3.1.3 Understanding that businesses operate within an external environment

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    3.1.3 Understanding that businesses operate within an external environment

    How the external environment can affect costs and demand

    The different areas of the external environment that affect a business:

    • Natural disasters
    • Interest rates
    • Availability of materials
    • Recession
    • Price of materials

     

    Components of the external environment:

    • Market conditions and competition
    • Incomes
    • Interest rates
    • Demographic factors (eg trend, behaviours of people)
    • Environmental issues

     

    The external business environment and how it affects it:

    • Current and changing conditions within the external environment have an impact upon a business
    • It can have a direct impact on their mission statement, aims, and objectives
    • The external environment helps us to understand choices that a business has made and helps a business make future decisions
    • It affects a firms costs and the demand for a product
    • Firms would increase the price in order to restore lost profit margins
    • Any factor that has the effect of increasing costs of a business could ultimately result in an increase in the price of a product set by the business

     

    Factors that affect demand:

    • Price
    • Income
    • Substitutions
    • Supply
    • Market trends
    • Complimentary goods
    • Marketing and advertising
    • Seasons
    • Government actions and laws

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