O Level Business: Economic issues (Cambridge 7115) – Revision Notes

These notes condense section 6.1, Economic issues, of the Cambridge O Level Business Studies 7115 syllabus for examination in 2026 (points 6.1.1 and 6.1.2). For full explanations and worked examples, read the study guide. When you have revised, try the practice questions, tick off the printable checklist and look at the course hub. If you are unsure where to start, use a free diagnostic. The wider unit also has a topic-level practice set.

Key terms

Term	Meaning
Business cycle	The repeating pattern of rising and falling economic activity over time
Gross Domestic Product (GDP)	Value of all output of goods and services made within a country over a set time
Economic growth	A rise in GDP over time
Employment level	Number of people in work; unemployment rate = unemployed / labour force × 100 (standard form)
Inflation	Prices in general rising over a sustained time
Tax	Compulsory payment to the government
Government spending	What the state spends on services, infrastructure, support and contracts
Interest rate	Cost of borrowing and reward for saving, as a percentage
Variable-rate loan	Rate moves with market rates (standard term)
Fixed-rate loan	Rate stays the same for an agreed period (standard term)

The business cycle (6.1.1)

Learn the four stages the syllabus gives as examples, in order of a typical cycle.

Stage	One-line memory	Business effect
Growth	GDP rising steadily	Sales up, firms invest
Boom	GDP rising fast, very low unemployment	Peak sales, but staff shortages and rising costs
Recession	GDP falling	Sales down, redundancies, spare capacity
Slump	GDP very low, weak demand	Closures, discounting, cash problems

Some books add “recovery” after a slump. It acts like growth.

Formulas (standard forms):

Measure	Formula
GDP growth rate	(new GDP - old GDP) / old GDP × 100
Inflation rate	(new index - old index) ÷ old index × 100
Unemployment rate	unemployed / labour force × 100
Profit margin	profit / sales revenue × 100
After-tax profit	profit before tax × (1 - tax rate)

Effects of employment, inflation and GDP

Change	Likely effect on a business
Employment up	More spending power, higher demand, harder to recruit, pressure on pay
Employment down	Weaker demand, easier recruitment, redundancy costs may arise
Inflation up	Costs rise; margin squeezed unless prices rise; customers may cut back
Inflation down or stable	Easier to plan, cost and price
GDP up	Higher incomes, more sales, expansion
GDP down	Lower sales, cuts in output, jobs and investment

Government objectives and tools (6.1.2)

Objectives: increasing GDP (the syllabus example); other common ones are lower unemployment and low, stable inflation. Tools: taxes, government spending and interest rates (often set through the central bank).

Tool	Cut or lower	Raise or increase
Profit tax	Firms keep more profit, can invest	Less profit retained, less investment
Income tax	Households have more to spend	Households have less to spend, wage demands may rise
Sales tax	Prices fall, demand may rise	Prices rise, demand may fall
Government spending	Fewer contracts, less demand	More contracts, more jobs and incomes
Interest rates	Cheaper loans, more borrowing and spending	Dearer loans, less borrowing and spending

Method: explaining an effect

1. State the change.
2. Say who it affects (business, customers, workers).
3. Say what changes in the business: price, demand, cost, profit or cash.
4. Use the numbers or the context in the stem.
5. Add a response or a judgement if the command word asks for one.

Method: justify a decision

1. Pick one option and say why, using the data.
2. State the main risk of that option.
3. Say why the other option is weaker in this case.
4. Add a condition (“this holds if the recession lasts more than a year”).

Business responses at a glance

Condition	Typical responses
Recession or slump	Cut costs, promotions, cheaper lines, new markets, less stock, delay investment
Growth or boom	Increase output, recruit, invest, control costs
High inflation	Find cheaper suppliers, raise prices, improve efficiency
Higher taxes	Cut costs, raise prices, delay investment
Higher interest rates	Repay debt, delay borrowing, fixed-rate finance
Lower interest rates	Borrow to expand, refinance, target credit-funded purchases

Every response has a cost. A discount can lower the margin. Delaying investment can leave a firm behind its rivals. Say so.

Command words for this topic

The syllabus lists these command words, with the meanings below.

Command word	Meaning	In this topic
State	Express in clear terms	Name a stage of the cycle or a government objective
Identify	Name, select, recognise	Pick the stage from a description or table
Define	Give precise meaning	GDP, inflation, interest rate
Calculate	Work out from given figures	Growth rate, inflation rate, tax, interest
Outline	Set out the main points	Several effects of a spending cut, briefly
Explain	Say why or how, with evidence	Link a change to a result for the business
Justify	Support a case with evidence or argument	Back a recommended response
Consider	Review and respond to given information	Use the data in the stem

Why the same change hits firms differently

The effect depends on the business, so check the stem for these clues.

Clue in the stem	What it changes
Sells big purchases bought on credit (cars, furniture)	More exposed to interest rates and to recession
Sells basic goods such as bread	Less exposed to recession; costs still rise with inflation
Has a large variable-rate loan	Interest rise hits profit directly
Sells to the government	Spending cuts matter most
Exports or imports	Pay attention to cost changes and demand in other countries
Labour-intensive	Wage pressure matters in a boom

Use at least one such clue in each answer. It turns a general point into application.

Small worked reminders

Varnley Bakery has a 100,000 loan at 6%. Interest is 100,000 × 0.06 = 6,000 a year. At 9% it is 9,000. The bill is up 3,000, or 50%. The rate rose by 3 percentage points, not 50%.

A firm earns 80,000 profit before tax. At a 20% rate, tax is 16,000 and profit after tax is 64,000. If the rate falls to 15%, profit after tax is 80,000 × 0.85 = 68,000, an extra 4,000.

A magazine costs 50 before sales tax. A 12% sales tax makes the shelf price 50 × 1.12 = 56.

Must-know distinctions

• GDP (output) versus inflation (prices): GDP can rise while prices are stable.
• Recession (GDP falling) versus slump (low and staying low).
• Percentage versus percentage point.
• Tax on profit (paid by the business) versus tax on sales (added to the price).
• Fixed-rate versus variable-rate loan: only the variable-rate loan moves with a rise in market rates.
• Government spending as a customer (contracts) versus spending that changes the whole economy.

Quick self-test

1. Name the four stages of the business cycle given as examples in the syllabus.
2. Define Gross Domestic Product.
3. GDP rises from 1,800 billion to 1,890 billion. Calculate the growth rate.
4. A price index rises from 100.0 to 106.2. Calculate the inflation rate.
5. State one effect of a boom on a firm’s costs.
6. A business has profit before tax of 80,000. Tax falls from 20% to 15%. Calculate the change in profit after tax.
7. A magazine costs 50 before sales tax. Calculate the price with a 12% sales tax.
8. Explain one way a rise in interest rates could reduce sales for a furniture shop.
9. There are 40m people in the labour force and 2.4m are unemployed. Calculate the unemployment rate.
10. State one way a firm could respond to a recession, and one cost of that response.

Answers

1. Growth, boom, recession, slump.
2. Everything a country produces, goods and services, added up in money terms for a set time.
3. (1,890 - 1,800) / 1,800 × 100 = 5.0%.
4. (106.2 - 100.0) / 100.0 × 100 = 6.2%.
5. Any one: wages rise as staff are scarce; materials cost more; suppliers raise prices; overtime is needed.
6. Old after-tax profit 64,000; new 68,000; the change is an increase of 4,000.
7. 50 × 1.12 = 56.
8. Customers often buy furniture with loans, so higher interest makes the purchase dearer and some delay it; fewer sales follow.
9. 2.4 / 40 × 100 = 6%.
10. For example, cut prices to hold sales, which lowers the margin on every item. Other valid pairs: cut costs (staff morale suffers), delay investment (may fall behind rivals).

Where marks are usually lost

• Describing a stage of the cycle without any effect on a business.
• Giving the direction of a change but not the link (“tax rises so profit falls” with no reason).
• Mixing up a rise in the tax rate on profit with a rise in sales tax.
• Writing about a firm with no loan as if it paid interest.
• Forgetting percentage points when comparing rates.
• Listing responses with no reason they suit this firm.
• Recommending without weighing the alternative.
• Ignoring figures provided in the stem.

Frequently asked questions

What is the difference between a percentage point and a percentage? A rate moving from 5% to 8% has risen by 3 percentage points, but the interest bill on a loan at that rate rises by 60%. Treating the two as the same is a common error.

Why does the same economic change affect businesses differently? Each firm’s position differs: a firm with no loan is not hurt by a rise in interest rates on loans, while one with a large variable-rate loan is. Apply the change to the type of business in the question.

What is the difference between a fixed-rate and a variable-rate loan? A variable-rate loan changes when market interest rates change. A fixed-rate loan stays the same for an agreed period, so the business is protected from a rise during that time.

What is GDP? Gross Domestic Product is the value of goods and services produced within a country over a period, usually a year. It is not money held by the government.

Official syllabus

Cambridge O Level Business Studies 7115 syllabus for 2026, Cambridge University Press & Assessment (Cambridge Assessment International Education), section 6.1 Economic issues.