3.1.3 Understanding that businesses operate within an external environment


    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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