1. 1.3.1 U NDERSTANDING THAT BUSINESSES OPERATE WITHIN AN EXTERNAL ENVIRONMENT AQA Business 1 W HAT IS BUSINESS ? Businesses are influenced by factors in the external environment. These are outside of their control. Can you name 3 of these factors? P _ _ _ _ _ C _ _ _ C _ _ _ _ _ C _ _ V _ _ _ _ _ _ _

2. 1.3.1 U NDERSTANDING THAT BUSINESSES OPERATE WITHIN AN EXTERNAL ENVIRONMENT  In this topic you will learn about  How the external environment can affect costs and demand Are the factors affecting demand at Tesco internal or external?

3. 1.3.1 U NDERSTANDING THAT BUSINESSES OPERATE WITHIN AN EXTERNAL ENVIRONMENT  The external environment can affect:  Costs Costs are the value paid or to be paid for the acquisition of goods and services by businesses  Demand The amount customers are willing and able to buy at a set price at any given point in time Recap: What are fixed, variable and total costs?

4. C OMPETITION – THE NUMBER AND RELATIVE POWER OF FIRMS TRADING IN THE SAME OR SIMILAR MARKETS. Effect on demand Effect on costs If there are many competitors in the market this will increase the selling power of the supplier as they will have a range of firms wanting to buy their goods or services. This can therefore push costs up. Competition may attract new suppliers into a market increasing the availability and therefore driving costs down. Competition can encourage firms to compete on price therefore lowering prices overall and increasing demand in the market. A number of firms competing may see a spread in demand between firms, reducing the market share of each firm if the market size remains unchanged.

5. M ARKET CONDITIONS – THE DEFINING CHARACTERISTICS OF THE MARKET E. G. LEVEL OF SALES, TRENDS AND DEGREE OF COMPETITION. Effect on demand Effect on costs Market conditions will affect the demand for supplies and therefore directly impact on costs. If the market is in decline costs may be lowered as firms try to maintain sales. If there is a high level of demand then supplies may be in short supply allowing suppliers to increase costs. The level of demand will be a clear indicator of market conditions. If the market is growing demand will be increasing and vice versa. Buoyant market conditions may act as a signal for new businesses to enter the market in anticipation of a further increase in demand.

6. I NCOMES – THE EARNINGS OF CONSUMERS THAT WILL DIRECTLY INFLUENCE SPENDING POWER. Effect on demand Effect on costs Rising incomes may be as a result of higher wages which are a cost to a business. This may be due to the government increasing the national minimum wage. Incomes directly affect consumers’ spending power. If incomes are rising this could lead to a rise in demand as consumers have higher discretionary incomes. Will the demand for all goods and services increase if incomes rise? What is GDP?

7. I NTEREST RATES – THE COST OF BORROWING OR THE REWARD FOR SAVING. Effect on demand Effect on costs Interest rates will affect the cost of borrowing by businesses. If interest rates go up so will the interest section of repayments on bank loans or overdrafts. This will increase the fixed costs of a business. Businesses may also find that suppliers try to pass on their own higher costs in the form of higher prices further increasing costs. If interest rates increase this encourages consumers to save and discourages spending. A fall in interest rates will have the opposite effect. High interest rates may therefore lead to a fall in demand, especially for items where consumers spend on credit. This will also be true of luxury goods where consumers may use savings to make a purchase.

8. D EMOGRAPHIC FACTORS – THE STATISTICAL CHARACTERISTICS OF THE POPULATION. Effect on demand Effect on costs Rising net migration has increased the size of the workforce in the UK. This has driven average wage costs down lowering the costs of production. Changes in UK demographics, including migration and the size and age of the population has increased costs to the public sector e.g. health care and education. Migration has seen an increase in demand for a wide range of goods and services e.g. housing, public transport and healthcare. Demographics also influences the types of products demanded e.g. changing taste of a more diverse nation and different demands from an ageing population.

9. D EMOGRAPHIC FACTORS – THE STATISTICAL CHARACTERISTICS OF THE POPULATION. Effect on demand Effect on costs How does an ageing population affect demand for social care and other services? How has a change in demographics, social factors and environmental issues affected demand for cycle insurance? What is the biggest factor affecting demand?

10. E NVIRONMENTAL ISSUES AND FAIR TRADE – THE VARIETY OF FACTORS THAT IMPACT ON THE ENVIRONMENT DUE TO THE OPERATIONS OF BUSINESSES E. G. POLLUTION. Effect on demand Effect on costs Fair trade may increase costs as a business is making a commitment to pay suppliers a fair price, hence increasing the cost of raw materials. Concern for environmental issues may also increase costs of production in terms of safe disposal of waste or upgrading of equipment to reduce emissions. Concern for environmental issues may also lower costs in terms of lower energy usage or avoidance of fines. Businesses can use environmental issues and fair trade as a USP or a recognisable feature of a brand leading to an increase in demand. If increased costs are passed on to the consumer in the form of higher costs this may lead to a fall in demand. What is fair trade?

11. T EAM TASK  Select one local and one national business  Prepare a presentation to explain the factors affecting cost and demand for both businesses  Try to cover:  Competition  Market conditions  Incomes  Interest rates  Demographic factors  Environmental issues and fair trade  For each business rank how significant each factor is and whether the affect is primarily positive or negative Do the factors affecting costs and demand vary depending upon the size of the business or another factor?

12. 1.3.1 U NDERSTANDING THAT BUSINESSES OPERATE WITHIN AN EXTERNAL ENVIRONMENT  In this topic you have learnt about  How the external environment can affect costs and demand