2.3a The Economic Climate
Factors Affecting Customer Spending
Customers will reduce their spending because of the economic climate — these overall conditions in the country or region, and are outside a businesses control.
The main factors are:
- A reduction to their income
- Unemployment
- High interest rates (see 2.3b Interest Rates)
Even if these factors have not yet happened, the fear of them is enough to make many customers reduce their spending.
Changes to Income
- Consumers have more money to spend on things they want
- People will be willing to pay more for goods
- Sales of goods will increase, increasing business profits
- Consumers will have to spend a greater proportion of their income on things they need (food, rent, gas, electricity)
- This leaves less to spend on things they want
- Sales of goods will decrease, reducing business profits
Unemployment
Unemployment is when a person is able to work, but cannot find a job
Retired people, those on sickness benefits, and those in full-time education are not classed as unemployed. Unemployment has a big effect on the whole economy.
Effects of Unemployment on Business
- Unemployed people have less money to spend, leading to lower sales by business, which can lead to more unemployment…
- Skills may be forgotten or lost entirely, so businesses have to re-train staff
- People desperate for a job may work for less, which reduces businesses wage costs
- Vacancies can be filled easier — lots of people will apply for jobs
- Government grants and schemes may be made available in areas of high unemployment
Common Misconception
When answering questions on the effect of unemployment, make sure you answer in the correct context.
For example, if the question asks about the negative effects of unemployment to a business, your answer should be about the potential for a decrease in sales because customers have less money to spend. Do not write about a reduction in staff causing increased workload for remaining staff.
2.2b The Environment
2.3b Interest Rates
