1.5.5

The Economy & Business

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Economic Booms and Recessions

The economy has a major impact on businesses.

Economic cycles

Economic cycles

  • The economy is the state of a country’s production and consumption of goods and services. A country’s economy goes through cycles of booms and recessions.
Booms

Booms

  • A boom is when the economy is growing significantly and the businesses in it are generally doing well.
Recessions

Recessions

  • During a recession, economic output falls (for 2 successive quarters there is negative economic growth) and because of this, businesses usually experience a fall in demand for their products.

What Determines if There is a Boom or Recession?

The economic climate (whether it is doing well or poorly) reflects whether businesses are doing well or badly for several reasons. A few different factors can indicate the state of the economy:

Unemployment

Unemployment

  • A recession leads to high levels of unemployment. This is bad for businesses because unemployed people have less money (disposable income) to spend.
  • If less people buy goods, a business' revenues will fall and it is likely that profits will fall too.
    • For example, the sales of supermarkets like Sainsbury's might fall during a recession because consumers will tend to buy essential groceries, but not expensive wine and DVDs.
Consumer spending

Consumer spending

  • A recession can lead to a fall in consumer spending because of:
    • Unemployment - If someone loses their job, they will spend less.
    • Reduced consumer confidence – If people are worried about the future then they are more likely to save just in case they lose their job. This leads to less spending.
    • Decreased income – People’s income may fall during a recession and this leads to less money being spent on goods and services.

Changes in Income and Businesses

The effect that a change in income has on businesses is less simple. Some firms might benefit from a fall in income and some firms might suffer from a fall in income.

Necessities

Necessities

  • A fall in income can mean that people have to spend a greater proportion of their money on necessities.
    • Even if income falls, it is unlikely that people will change the amount of money they spend on products like water.
    • This means that they will have less money to spend on their wants (like a Playstation 4 console).
  • Because of this, businesses that provide products and services for consumers’ wants rather than their needs will suffer if incomes fall.
Luxury products (and services)

Luxury products (and services)

  • When people’s income falls, people are less likely to spend money on ‘luxury’ goods or services and instead will favour discount shops and cheap goods and services.
    • Aldi and Lidl tend to increase their market share of grocery shopping in recessions, with supermarkets like Waitrose losing market share.
    • Poundland and Primark generally increase their market share when incomes fall.
Jump to other topics
1

Investigating Small Business

1.1

Enterprise & Entrepreneurship

1.1.1The Dynamic Nature of Businesses1.1.2Risk & Reward1.1.3The Role of Business Enterprise1.1.4The Role of Business Enterprise 21.1.5The Role of the Entrepreneur1.1.6End of Topic Test - Dynamic Nature of Business1.1.7Grade 9 - Dynamic Nature of Business
1.2

Spotting a Business Opportunity

1.2.1Customer Needs1.2.2Market Research1.2.3Market Segmentation1.2.4The Competitive Environment1.2.5Primary & Secondary Market Research1.2.6End of Topic Test - Business Opportunities1.2.7Application Questions - Business Opportunities1.2.8Exam-Style Questions - Market Segmentation1.2.9Diagnostic Misconceptions - Competition
1.3

Putting a Business Idea into Practice

1.3.1Business Aims1.3.2Business Objectives1.3.3Business Revenues & Costs1.3.4Costs - Calculations1.3.5Revenue - Calculations1.3.6Business Profits & Break-Even Analysis1.3.7Profits & Losses - Calculations1.3.8Interest - Calculations1.3.9Cash & Cash Flow1.3.10Cash & Cash Flow 21.3.11Cash Flow - Calculations1.3.12Sources of Business Finance1.3.13End of Topic Test - Business in Practice1.3.14Grade 9 - Business in Practice1.3.15Exam-Style Questions - Business in Practice1.3.16Diagnostic Misconceptions - Profit1.3.17Diagnostic Misconceptions - Company vs Business1.3.18Diagnostic Misconceptions - Economies of Scale1.3.19Diagnostic Misconceptions - Cash Flow1.3.20Diagnostic Misconceptions - Break-even1.3.21Diagnostic Misconceptions - Fixed Costs
1.4

Making the Business Effective

1.4.1The Options for Start-Up & Small Businesses1.4.2Limited Liability1.4.3Franchising & Not-For-Profits1.4.4Business Location1.4.5The Marketing Mix1.4.6Business Plans1.4.7End of Topic Test - Effective Business1.4.8Application Questions - Effective Business1.4.9Exam-Style Questions - Business Plans
1.5

Business Stakeholders

1.5.1Business Stakeholders1.5.2Technology & Business1.5.3Legislation & Business1.5.4Legislation & Business 21.5.5The Economy & Business1.5.6External Influences1.5.7End of Topic Test - Business Stakeholders1.5.8Grade 9 - Business Stakeholders1.5.9Diagnostic Misconceptions - Recessions
2

Building a Business

2.1

Growing the Business

2.1.1Business Growth2.1.2Finance2.1.3Changes in Business Aims & Globalisation2.1.4Ethics & Business2.1.5The Environment & Business2.1.6End of Topic Test - Growing a Business2.1.7Application Questions - Growing a Business2.1.8Exam-Style Questions - Business Growth
2.2

Making Marketing Decisions

2.2.1Product2.2.2Product Life Cycle2.2.3Price2.2.4Pricing Methods2.2.5End of Topic Test - Product & Price2.2.6Grade 9 - Product & Price2.2.7Promotion & Advertising2.2.8PR & Sales Promotions2.2.9Sponsorship & Product Placement2.2.10Promotional Mix2.2.11End of Topic Test - Promotion2.2.12Application Questions - Promotion2.2.13Exam-Style Questions - Promotional Mix2.2.14Place & Wholesalers2.2.15Direct to Consumer2.2.16E-commerce & M-commerce2.2.17Diagnostic Misconceptions - Decreasing Price2.2.18Diagnostic Misconceptions - Advertise vs Promote2.2.19Diagnostic Misconceptions - Social Media
2.3

Making Operational Decisions

2.3.1Job Production2.3.2Batch & Flow Production2.3.3Working with Suppliers2.3.4Effective Supply Chains2.3.5Just In Time & Just In Case2.3.6Managing Quality2.3.7Total Quality Management2.3.8The Sales Process2.3.9End of Topic Test - Operational Decisions2.3.10Grade 9 - Operational Decisions2.3.11Exam-Style Questions - Managing Stock2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4

Making Financial Decisions

2.4.1Gross Profit & Net Profit - Definitions2.4.2Gross Profit - Calculations2.4.3Net Profit - Calculations2.4.4Rate of Return2.4.5Rate of Return - Calculations2.4.6Research & Financial Data2.4.7Marketing Data2.4.8Percentage Change - Calculations
2.5

Making Human Resource Decisions

2.5.1Organisational Structures2.5.2Organisational Structures 22.5.3Recruitment2.5.4Effective Recruitment2.5.5Training a Workforce2.5.6Motivating a Workforce2.5.7End of Topic Tests - Human Resources2.5.8Application Questions - Human Resources2.5.9Exam-Style Questions - Human Resources2.5.10Diagnostic Misconceptions - Owners vs Shareholders2.5.11Diagnostic Misconceptions - Internal Recruitment2.5.12Diagnostic Misconceptions - Employee Motivation

Practice questions on The Economy & Business

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    What are the 2 components of economic cycles?Fill in the list
  2. 2
    What happens during a recession?True / false
  3. 3
    What are the factors that indicate the state of economy?Fill in the list
  4. 4
    What is likely to happen to the sales at a supermarket like Waitrose during a recession?Multiple choice
  5. 5
    During a recession, which supermarket is most likely to increase their market share?Multiple choice
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Legislation & Business 2

External Influences