Unit:1 Understanding the
Analysing economic and
LO1 - Identify the economic impacts on a
LO2 - Discuss how changes in the
competitive structure of a market can affect
LO3 - Highlight how unpredictable external
influences on the market can affect an
Defined: a general rise in the price level over
a period of time (averages around 2%). Due
To recent petrol increases this is now 2.1%
– RPI – Retail Price Index
– RPIX = RPI – mortgage
– RPIY = RPIX – indirect
– taxes and local authority tax
– HICP – Harmonised Index of Consumer Prices
(From November 2003)
Defined: the number of people in the workforce
in a country who are looking for a job, but cannot
• Policies designed to help those who want to
work get work:
– Strong economy.
– National Minimum Wage and changes to
– ‘New Deal’ and ‘Employment Zones’.
– Investing in education and training.
– Investing in diversity.
Defined: The rate at which one
currency can be exchanged for
e.g. £1 = €1.39, £1 = $2.04
Influences the perceived prices of
imports and exports and therefore
costs and competitiveness.
Exchange Rates - effects on business
Appreciation – value of £ against other
currencies rises, e.g. £1 = €1.39 to £1 = €1.49.
Exports harder to sell abroad (foreign traders
have to give up more of their currency to get
same amount of £ - export prices appear to rise.
Imports appear to be cheaper – buyer in UK
gets more foreign currency for every £.
Exchange Rates - effects on business
Depreciation – value of £ against other currencies
falls, e.g. £1 = $2.04 to £1 = $1.96.
Exporters benefit – foreign traders get more £ for
their currency – export prices appear to fall.
Importers – have to give up more £ to get same
amount of foreign currency – appears import
prices have risen.
Precise effect of both depends on Price Elasticity of
demand for imports and exports.
• Monetary Policy:
• Changes in the rate of
interest to help control
the level of expenditure
in the economy and
therefore the level of
• In hands of the Monetary
Policy Committee –
(MPC) of the Bank of
• Significant effects on
Interest Rates – affects on business
• Rising Interest Rates:
– Likely to depress consumer spending.
– Increases the cost of borrowing – impacts
on investment decisions.
– Increases existing loan costs – the more
highly geared the greater the impact.
– Affects exchange rate – could impact on
sales abroad (exports) or cost of imported
• Falling rates have the opposite effect.
Measured by Gross Domestic Product (GDP) –
the value of output of goods and services in the
economy over a period of a year:
– Measured by adding up total incomes (Y) or total
expenditure (E) or total output of industry
– Appropriate growth levels in UK
too high - economy overheating,
too low - economy stagnating, resources
– Actual growth of 2–2.5% seen as being sustainable
Economic Growth – effects on business
• Low growth – business sales low, profit
margins tight, excess capacity, orders
reduced, excess stock, redundancies.
• High growth – business sales rising quickly,
profits rising, skill shortages, inflationary
pressure on prices, capacity squeezed, stocks
Economic Growth – The Business Cycle
Excess capacity –
Changes in the Competitive Structure:
• firms operate in markets, these
are structured differently
• we can look at three different
types of market structure and find
examples of each:
• a market structure where there is a
single seller of a unique product
• no competition, as the firm = the
• potential for abuse of monopoly position
• the market may be a natural monopoly
– having competition amongst firms in this
kind of market would be costly
Example of Monopoly
• there may be significant savings to
be had from having one company
running the market
• Network Rail are responsible for
the maintenance and upgrading of
the UK rail network
• is it safer to have one company in
• two large producers or sellers
• exactly two equally dominant firms
• tend to compete or collude
Example of Duopoly
• global aircraft market
• two dominant firms are Airbus and
• how do they compete with each
• markets dominated by a small
number of large firms
• the most common types of market
• large firms are involved in selling
either identical or very similar
• significant barriers to entry into
Example of Oligopoly
• the personal and domestic care
• dominated by:
– Procter and Gamble
Unpredictable External Influences:
• This can include events such as
‘September 11th’ or the London
bombings, which can impact on both
individual organisations and the
economy as a whole.
Read 51 – 62 in IGCSE Business
Studies answering questions on
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mean READ!!!! Skip this at your