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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… • • • • • • • • • • • Bank of England bank rate booming economy chancellor of the exchequer commodity consumer spending economic growth European Union exchange rate exports interest rate • • • • • • • • • • forecast foreign exchange markets liquidation market monopoly primary stakeholder recession secondary stakeholder stakeholder wholesale © 2009 Ian Marcousé and Naomi Birchall