The economy and business

Last Lesson

Answer from memory before the answers appear.

• Under consumer law, what three things must goods be?

  Of satisfactory quality, fit for purpose and as described.

• What can a customer get within 30 days for faulty goods?

  A full refund.

• Name the four areas of employment law.

  Recruitment, pay, discrimination and health and safety.

• Give one consequence of breaking the law.

  Fines, compensation, bad publicity or closure.

The Economic Climate

The economic climate is the state of the economy as a whole - whether people have jobs, money to spend and confidence.

• Outside the business's control

  A small business cannot change the economy; it can only respond to it.

• Good times

  Most people have jobs and rising incomes, so they spend more and businesses sell more.

• Hard times

  Jobs are lost and incomes fall, so customers cut back and many businesses struggle.

• Some businesses gain

  In hard times, discount shops and repair services may do better as customers look for cheaper options.

Unemployment

Unemployment is when people who want to work cannot find a job.

• Less spending

  Unemployed people have less income, so they spend less - especially on luxuries such as meals out and holidays.

• Lower sales

  Businesses selling non-essentials see sales fall.

• Easier to recruit

  More people are looking for work, so a small business can find staff more easily and may not need to raise pay.

• Cheaper goods do better

  Businesses selling cheaper alternatives may gain customers.

Changing Levels of Consumer Income

Consumer income is the money people have to spend after tax.

• Rising income

  Customers spend more, and buy more luxuries and higher-quality products. Sales rise.

• Falling income

  Customers cut back, look for cheaper options and delay big purchases. Sales of luxuries fall.

• Different businesses, different effects

  A budget supermarket may gain customers when incomes fall; an upmarket restaurant may lose them.

• The business's response

  Adjust the marketing mix - value deals when incomes fall, premium products when they rise.

Inflation

Inflation is the rise in the general level of prices over time, usually measured as a percentage each year.

• Higher costs

  A business pays more for materials, energy and stock, and staff ask for higher wages to keep up.

• Pressure on prices

  To protect its profit, the business raises its own prices - but customers may buy less.

• Customers cut back

  If wages rise more slowly than prices, customers' real incomes fall and they spend less.

• Planning is harder

  Rising costs make it harder to forecast costs, prices and profit.

Changes in Interest Rates

The interest rate is the cost of borrowing money, and the reward for saving it. The Bank of England sets the Bank Rate, which banks follow.

• Borrowing costs more

  When interest rates rise, loan and overdraft repayments go up, increasing a business's costs and reducing profit.

• Customers spend less

  Customers with mortgages and loans pay more interest, so they have less to spend.

• Saving is more attractive

  Higher rates encourage people to save rather than spend.

• The reverse

  When interest rates fall, borrowing is cheaper, customers have more to spend, and businesses are more willing to borrow to grow.

The Figures Behind the Chart

• 2020

  Inflation (CPI, annual average): 0.9%. Bank Rate (end of year): 0.1%

• 2021

  Inflation (CPI, annual average): 2.6%. Bank Rate (end of year): 0.25%

• 2022

  Inflation (CPI, annual average): 9.1%. Bank Rate (end of year): 3.5%

• 2023

  Inflation (CPI, annual average): 7.3%. Bank Rate (end of year): 5.25%

• 2024

  Inflation (CPI, annual average): 2.5%. Bank Rate (end of year): 4.75%

Government Taxation

Taxes are payments to the government that businesses and customers must make.

• VAT

  A tax added to the price of most goods and services - 20% at the standard rate. A rise makes products more expensive, so customers may buy less.

• Income tax

  A tax on people's wages. Higher income tax leaves customers with less to spend.

• Taxes on business profits

  Sole traders pay income tax on their profits; companies pay corporation tax. Higher taxes leave the owners with less profit.

• Employer costs

  Businesses also pay National Insurance on their employees' wages, so a rise increases the cost of employing staff.

Changes in Exchange Rates

The exchange rate is the value of one currency in terms of another, for example £1 = €1.15.

• Importing

  A small business that buys supplies from abroad - a café importing Italian coffee, a shop buying stock from China - pays in foreign currency.

• Exporting

  A small business that sells abroad - such as an online shop with customers in Europe - is paid in foreign currency or sets prices in it.

• A stronger pound

  Buys more foreign currency, so imports become cheaper, but UK exports become more expensive for foreign customers.

• A weaker pound

  Buys less foreign currency, so imports become more expensive, but UK exports become cheaper for foreign customers.