• Market and competition:
– Types of market
– Capacity utilisation
– Fair and unfair competition
• Macro-economic issues:
– Business cycle
– Interest rates
– Exchange rates
– Inflation
– Unemployment
• Economic growth
• International competitiveness
• EU

• A market is a place where buyers and sellers meet to exchange goods and services
• Markets have a number of influences on businesses including:
– Market size
– Degree of competition within the market
– Type of market

• Markets can be categorised by the degree of competition and the number of firms
1. Perfect competition – this is a market with lots of small firms who produce similar products at similar prices
• No barriers to entry / exit
• Potential profits are low

2. Few firms in the market who are interdependent in their actions
– Firms consider competitors reactions when changing prices / introducing new products
– There is a high degree of competition
– Businesses try and avoid price competition preferring non price competition
– Can be many take-overs
– Collusion may occur leading to cartels being formed

3. Monopoly – a single producer in the market
– One producer is able to charge relatively high prices
– New products are rarely introduced
– Resources are not used efficiently
– UK based monopolies are open to competition from overseas rivals

• The extent to which a firm uses the productive capacity available to it
• Markets can experience shortages of capacity meaning consumer needs are not met leading to:
– An increase in market price for products
– New producers being attracted to the market
– Consumers purchasing products overseas
• This is common where tastes and fashions change quickly or if there is a time lag between increases in demand and the firms ability to produce products

• UK markets are regulated to ensure free and fair competition
• Unfair competition includes cartels
• UK government and EU deem unfair competition as illegal

• Gross Domestic Product or GDP measures the value of a nation’s output over a period of time
• A nation’s business cycle will display regular fluctuations in economic activity (levels of spending, production and employment) and GDP

• The economy is recovering from a slump and production and employment is beginning to rise
• Customers are feeling more secure in their employment and are spending more (CONSUMER CONFIDENCE)
• Firms begin to invest more in FIXED ASSETS and increase their capacity
• Increased capacity involves more workers being employed

• Follows the recovery stage
• In this stage production levels are high so employment is also high
• Expenditure from businesses, consumers and the
Govt.increase as confidence grows
• The economy approaches maximum capacity and shortages / bottlenecks occur as raw materials run low
• Skilled workers become scarce and businesses try to attract workers with higher pay
• High wages and scarcity of resources lead to INFLATION

• The UK Government increases interest rates to curb inflation
• Rising prices of labour and materials mean that businesses costs of production rise significantly and eat into business profits
• Increases in interest rates prevent firms from borrowing and investing money
• Production begins to fall so workers laid off

• Often follows a recession
• Production is low and unemployment is high
• Demand is low
• Governments begin to take action by increasing their own spending to try to create jobs or lowering interest rates to boost demand

• Bank of England is responsible for setting interest rates
• Interest rates – price paid for borrowed money
• Consumer spending depends of interest rates as:
– When interest rates are high consumers are more likely to save
– Increasing in interest rates make borrowing more expensive reducing consumers disposable income
– Increasing interest rates increase mortgage payments
– Pensions and investments are dependent on interest rates

• Consequences of an increase in interest rates:
– Business overheads often increase
– Business may try to decrease borrowing
– Businesses try and save more
– Investment decisions are postponed
– Businesses try and reduce stock levels
• Some types of business are more effected e.g. those producing luxury items, those with high credit sales and those with high levels of overseas trade
• Businesses have a tendency to have a long term view on interest rates

• The value of a nation’s currency in terms of another currency
• i.e. £1=$2
• An exchange rate is set by demand and supply of a currency

• Exchange rates create uncertainty because:
– If a deal is agreed in foreign currency firms may receive more or less than expected due to changes in exchange rates
– Changes to exchange rates can affect prices and sales overseas
– Competitors can respond in unexpected ways to exchange rate changes

• Changes in the UK’s interest rates will lead to changes in the exchange value of the pound.
• If interest rates rise the value of the pound will rise so the pound will now buy more US dollars, Japanese Yen, Euros etc.
• If interest rates fall the value of the pound will fall so the pound will now buy less US dollars, Japanese Yen, Euros etc

• If interest rates are higher than rates in other countries the
UK will become more of an investment opportunity.
• Investors will exchange their currency into sterling to invest it in UK banks to earn high rates of interest on their savings.
• This will increase the DEMAND for Sterling which will appreciate in value

• If interest rates are lower than rates in other countries the
UK will become less of an investment opportunity.
• Investors will exchange their currency from sterling to invest it in Foreign banks.
• They will withdraw £ in the UK to buy foreign currency.
• This means an increased supply of sterling will be available in the world’s currency market causing the £ to depreciate

• Inflation- A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services.
• Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less.

• Every month the Government surveys prices and generates the current consumer price index (CPI)
• This allows you to compare current figures with past figures

• Inflation results when the macro economy has too much demand for available production.
1. Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to purchase more output than the economy is capable of producing.
2. Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to increases in production cost

• Inflation may lead to a decrease in sales for businesses
• When there is high inflation it is hard for business to remain competitive especially with overseas firms

• Governments try and control inflation using the following tools:
– An increase in interest rates
– Legislation reducing trade union power
– Reduced expectations of inflation allowing businesses more confidence when setting prices

• In recent years inflation has been low, this means:
– Cost are easier to control
– Pricing strategies are easier to establish
– If UK inflation is lower than other countries gives UK firms a competitive advantage
– Sales forecasts will be more accurate

• There are a number of types of unemployment:
– Structural unemployment
– Cyclical unemployment
– Frictional unemployment
• Structural unemployment occurs when the economy changes and industries die out
• Training is needed to give the unemployed workers new skills

• Cyclical unemployment is caused by the business cycle
• Frictional unemployment is caused when people are temporarily out of work as they are moving jobs

• Increasing levels of unemployment can cause problems for firms
• Cyclical unemployment can lead to a decrease in sales meaning businesses need to look for new markets
• Structural unemployment can affect businesses in the local area

• Businesses can also incur problems due to falls in the level of unemployment as there may be skills and labour shortages
• If this is the case businesses can:
– Switch to capital intensive manufacturing systems
– Relocate overseas to exploit cheaper and more plentiful labour
– Invest in training schemes to develop employees skills

• This is an increase in the value of goods and services produced by the economy as a whole
• Long term most countries experience economic growth
• In the shorter term countries can experience slumps
/ decline in the size of their economy

Advantages
• It increases levels of taxation which the government can spend on public services
• Increases opportunities for all businesses / individuals
• Businesses experience higher sales and profits
Disadvantages
• Regional disparities
• Can lead to resource shortages especially for labour
• Increases pressure on individuals and businesses

• Growth can be spurred on in the short term by decreases in interest rates and taxes, or by increasing Government spending
• These measures create fluctuations in GDP
• For the longer term the Government needs to increase employment (full employment), increase capacity, improving education and skills and promoting competition in markets

• With the growth of free trade businesses now are having to compete internationally
• This may be in order to increase profits and market share, or simply to wider their customer base to survive
• In order to be COMPETITIVE businesses must keep price affordable but keep the quality and features

• Many businesses have welcomed the concept of globalisation as a chance to attract a wider audience
• Other businesses have failed in markets of increased competition

• The EU has 31 member states and over 450 million people
• The EU offers more consumers and therefore sales to UK based firms
• By locating in cheaper countries e.g. Eastern
Europe businesses are able to reduce costs
• Can also lead to increased competition

• European commission – policy and legislation
• Council of ministers – unions decision making body
• European parliament
• European court of justice
• European central bank

• In January 1999 the Euro was introduced into 12 countries
• By January 2002 Euro notes and coins were available
• The Euro influences markets by:
– Having cheaper transaction costs
– Stable exchange rates
– Transparent price differences

• Businesses are influenced by the market they operate in
• Perfect competition exists where there are many firms all producing similar products charging similar prices
• Oligopolies exist where there are few firms who have a high degree of interdependence
• Monopolies exist where there is one firm in the market
• Capacity utilisation refers to how well businesses are using the productive capacity available to them, markets may experience shortages in capacity
• The UK government tries to ensure fair competition within markets
• The business cycle shows the rate of economic growth over time and includes recession and boom periods
• Interest rates are the cost of borrowing money
• Exchange rates value one currency in terms of another
• Inflation is the rise in the general level of prices
• Unemployment measures the total amount of people out of work and can include structural ,cyclical and frictional types
• Economic growth measures the rate at which the economy is growing in size
• As markets are becoming increasingly global it is important for firms to compete on an international scale
• The EU is a collection of 31 countries which have no trade barriers creating opportunities and threats for
UK businesses