6. External influences on business activity
- Syllabus
- 0264–2027–2028
- Section
- 6
- Level
- —
Exam analysis
6.1. Economic issues
- Syllabus
- 0264–2027–2028
- Topic
- 6.1
- Level
- —
How the business cycle changes decisions
The business cycle is the repeated fluctuation of economic activity over time. Movement through growth, boom, recession and slump changes customer income and demand, the availability and cost of workers, business costs and confidence. A stage therefore creates several connected effects rather than one guaranteed outcome.
| Stage | Typical conditions | Possible effect on a business |
|---|---|---|
| growth | GDP, employment, income and demand rise | sales, output, profit and investment may rise; skilled workers and premises can become harder or costlier to obtain |
| boom | demand and capacity use are very high; unemployment is low; inflationary pressure grows | strong revenue and confidence may support expansion, but wage, material and borrowing pressures can squeeze profit |
| recession | GDP and consumer spending fall; unemployment rises | sales, cash flow and profit may fall, so a business may cut costs, delay expansion or prioritise survival; recruitment may become easier |
| slump | economic activity and confidence remain very low | prolonged weak demand can cause losses, supplier failure and difficulty borrowing, although labour may be more available |
| Change | Demand-side effect | Cost or capacity effect |
|---|---|---|
| higher employment | more household income can raise sales | fewer available workers can raise recruitment difficulty and wages |
| higher inflation | customers may buy less after prices rise | materials and wages may cost more; raising prices can further reduce demand |
| faster economic growth | rising income and confidence can raise demand and encourage investment | competition for labour, sites and inputs can raise costs |
For example, rapid growth may increase a housebuilder's orders and profit, encouraging more output and investment. At the same time, scarce builders may demand higher wages. Whether profit rises depends on whether extra revenue is greater than the extra labour and input costs.
Do not assume every business moves with the economy in the same way. The effect depends on what it sells, how price- or income-sensitive demand is, whether it needs new workers or borrowing, and how long the change lasts.
How government policy reaches a business
Government policy affects a business through four main routes: the profit it keeps, customers' disposable income, government-created demand and the cost of borrowing. Trace the policy change through one of these routes before deciding its likely effect.
| Policy change | Mechanism and likely business effect | Possible business response |
|---|---|---|
| higher tax on business profit | less profit remains for dividends or reinvestment | postpone expansion, seek other finance, reduce costs or reconsider prices |
| higher tax on people's income | disposable income and demand may fall, especially for non-essential products | adjust price or product mix, control costs or target customers less affected |
| higher government spending | government purchases, jobs or infrastructure may raise demand; later tax or inflation effects may raise costs | tender for contracts or add capacity only when the extra demand is credible |
| higher interest rates | loans and overdrafts cost more; household loan payments can reduce spending and sales | delay or reduce borrowing and investment, use retained profit or another finance source |
| lower interest rates | borrowing costs and some household repayments fall, which may increase investment and demand | take a viable loan, expand capacity or invest when expected returns still exceed the cost and risk |
A rise in income tax can reduce customers' disposable income, lowering demand and revenue. A rise in profit tax acts after profit is earned and leaves less retained profit for investment. The two taxes therefore reach the same business through different mechanisms.
An increase in government spending may directly raise orders for suppliers, create jobs and increase consumer spending. It does not benefit every business equally: the spending destination, possible inflation, competition for workers and any future tax increase can change the final result.
A policy change is not automatically good or bad. Its size and timing, the type of tax, whether the business or its customers borrow, the product's demand, and the business's current profit and capacity determine which mechanism dominates.
6.2. Business and the international economy
- Syllabus
- 0264–2027–2028
- Topic
- 6.2
- Level
- —
How globalisation creates opportunity and pressure
Globalisation is the growing connection between countries through trade, investment and business operations. It accelerates when moving goods, information and businesses across borders becomes easier, cheaper or more worthwhile.
| Reason | How it increases globalisation |
|---|---|
| improved transport links | faster or cheaper movement makes distant suppliers and customers practical |
| technological change and communication | businesses can coordinate production, promotion, orders and service across countries |
| free trade agreements | fewer tariffs, quotas or other barriers allow more cross-border trade |
| newly industrialised countries | rapid economic growth creates expanding markets and new production or sourcing opportunities |
| Opportunity | Matching threat |
|---|---|
| access to more customers can raise sales and spread risk | foreign competitors can take customers or force prices and margins down |
| wider supplier and labour choices may lower costs or improve quality | long supply chains can add delay, coordination and quality risk |
| larger markets can support expansion and economies of scale | demand, regulation and trade barriers can differ between countries |
| Import control | Meaning | Effect on businesses |
|---|---|---|
| tariff | a tax on imported goods | raises an importer's cost; a foreign exporter may raise price and lose competitiveness, or absorb the tax and accept a lower margin |
| quota | a limit on the quantity imported | restricts supply and potential sales; exporters may need another market, while protected domestic producers may face less imported competition |
Globalisation does not guarantee higher profit. The result depends on the product, added competition, transport and coordination costs, and whether a tariff or quota affects the business's inputs, its exports or its competitors.
Who gains when a business becomes multinational?
A multinational company (MNC) has production or service operations in more than one country. Becoming multinational can strengthen the business, but the country hosting its operations can receive both benefits and costs.
| Advantage to the business | Mechanism |
|---|---|
| reach new markets | local operations can increase sales and market share |
| lower operating cost | cheaper labour, materials or government incentives may reduce production cost |
| avoid trade barriers | producing inside the market can avoid tariffs or quotas on finished imports |
| locate near customers or inputs | shorter transport routes can lower cost and improve responsiveness |
| spread risk and remain competitive | operations in several markets reduce reliance on one country and may match rivals' expansion |
| Possible host-country advantage | Possible host-country disadvantage |
|---|---|
| jobs and incomes | low wages, poor conditions or mainly low-skill work |
| investment and infrastructure | influence over government or displacement of local firms |
| more exports and tax revenue | profits repatriated to the MNC's home country or tax reduced |
| greater consumer choice and competition | local businesses face stronger competition |
| new production capacity | pollution, environmental damage and exploitation of natural resources |
Judge the net effect by asking how many lasting jobs and supplier links are created, how much value and tax stay in the country, what resources are used, and whether environmental and competitive damage can be controlled.
An MNC is defined by operations in more than one country, not simply by exporting there. A benefit to the company is also not automatically a benefit to the host country; identify whose costs and gains are being assessed.
Costs and benefits beyond the business
An external cost or benefit is an effect of a business decision on third parties who were not directly involved and do not receive appropriate compensation. It sits outside the business's own revenue and costs, but it still matters to society.
| Business decision | External cost to third parties | External benefit to third parties |
|---|---|---|
| open or expand a factory | noise, waste or air and water pollution; extra congestion | local employment and supplier sales; tax revenue or improved infrastructure may support the area |
| use land or natural resources | loss of space, habitats or resources available to others | restoration, new access or services can benefit nearby communities when provided |
Trace the full chain. Factory traffic can increase congestion, which adds journey time and pollution for residents who did not choose the production decision. A new factory can also raise orders for local suppliers, increasing activity and income beyond the company itself.
Do not label every business expense an external cost. Wages, rent and materials paid by the firm are private costs. The external part is the uncompensated effect on people or organisations outside the transaction.
Exchange rates: import costs and export competitiveness
An exchange rate compares the value of one currency with another. An appreciation means the home currency rises in value and buys more foreign currency; a depreciation means it falls in value and buys less.
| Change in the home currency | Business that imports | Business that exports |
|---|---|---|
| appreciation | foreign inputs become cheaper in home currency, reducing cost and allowing a lower price or higher margin | the export price becomes dearer to foreign buyers, so competitiveness and demand may fall |
| depreciation | foreign inputs become dearer, raising cost and possibly price or reducing margin | the export price becomes cheaper to foreign buyers, so competitiveness and demand may rise |
A bicycle producer that imports most raw materials but sells abroad can face both effects at once. After depreciation, material costs rise while its bicycles appear cheaper in foreign markets. Profit improves only if the gain in export sales and revenue outweighs the higher input cost and any price response.
The direction is predictable, but the size of the effect is not. It depends on the share imported or exported, whether prices change, customer responsiveness, contracts and competitors. Candidates explain these effects; exchange-rate calculations are outside this syllabus.
6.3. Business and the environment
- Syllabus
- 0264–2027–2028
- Topic
- 6.3
- Level
- —
Responding to environmental impact
Business activity can impose environmental costs through air, water or noise pollution; greenhouse-gas emissions; waste and traffic; loss of green space or habitat; and depletion of finite natural resources. A useful response targets the cause rather than only promoting a greener image.
| Source of impact | Possible business response | How the response helps |
|---|---|---|
| energy and production | use renewable energy or efficient machinery; reduce material use and production waste | lowers emissions, energy use and resource depletion |
| product and packaging | redesign products; use recycled or reusable packaging; ask customers to reuse containers | reduces raw-material use and disposal waste |
| transport and supply | reduce journeys, alter delivery methods or choose nearer suppliers | lowers congestion, fuel use and emissions |
| disposal | recycle materials and change how waste is stored or treated | reduces pollution of land and water |
Businesses may respond voluntarily to protect reputation, maintain or increase sales, avoid customer boycotts or pressure-group action, differentiate from competitors, attract employees or investors, and prepare for legal standards. These gains are possible, not automatic: customers must value the change and the claim must match the action.
| Legal control can change... | Example effect on the business |
|---|---|
| how it produces | new machinery, cleaner energy, staff training, lower output or different waste treatment |
| what it produces or sells | restricted materials, redesigned products or packaging, a smaller product range |
| where it produces or sells | a site may be prohibited, relocated or required to meet location and disposal rules |
| its costs | equipment, training, alternative suppliers, permits, taxes or fines raise cash outflow; efficiency may lower some costs later |
Environmental action can raise short-term costs even when it reduces harm or improves reputation. Legal controls cannot simply be ignored, but their effect varies with the rule, the firm's existing equipment, its location and whether customers reward the change with higher demand.
6.4. Business and ethical issues
- Syllabus
- 0264–2027–2028
- Topic
- 6.4
- Level
- —
Making ethical business decisions
An ethical business uses moral judgements when deciding how it operates and treats stakeholders. Ethical action goes beyond a claim or slogan: the business changes employment, purchasing or production decisions to reduce avoidable harm and improve fairness.
| Ethical issue | Practical business response |
|---|---|
| child labour | do not employ children or buy from producers that use child labour; check supplier practices |
| fair treatment of employees | pay fair wages and provide fair working conditions rather than relying only on the lowest legal cost |
| fair treatment of suppliers | pay a fair price and pay on time so suppliers can maintain reliable production and standards |
| environmental harm in the supply chain | choose suppliers and materials that avoid environmental damage; reduce waste, recycle or source responsibly |
| Possible advantage | Possible disadvantage |
|---|---|
| stronger reputation and customer loyalty can raise demand, revenue or the price customers accept | fairer wages and materials may raise labour or variable costs and reduce short-term margin |
| ethical treatment can help recruit, motivate and retain employees | checking and changing suppliers takes time and may delay production |
| fair payment can improve supplier relations and supply reliability | fewer acceptable suppliers or materials can restrict output and choice |
| investors and pressure groups may respond more positively | higher costs may lead to higher prices and lower demand if customers will not pay more |
Suppose a computer producer stops buying from a low-cost supplier that uses child labour and instead pays a verified supplier more. Material cost rises, but supply relationships, reputation and customer trust may improve. Profit rises only if the revenue or operating gains outweigh the extra cost and disruption.
Being ethical does not automatically raise or lower profit. The result depends on the size of extra costs, customer willingness to reward the change, employee and supplier responses, and how credible the action is. Legal compliance alone may also be narrower than an ethical judgement.
6.5. Pressure groups
- Syllabus
- 0264–2027–2028
- Topic
- 6.5
- Level
- —
How pressure groups influence business decisions
A pressure group is an organised group of people with a shared interest that tries to influence business or government decisions. It applies pressure; it does not directly control the business.
| Pressure-group action | Immediate pressure | Decision the business may reconsider |
|---|---|---|
| customer boycott | fewer sales and less revenue | change a product, supplier or operating policy |
| negative publicity or publishing evidence | reputational damage and weaker customer trust | respond publicly or change the criticised practice |
| demonstrations, protests or petitions | public attention and possible concern from investors | negotiate, delay or alter a project |
| lobbying or letters to government | risk of regulation or a change in law | improve standards before rules tighten |
| legal action | legal cost, delay and possible compensation | stop or modify the disputed activity |
Use a complete causal chain: action → stakeholder response → business impact → decision. For example, a boycott may reduce demand, lowering revenue; the business may then replace a polluting input if the expected loss from continuing is greater than the cost of changing.
| More likely to be effective when… | Less likely to be effective when… |
|---|---|
| many customers or investors support the campaign | the group has little public reach or weak evidence |
| the action directly affects sales, cost or reputation | customers keep buying and the business can absorb the pressure |
| government is likely to regulate the issue | lobbying is slow and no legal change follows |
| changing the decision is affordable and practical | changing suppliers or production would be very costly or impossible quickly |
No method is automatically the most effective. Compare at least two methods and judge using the business context: customer dependence, media reach, legal risk, cost of responding and how quickly each method affects the decision.