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EDEXCEL BUSINESS for GCSE
Section 5
Understanding the economic
context
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
What is the economy?
‘The British economy is a collection of
business transactions that takes place
throughout the country, throughout the
year.’
What exactly does this mean?
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Demand
• Demand is the amount of a product that
customers are willing to buy and able to
afford.
• A demand curve shows the level of
demand over a range of prices.
• As the price rises, demand falls (and
vice versa).
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Supply
• Supply of a product is also related to price.
• A supply curve shows how supply changes
over a range of prices.
• As prices rise, supply also rises.
• A single supplier in a market is known as a
monopoly.
• What happens if supply is greater (or less)
than demand?
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Prices of commodities
• Commodities are basic products such
as:
– metals, e.g. steel, copper, aluminium
– clothing materials, e.g. cotton, wool
– food, e.g. coffee, cocoa, sugar.
• One supplier’s goods are very similar to
another’s – and easily interchangeable.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Prices of commodities
• Increases in commodity prices may
cause business costs to increase.
• Small businesses may find it particularly
hard to pass these cost increases on in
the form of higher prices. Why?
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Interest rates
• The interest rate is the annual
percentage charge made for borrowing
money.
• Interest payments act as a cost to
businesses.
• Changes in interest rates within the
economy can affect businesses in a
number of ways!
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Effects of a rise in interest rates
• Households with mortgages cut back on
spending to meet higher repayments, leading
to a fall in demand for goods and services.
• Firms with existing borrowing face increased
overheads, leading to a squeeze in profits.
• Firms are discouraged from carrying out new
investments as new borrowing becomes
more expensive.
• They may even cut back on staff.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Effects of a fall in interest rates
• Households with mortgages experience a fall
in repayments, leading to an increase in
demand for goods and services.
• Firms with existing borrowing see overheads
reduced, leading to a boost in profits.
• Firms are encouraged to invest in new
projects as new loans become cheaper.
• They may take on new staff.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Exchange rates
• The exchange rate measures the value
of one currency – e.g. the £ – in terms
of how much it will buy of another, e.g.
the $.
• If £1 = $1.30, then:
– multiply to convert £s into $s (£100 = $130)
– divide to convert $s into £s ($100 = £77).
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Does a strong £ matter?
• A strong £ means that its value is rising
against foreign currencies.
• A strong £ makes it cheaper to buy imported
goods: good for UK consumers and UK firms
buying foreign raw materials.
• A strong £ makes imports more price
competitive in the UK: bad for UK firms that
have to compete with them.
• A strong £ makes it more costly to buy UKmade goods abroad: also bad for UK firms.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
What if the £ is weak?
• A weak £ means that its value is falling against
foreign currencies.
• A weak £ makes it cheaper for foreign
customers to buy UK goods: good for UK firms.
• A weak £ makes it more expensive to buy
imported goods: bad for consumers but good
for UK firms competing against them.
• A weak £ makes imported raw materials more
expensive: bad for UK firms that import their
raw materials.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Changes in economic activity
• The rate of economic growth varies over
time.
• As the growth rate varies, so do the levels
of demand and unemployment within the
economy.
• These changes are part of the business
cycle.
• The effects of the business cycle on small
businesses can be significant.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Recession and small businesses
• A recession means a downturn in economic
activity.
• A fall in consumer spending often leads to a
fall in business sales and production.
• Small businesses will have fewer resources
to rely on and are likely to be hit harder than
larger firms.
• The extent of the impact will depend on:
– what the business produces
– how well prepared it is.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Stakeholders
• Stakeholders are the people or groups with
an interest in the performance of an
organisation and the way it is run.
• Primary stakeholders are seen by the
business as fundamental to its success or
failure.
• Secondary stakeholders include other people
or groups who may also feel that they are
involved in the firm’s success – whether or
not management agrees!
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Now make sure you understand…
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Bank of England
bank rate
booming economy
chancellor of the exchequer
commodity
consumer spending
economic growth
European Union
exchange rate
exports
interest rate
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forecast
foreign exchange markets
liquidation
market
monopoly
primary stakeholder
recession
secondary stakeholder
stakeholder
wholesale
© 2009 Ian Marcousé and Naomi Birchall