The External Business Environment

Remember the PESTEC factors?

P
Economic factors
S
T
E
C
What we will learn today:

By the end of the lesson all students will be

able to:

● Describe the economic cycle

● explain some of the characteristics of the
various stages of the cycle
● describe and explain the impact of the
cycle on the government, the consumer nd
the business
How do we measure Economic
activity?

Gross Domestic Product (GDP) is the value of all the

goods and services produced in an economy over a
period of time.

GDP is therefore a measure of economic activity.

Different countries have different
GDP’s
The Economy

Economic growth occurs when there is an increase in

GDP from one defined period of time to the next.

If GDP falls, then we say negative growth is occurring.

When GDP is growing, we’re in a period of expansion or

economic growth
When GDP is shrinking, we are in a recession.
What is Economic Growth?
● Economic Growth – a period of
month by month increase in
goods produced and sold in an
economy, leading to increased
incomes.
● People have more money to spend and
business people have confidence that the
investments they make will be successful.
● Increased demand stimulates the economy.
.
What is a Recession?
● A recession happens when an economy
shrinks for more than a couple of months.
● It means there’s been less demand for goods
and services, and that has a knock-on effect.
● Businesses shut down, and
● people lose their jobs.
● a recession is just temporary. It’s part of what’s called

the business cycle.

The Economic or Business Cycle
Business cycle
Consists of alternate periods of economic activity.

● Slump or trough- occurs when there is a real

drop in the economy. Businesses need to cut
costs and prices
● Recovery- Increases in economic activity,
businesses can take on resources and start
investments
● Boom or Peak- occurs when an economy is
close to it’s peak, employment is high,
demand is high, businesses may want to
expand.
● Recession- when the economy slows,
businesses may look for ways to cut costs
 How bad is a recession?

Since 1955, the UK has experienced eight

recessions. The last and biggest UK recession was
during the 2007 - 2009 financial crisis, when GDP
declined for five consecutive quarters.
The rocketing value of property, private pensions
and shares have helped the UK's wealth to recover
and grow by 70% since 2010.
historical curve for the UK economy 1973 -
2001
Let us look in more detail at the
different stages
The Boom or Peak
Characteristics:
BO
1. High confidence OM!
2. High levels of demand 🡪higher prices (inflation)
3. Low unemployment
4. Increased wages
5. Businesses invest and expand
6. Many business start-ups
The Recession

Characteristics:

1. Demand falls
2. Business confidence falls
3. Businesses reduce investment
4. Businesses reduce output and start ‘cutting back’
5. Unemployment rises
6. Fewer businesses start-up & more business close
The Trough or Slump

Characteristics:

1. Low demand
2. Low business confidence
3. Low levels of production
4. High unemployment
5. Very little investment
6. Many business close & very few businesses start up
Growth or Recovery

Characteristics:

1. Rising demand and sales

2. Cautious but increasing
business confidence
3. Unemployment begins to fall
4. Investment opportunities are considered
5. Production begins to increase
What do Governments do about
a peak or recession?
The Recession
Possible Government /
Bank of England responses:

1. Reduce taxes and interest rates

to stimulate demand

2. Increase government spending to stimulate demand

The Boom
Possible Government / Bank of England
responses:

1. Increase taxes and interest rates to dampen demand

and check inflation

2. Reduce government spending

BO
OM!
The Trough or Slump

Possible Government /
Bank of England responses:

1. Reduce taxes and interest

rates to stimulate demand

2. Increase government spending to stimulate demand

What do businesses do about a
recession?
The Economic Environment
Recession Strategies
1. Reduce Costs e.g. find cheaper suppliers, reduce the
size of the workforce, cut unnecessary expenditure

2. Stimulate Demand e.g. reduce prices, increase

promotional activity

3. Postpone Investment plans

4. Reduce Spare Capacity e.g. by selling assets or

stopping overtime
 What happens at each stage?

● Many businesses are affected by the

business cycle:

Can you explain why some goods are

affected by the business cycles whilst
others are not?
The effects on businesses of a
Boom or a Recession?

Wine Coal
Sport & Leisure goods Bread

Restaurant meals Petrol

Jewellery Cigarettes
Household furniture Fresh Vegetables
 The effects on consumers

● Consumers are also affected by the

business cycle: Pretend you are
employed. Your job is……
 You should now understand?

● How businesses are affected during

the different parts of the cycle.

● What sort of response a business

would consider in the different parts
of the Business Cycle?