O Level Business: Economic issues (Cambridge 7115)

This guide covers section 6.1, Economic issues, of the Cambridge O Level Business Studies 7115 syllabus for examination in 2026. It teaches the business cycle (6.1.1) and how government control over the economy affects business activity, and how businesses may respond (6.1.2). Work through it with the revision notes and the practice questions. There is also a topic-level set on the wider unit: external influences practice. Check your progress against the course hub and the printable checklist, or take a free diagnostic.

All money amounts below are in an unnamed local currency.

What the syllabus asks for

Ref	What you must be able to do
6.1.1	Describe the main stages of the business cycle, e.g. growth, boom, recession, slump
6.1.1	Explain the impact on businesses of changes in employment levels, inflation and Gross Domestic Product (GDP)
6.1.2	Identify government economic objectives, e.g. increasing GDP
6.1.2	Explain the impact of changes in taxes and government spending
6.1.2	Explain the impact of changes in interest rates
6.1.2	Explain how businesses might respond to these changes

The syllabus overview says Paper 1 (short answer and data response) and Paper 2 (case study) each last 1 hour 30 minutes and carry 80 marks. Both draw on the whole syllabus, so expect this topic to appear inside questions about pricing, finance, marketing or people. The assessment objectives are knowledge, application, analysis and evaluation. In this topic that means: know the term, apply it to the business in the stem, build a chain of reasoning, then reach a judgement.

The business cycle (6.1.1)

The economy does not grow in a straight line. Total output rises for a while, then slows or falls, then recovers. This repeating pattern is the business cycle. Gross Domestic Product (GDP) is the standard measure: the total value of goods and services produced inside a country in a period, usually a year. Economic growth is a rise in real GDP, and the GDP growth rate is the percentage change:

GDP growth rate = (new GDP - old GDP) / old GDP × 100

This is the standard form of the calculation.

Stage	GDP	Employment and prices	Typical business experience
Growth	Rising steadily	Unemployment falling, inflation usually low	Rising sales, firms start to invest
Boom	Rising fast, near full capacity	Very low unemployment, prices and wages rising fast	Record sales, but shortages of staff and rising costs
Recession	Falling	Unemployment rising, spending cut	Falling sales, spare capacity, redundancies
Slump	Very low and staying low	High unemployment, weak demand	Many closures, heavy discounting, cash shortages

The syllabus gives these four as examples. Many textbooks add “recovery” for the climb out of a slump. It behaves like growth, so describe it that way if you meet the word.

Changes in employment, inflation and GDP

Employment levels. Employment is the number of people with jobs. The unemployment rate is the unemployed as a percentage of the labour force (standard form). Rising employment means more households have wages to spend, so demand for many products rises. Firms can also find it harder to recruit and may have to offer higher pay. Falling employment cuts spending, so sales fall and there is a larger pool of workers to hire from.

Inflation. Inflation means prices in general keep rising over time. The inflation rate is the percentage by which a price index has risen (standard form). Higher inflation raises the cost of materials, rent and wages. A business that holds its prices squeezes its own profit margin. If it raises prices, customers may buy less or switch to rivals. Savings lose buying power, so some customers cut spending.

GDP. When GDP rises, incomes rise, so firms usually sell more and may expand. When GDP falls, sales usually fall, and firms may cut output, jobs and investment.

Worked example 1: reading the cycle

Brenmoor Tiles sells floor tiles in a country with the following figures.

Year	GDP (billion)	Unemployment rate	Brenmoor’s sales revenue
1	2,400	8.0%	3.10m
2	2,520	6.0%	3.55m

GDP growth in year 2 = (2,520 - 2,400) / 2,400 × 100 = 5.0%. Output is rising, unemployment is falling and Brenmoor’s revenue is up by 14.5% (3.55m - 3.10m = 0.45m, which is 0.45 / 3.10 × 100 = 14.5%). The economy is in the growth stage. Brenmoor could reasonably order more stock and hire a fitter. A good answer also adds a caution: if growth turned into a boom, wage and material costs could climb.

Worked example 2: inflation and a fixed price

Quillfern Printers charges 40 for a standard print job. The cost of materials and labour is 32 per job, so profit per job is 8 and the profit margin is 8 / 40 × 100 = 20%. A consumer price index rises from 112.0 to 116.2, so inflation is (116.2 - 112.0) / 112.0 × 100 = 3.75%. Suppose Quillfern’s own costs rise by 6%. Cost per job becomes 32 × 1.06 = 33.92. If the price stays at 40, profit per job falls to 6.08 and the margin to 6.08 / 40 × 100 = 15.2%. Quillfern must choose between absorbing the cost, raising its price, or cutting other costs.

Government objectives (6.1.2)

A government wants the economy to perform well for its people. The syllabus example is increasing GDP. Other objectives commonly named in textbooks, which fit this section, are reducing unemployment and keeping inflation low and stable. They are linked. Higher GDP tends to create jobs, and stable prices make it easier for firms to plan. They can also conflict: fast growth can push up prices.

The government has tools to pursue these objectives: taxes, its own spending, and (often through the central bank) interest rates.

Taxes (6.1.2)

A tax is a compulsory payment to the government. Three types matter for business:

• Taxes on profit (corporation tax), paid by companies on their profit.
• Taxes on income (income tax), paid by workers and owners on what they earn.
• Taxes on spending (sales tax), added to the price of goods and services.

Change	Effect on the business	Effect on customers
Lower profit tax	More profit kept for investment, dividends or reserves	None directly
Higher profit tax	Less retained profit, less to invest	None directly
Lower income tax	May ease pressure on wage demands	More take-home pay, more spending
Higher income tax	Workers may ask for higher pay	Less take-home pay, less spending
Higher sales tax	Product dearer unless the firm absorbs it, so demand may fall	Prices rise
Lower sales tax	Product cheaper, demand may rise	Prices fall

Worked example 3: profit tax

Drayholt Cycles makes a profit before tax of 250,000. Tax at 20% is 250,000 × 0.20 = 50,000, so profit after tax is 200,000. If the rate rises to 25%, profit after tax is 250,000 × 0.75 = 187,500, a fall of 12,500. The firm has less to put towards new machinery, so it may delay buying them.

Worked example 4: sales tax

A helmet costs 80 before sales tax. At 10% the shelf price is 80 × 1.10 = 88. At 15% it is 80 × 1.15 = 92, a rise of 4 or 4.5%. The seller may pass the rise on, in which case demand may fall, or absorb it, in which case its margin falls. Which is better depends on how sensitive customers are to price in that market.

Government spending (6.1.2)

Governments spend on roads and rail, schools, hospitals, defence and support for households. Spending affects business in three ways.

1. As a customer. Contracts to build, supply or maintain things raise the sales of the firms that win them.
2. Through the economy. Spending creates jobs and incomes, so households spend more with local businesses.
3. Through services and support. Better transport cuts delivery times and costs. A better-educated workforce is easier to recruit. Some spending takes the form of grants or subsidies to firms.

When spending is cut, the reverse can happen: contracts disappear, public-sector workers have less to spend, and shops near them may suffer. A cut can also be followed by lower taxes, which helps firms in other ways.

Interest rates (6.1.2)

An interest rate is the cost of borrowing money and the reward for saving it, shown as a percentage. A variable-rate loan changes when market rates change. A fixed-rate loan stays the same for an agreed period (standard terms).

If interest rates rise	If interest rates fall
Loan repayments cost more, so profit falls	Loan costs fall, so profit rises
New borrowing and investment look less attractive	Borrowing for expansion looks more attractive
Customers who borrow (cars, furniture, houses) buy less	Customers borrow and spend more
Saving pays better, so some spend less	Saving pays less, so spending is encouraged

Worked example 5: a variable-rate loan

Halbrook Quay Cafe has a loan of 200,000 at 5%. Profit before interest is 60,000. Annual interest is 200,000 × 0.05 = 10,000, leaving 50,000. The rate rises to 8%: interest is 200,000 × 0.08 = 16,000, leaving 44,000. Interest is 6,000 higher and profit after interest falls by 6,000 / 50,000 × 100 = 12%.

How businesses might respond (6.1.2)

A good response matches the change and the firm.

Situation	Possible responses
Recession or slump	Cut costs, lower prices or run promotions, move into lower-priced lines, widen the market, hold less stock, postpone investment
Growth or boom	Raise output, hire and train staff, invest in capacity, watch costs, raise prices carefully
Rising inflation	Look for cheaper suppliers, raise prices, improve efficiency, negotiate fixed-price contracts
Higher taxes	Cut costs, raise prices, delay investment
Higher interest rates	Repay debt, delay borrowing, choose fixed-rate terms, find cheaper finance

Each response has costs. A price cut raises demand only if customers notice and respond, and it lowers the margin on every sale. Delaying investment protects cash now but may leave the firm behind rivals later.

Answering case-study questions on this topic

The syllabus asks for application, analysis and evaluation. These steps work.

1. Name the change (for example, interest rates rise).
2. Link it to the business in the stem (a variable-rate loan, customers who buy on credit).
3. Follow the effect through to sales, costs or profit, using the figures given.
4. If the command word is “recommend and justify” or “justify”, weigh the other option too, then give a reasoned choice.

The command words in the syllabus include calculate, define, explain, identify, justify, outline and state. “Explain” needs a reason with a consequence. “Justify” needs evidence or argument supporting your case.

Common errors

• Describing GDP as “money the government has”. It is the value of output produced in the country.
• Saying a tax cut always raises sales. A profit-tax cut does not change the price customers pay.
• Giving the right direction but no link, such as “interest rates rise so profit falls”, without saying that loan costs go up.
• Applying a general answer to every business. A firm with no loan is not hurt by a rise in the interest rate on loans.
• Treating a percentage point as a percentage. A rate moving from 5% to 8% is 3 percentage points, but the interest bill rises by 60%.

Frequently asked questions

How do you calculate the GDP growth rate? GDP growth rate = (new GDP − old GDP) ÷ old GDP × 100. This is the standard form of the calculation.

How does inflation affect a business? Higher inflation raises the cost of materials, rent and wages. If the business keeps its selling price fixed, its profit margin falls.

What types of tax affect businesses in Cambridge O Level Business 7115? Taxes on profit paid by companies, taxes on income paid by workers and owners, and taxes on spending, such as sales tax added to the price of goods and services.

How does government spending affect businesses? Government spending raises sales for firms that win contracts, creates jobs and incomes that households spend locally, and improves services such as transport and education. Cuts in spending can have the reverse effects.

Does a tax cut always raise a business’s sales? No. A cut in profit tax leaves more profit after tax but does not change the price customers pay, so it does not directly raise demand.

Official syllabus

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