1.3 The External Environment (AQA A Level Business): Flashcards
Exam code: 7132
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Define competition (in a market).
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Define competition (in a market).
Competition describes how many rival businesses operate in a market and how strong they are.
What is a monopoly market?
A market with one dominant seller (e.g. a local water company).
What is an oligopoly market?
A market dominated by a few large rivals (usually four to seven), e.g. UK supermarkets.
How can strong competition raise a business's costs?
It can force higher marketing spend, more R&D/innovation, and price wars that squeeze margins.
How does competition affect demand for a business?
With substitutes available, a small price rise can send customers to rivals; brand loyalty helps retain them.
In a market there are many small firms, none with significant power (e.g. hairdressers).
In a competitive market there are many small firms, none with significant power (e.g. hairdressers).
Why can large, dominant firms have lower costs?
Their size gives bargaining power, allowing bulk-buying savings (e.g. BT Openreach buying cable in bulk).
Define market conditions.
Market conditions describe what a market looks like now — its growth, number of buyers/sellers, and geographic reach.
How can a fast-growing market raise costs?
New entrants chase the same raw materials, driving prices up (e.g. oat prices as oat-milk brands entered).
How does high market growth affect demand?
It lifts demand — e.g. plant-based food sales rising, boosting revenue without price cuts.
True or False?
A monopoly market has many firms competing strongly.
False.
A monopoly has one dominant seller; many competing firms describes a competitive market.
True or False?
Selling nationally or internationally can add compliance costs compared with a local market.
True.
Exporting adds health certificates, labels and tariffs, while local delivery stays cheap.
Why does a monopoly like Thames Water see stable demand?
With no competition, customers cannot easily switch, so demand stays stable.
Define disposable income.
Disposable income is the money households have left after tax and essential bills (rent, council tax, basic utilities).
What happens to demand for non-essentials when disposable income rises?
Demand usually grows for non-essential (luxury) products — e.g. overseas holidays, eating out, big-ticket electronics.
What happens to demand when incomes fall?
Demand often shifts to budget products — e.g. discount groceries (Aldi/Lidl) and own-label value ranges.
Why can rising average incomes increase a firm's costs?
Higher wage expectations, a higher National Living Wage, and higher pension contributions.
When disposable income falls, buyers reduce spending, especially on products.
When disposable income falls, buyers reduce spending, especially on non-essential products.
Give two products strongly influenced by income levels.
Overseas holidays, new cars, designer fashion, private healthcare, or premium gym memberships (any two).
Give two products whose demand is barely affected by income.
Staple foods, basic toiletries, fuel, prescription medicines, or school uniforms (any two).
During a cost-of-living crisis, households 'trade ' to cheaper discount grocers.
During a cost-of-living crisis, households 'trade down' to cheaper discount grocers.
True or False?
When incomes rise, demand for luxury goods usually increases.
True.
Higher disposable income lifts demand for non-essential (luxury) products.
True or False?
Demand for staple foods like bread and milk changes greatly with income.
False.
Income has little influence on staple foods — people buy them regardless.
Why do employer pension contributions rise as incomes rise?
They are a percentage of pay, so as salaries rise, employer payments rise too.
The UK's National Living Wage follows median pay, so a stronger economy leads to larger .
The UK's National Living Wage follows median pay, so a stronger economy leads to larger increases.
Define the interest rate.
The interest rate is the percentage reward for saving money and the percentage charged for borrowing money.
Why do lenders charge more than the Bank of England base rate?
They charge a higher rate on borrowing and offer a lower rate on savings to make a profit.
How does a rise in interest rates affect business costs?
Variable-rate and new borrowing cost more, raising costs; firms may also delay investment.
How does a rise in interest rates affect consumer demand?
Customers are less likely to buy on credit and have smaller budgets (higher mortgage repayments), so sales fall.
When interest rates rise, customers are less likely to purchase goods on , leading to a fall in sales.
When interest rates rise, customers are less likely to purchase goods on credit, leading to a fall in sales.
Why might a rise in interest rates reduce demand for a UK exporter's goods?
Higher rates usually strengthen the pound, making UK products more expensive abroad, so overseas demand falls.
Why might higher interest rates delay a business's investment?
Projects that looked profitable at lower rates may no longer be viable, and retained profit may earn more in savings.
A higher interest rate is likely to the pound against other currencies, lowering the cost of imported supplies.
A higher interest rate is likely to strengthen the pound against other currencies, lowering the cost of imported supplies.
True or False?
When interest rates rise, saving becomes more attractive than spending.
True.
Higher rates tempt people to save spare cash rather than spend it, hitting discretionary spending.
True or False?
Higher interest rates make it cheaper for businesses to borrow.
False.
Higher rates make borrowing more expensive — overdrafts and variable-rate loans cost more.
Why do bigger purchases like cars fall when interest rates rise?
Car finance and credit-card interest increase, so households delay buying expensive items.
In March 2020, the UK interest rate was cut to a historic low of 0.1% to cushion the shock.
In March 2020, the UK interest rate was cut to a historic low of 0.1% to cushion the COVID-19 shock.
Why might a supplier raise its prices when interest rates rise?
When suppliers pay more to borrow, they pass on the higher cost by raising their own prices.
Define demographics.
Demographics means the number of people and the mix of ages, genders, backgrounds and locations.
Name three demographic trends in the UK.
An ageing population, a slow birth rate, net inward migration, greater ethnic diversity, and urban concentration (any three).
What is the 'grey pound'?
The growing spending power of over-65s — driving demand for care beds, stair-lifts and 'silver' holidays.
How can an ageing population raise a business's costs?
Products may need redesign for older customers (e.g. larger fonts, easier packaging), which costs money to develop.
How does an ageing population affect demand?
Older customers spend more on home care, mobility aids and specialist holidays.
The UK has an population, with over-65s set to exceed 20% by 2028.
The UK has an ageing population, with over-65s set to exceed 20% by 2028.
How can a falling birth rate affect businesses?
Firms selling prams, baby formula and baby clothes face slower domestic sales (e.g. Silver Cross focusing on exports).
How does greater ethnic diversity affect demand?
It brings wider food and lifestyle tastes — e.g. more KFC branches serving halal chicken.
High net increases demand for budget retailers, rental housing and money-transfer apps.
High net migration increases demand for budget retailers, rental housing and money-transfer apps.
Why can demographic change raise labour costs in some sectors?
Staff shortages (e.g. care, retail) push employers to raise pay or offer bonuses to fill vacancies.
Around two-thirds of UK people live in areas, boosting demand for rapid grocery apps and grab-and-go meals.
Around two-thirds of UK people live in urban areas, boosting demand for rapid grocery apps and grab-and-go meals.
True or False?
An ageing population reduces demand for mobility aids and specialist holidays.
False.
An ageing population increases demand for home care, mobility aids and specialist holidays.
True or False?
Urban concentration has increased demand for convenience stores and home delivery.
True.
City living encourages quick, local shopping and home delivery (e.g. Tesco Express, rapid grocery apps).
Give one way environmental issues can raise business costs.
Taxes (e.g. plastic packaging tax), compliance / low-carbon equipment, and damage from extreme weather.
How can environmental issues create new demand?
They create demand for green products and services — e.g. solar panels, heat pumps and refill schemes.
UK law requires greenhouse-gas emissions to fall to by 2050.
UK law requires greenhouse-gas emissions to fall to net zero by 2050.
How can environmental credentials benefit a business?
They can form a USP and attract customers — e.g. Lush selling plastic-free 'naked' products.
How does extreme weather affect business costs?
It raises insurance premiums, disrupts output, and may require spending on flood defences and continuity planning.
Define fair trade.
Fair trade guarantees farmers in poorer countries a minimum price plus a premium for community projects.
How does fair trade affect a business's costs?
It raises raw-material prices (the minimum price), plus certification/audit fees and more complex logistics.
How can fair trade increase demand?
Ethical shoppers boost sales, and more shelf space for Fairtrade goods lifts sales (e.g. Co-op's all-Fairtrade chocolate).
Products that pass the Fairtrade audit carry the Fairtrade .
Products that pass the Fairtrade audit carry the Fairtrade mark.
Why might some customers avoid Fairtrade products?
Price-sensitive shoppers may switch to cheaper non-certified or other ethical brands (e.g. Rainforest Alliance tea).
A plastic packaging tax means firms using plastic pay more.
A plastic packaging tax means firms using virgin plastic pay more.
True or False?
Environmental issues can raise costs but also create new business demand.
True.
They raise costs (taxes, compliance) but also create demand for green products and services.
True or False?
Fair trade guarantees farmers only a fixed maximum price.
False.
Fair trade guarantees a minimum price plus a premium, protecting farmers from price falls.
How can fair trade save a business money on marketing?
The Fairtrade label itself attracts ethical shoppers, so firms may spend less on 'green' advertising.
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