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Using the data in Extract G and your own business knowledge, assess the likely effects of the changes in interest rates between 2019 and 2021 on Buy It Direct. - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2
Question 2
Using the data in Extract G and your own business knowledge, assess the likely effects of the changes in interest rates between 2019 and 2021 on Buy It Direct.
Worked Solution & Example Answer:Using the data in Extract G and your own business knowledge, assess the likely effects of the changes in interest rates between 2019 and 2021 on Buy It Direct. - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2
Step 1
Assess the positive effects on Buy It Direct
Answer
Interest rates have significantly fallen from 0.75% in 2019 to an estimated 0.1% in 2021. This decline can be advantageous for Buy It Direct, particularly in several ways:
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Lower Borrowing Costs: The reduction in interest rates means lower costs for borrowing. Consequently, Buy It Direct may leverage this to finance new projects, such as expanding its product offerings or enhancing its online presence.
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Increased Consumer Spending: With lower borrowing costs, consumers might be more inclined to purchase household appliances and consumer electronics. This could lead to higher sales for Buy It Direct.
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Competitive Pricing: The decreased interest expenses mean that Buy It Direct can offer more competitive prices. This change can attract price-sensitive consumers who are looking for the best deals on electronics.
Step 2
Consider potential counterbalances
Answer
While the decline in interest rates presents considerable benefits, it's also essential to recognize possible counterbalances that may limit the overall impact:
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Impact on Savers: The fall in interest rates implies lower returns for savers. Therefore, consumers who rely on savings might have reduced purchasing power, thereby diminishing demand for higher-end products in the electronics sector.
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Depreciation of Imports: A decline in interest rates may devalue the pound, leading to higher costs for imported goods. This could pressure Buy It Direct's pricing strategy, especially for products sourced from overseas.
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Limited Sale Growth: Despite lower interest rates, Buy It Direct may find its sales growth limited due to the fixed increase of only 0.65% between 2019 and 2021. The modest change in interest rates might not lead to enough consumer behavioral shifts to significantly benefit the company.
Step 3
Evaluate overall impact
Answer
In conclusion, while the reduction in interest rates presents several opportunities for Buy It Direct, such as lower borrowing costs and potential for increased consumer spending, the overall effect may be tempered. The lack of a substantial decrease in interest rates (only 0.65% between 2019 and 2021) indicates that the resulting changes in consumer behavior might also be limited. Therefore, while opportunities are present, they may not dramatically increase Buy It Direct's sales.