
mark) Or it may be used to compensate for falling sales and maintain profit until the economy
recovers and sales pick up.’ (1 mark)
© Pearson Education Ltd 2009
Edexcel GCSE Business Studies
page 2
Topic 1.5: The economic context
4.
Compare two different measures that Gisborne’s might take to survive the slowdown apart from
making workers redundant. Discuss which one you think could be the most important in ensuring
its survival.
(9)
Indicative content
Sell off premises

Reduce outgoings

Pay off loan

One-off action

Depends on how much it raises

May need other strategies alongside
Reduce prices

May increase revenue – profits may fall or rise depending on response

May be no reaction from customers to the price reduction so might not work

Short-term measure

New customers may be generated as a result

Might possibly help it to increase market share
Restructure finance

Increase its overdraft to meet changed cash flow situation

Try to find ways to reduce its outgoings – its fixed and variable costs

Try to renegotiate the terms of its loan with its bank – maybe pay it off over a longer period of
time

Be willing to accept lower profits during the slowdown

Find ways to make sure it gets the payments it is owed by debtors
Find new customers

Carry out market research to find new customers

Look to promote their product and service more effectively
© Pearson Education Ltd 2009
Edexcel GCSE Business Studies
page 3
Topic 1.5: The economic context
Mark scheme
Level
Mark
Descriptor
No mark
Non-rewardable material
Level 1
1–3
Level 2
4–6
Up to two measures are given but with limited
development of one or both. At the top of the mark
range a judgement is given but not supported. For
example, ‘Two methods could be selling property and
restructuring finance. Reducing costs such as loans
could be the easiest method.’
Up to two measures are given with some development
of each and some attempt to draw a comparison. At
the top end of the mark range a judgement will also
be given with some limited support. For example, ‘Two
methods could be reducing their prices and
restructuring finance. Reducing prices might help to
encourage more sales. Restructuring its finance may
mean getting an extension to its overdraft to help it
manage its cash flow. Given that Gisborne’s is facing a
slowdown and sales in construction have fallen so far, it
is probably better to try to get an overdraft extension
because even if it does reduce prices there may not
be the business available to get more sales.’
Two measures are given with some analysis of each
which makes use of appropriate terminology. There is a
clear attempt to draw a comparison and a conclusion
will be given that makes a judgement and draws
together the analysis given.
Level 3
7–9
For example, ‘Two ways to cope with the slowdown is
to restructure its finance and find new customers. It
can try to negotiate new terms for its loan with its bank
to try and pay the loan back over a longer period of
time and reduce its monthly payments. This will help
reduce its costs. As its cash flow is weaker it might also
ask for an extension of its overdraft to help cover the
weaker cash flow. It could try to find ways of finding
new customers. This could be done by some market
research. However, this is likely to be expensive and
may not be appropriate given the economic
conditions. As the construction industry has slowed
down quite a lot there may simply not be any new
customers anyway.
As a result it would seem that dealing with its finance
may be a better way of surviving the slowdown. It is
not in a totally hopeless situation as firms are repairing
diggers rather than buying new ones so it might benefit
from that. It can explain this to the bank that may be
willing to take the risk of helping with finance.
Restructuring finance will be the most appropriate
option, therefore.’
© Pearson Education Ltd 2009
Edexcel GCSE Business Studies
page 4