Business Environment and Markets
What you must understand
A business never operates in a vacuum. The external environment includes the economic, legal, political, social, technological and global forces that shape what a firm can do. The internal environment covers the resources, culture and capabilities the firm controls. Candidates should be able to use a scanning tool such as PESTLE to categorise external influences and a SWOT analysis to connect internal strengths and weaknesses with external opportunities and threats.
Market structure matters. Distinguish perfect competition, monopolistic competition, oligopoly and monopoly by number of sellers, product differentiation, barriers to entry and price-setting power. Demand and supply analysis explains equilibrium price; shifts in demand (income, tastes, substitutes) differ from movements along the curve caused by price changes.
Traps in questions
- Confusing a movement along a demand curve with a shift of the curve.
- Treating PESTLE factors as internal when they are external.
- Assuming a monopoly always earns supernormal profit; regulation and contestability can erode it.
- Ignoring that market structure is a spectrum, not a set of rigid boxes.
Worked example
A question asks how a new competitor entering an oligopoly affects pricing. Rule of thumb: entry raises contestability, increases substitutes and reduces each incumbent's market power, so incumbents may lower price or increase differentiation to protect share. State the mechanism, not just the outcome.
Rule of thumb
For any environment question, name the force, classify it (external or internal), then explain the effect on price, cost or demand.