ACCA Applied Knowledge · Business and Technology

Political and legal factors affecting business: formula sheet

Full chapter guide

Key formulas

Expansionary fiscal policy: Lower taxes and/or higher government spending → higher demand; Used to fight recession and unemployment. It can increase the budget deficit and may add to inflation.
Contractionary fiscal policy: Higher taxes and/or lower government spending → lower demand; Used to control inflation or reduce a deficit. It can slow growth.
Expansionary monetary policy: Lower interest rates and/or higher money supply → cheaper borrowing → higher spending; A lower rate usually weakens the currency, which helps exporters and raises import costs.
Contractionary monetary policy: Higher interest rates and/or lower money supply → dearer borrowing → lower spending; Used to control inflation. Firms with high borrowings feel the effect most.
Fiscal vs monetary: Fiscal = tax and spending. Monetary = interest rates and money supply; Fiscal is set by the government. Monetary is often run by an independent central bank.
Tariff effect: Tariff → higher import price → domestic producers protected, importers' costs rise; Consumers may pay more. Other countries may retaliate.
PESTEL headings: Political, Economic, Social, Technological, Environmental, Legal; Learn the order. Scan the scenario for a clue under each heading.
Political factor checklist: Stability, taxation, regulation, trade restrictions, government spending, attitude to foreign investment; Use as a prompt list. Not every item will be relevant to a scenario.
Trade barriers: Tariff = tax on imports; Quota = limit on import quantity; Embargo = ban on trade; Each makes imports costlier or harder to get. Do not mix up the three terms.
Answer pattern: Factor → link to business → opportunity or threat; Use this in every written or objective answer to show application.
Two-effect rule: Effect of a law = change in behaviour + change in cost; Use this structure for any question asking how a law affects a business.
Regulation vs deregulation: Regulation = rules added or enforced; Deregulation = rules removed or relaxed; Say who gains and who is at risk under each.
Five law areas: Competition, consumer, health and safety, employment, data protection; Use this list as a memory prompt when a question is open.
Cost of non-compliance: Total cost = compliance cost + penalties + reputation damage; Penalties include fines, damages and legal action.
Why governments control monopolies: Monopoly power → higher prices + lower output + less choice + less innovation; Use this chain to explain the harm in any question about why regulation is needed.
Main targets of competition policy: Cartels/agreements + abuse of dominance + harmful mergers; Dominance itself is not normally unlawful. Abuse of it is.
Regulation of privatised monopolies: Natural monopoly + privatisation → independent regulator (price caps, service standards, network access); The regulator acts as a substitute for competition.
Tariff effect on price: Domestic price of import = world price + tariff; For a per-unit tariff add the amount. For a percentage tariff, price × (1 + rate).
Free trade area: Free trade area = no internal barriers; own external tariffs; Each member sets its own tariffs on non-members.
Customs union: Customs union = free trade area + common external tariff; This is the key difference from a free trade area.
Common market: Common market = customs union + free movement of labour and capital; Economic union adds common economic policies.

Quick revision

Government policy affects business through tools such as taxes, spending, subsidies and regulation.
PESTEL stands for political, economic, social, technological, environmental and legal factors.
Political factors relate to government actions and stability; legal factors relate to the laws and rules themselves.
Regulation usually raises compliance costs but protects consumers, employees and the environment.
Competition policy aims to stop firms abusing market power and to keep markets competitive.
A monopoly is a single dominant seller, and it may be able to raise prices or limit choice.
Governments can control monopolies by regulation, investigation or preventing harmful mergers.
Trade barriers such as tariffs and quotas protect domestic firms but can raise prices for buyers.
Trading blocs are groups of countries that reduce trade barriers among themselves.
Globalisation gives firms bigger markets and cheaper inputs but exposes them to more competition and risk.
In multiple response questions, select exactly the stated number of options.
Always tie your answer to the facts in the scenario.

Common mistakes

Calling an interest rate change a fiscal policy. Fix: Remember: fiscal = the government's budget (tax and spend). Monetary = the price and supply of money.
Saying a rate cut always helps every business. Fix: State who benefits (borrowers, exporters, retailers) and who may lose (savers, importers). Say 'usually' or 'tends to'.
Listing factors without linking them to the business. Fix: Always add 'for this business' and name the effect on costs, demand or risk.
Mixing up political and legal factors. Fix: Use political for government policy, stability and attitudes. Use legal for specific laws and regulations. Say which you choose if the item could fit both.
Treating legal factors as only a cost. Fix: Also mention benefits such as safer staff, customer trust and fairer markets.
Mixing up competition law and consumer law. Fix: Competition law targets market power and anti-competitive agreements; consumer law targets how products and sales are handled.
Saying a monopoly is illegal just because a firm is dominant. Fix: Remember that the law mainly targets abuse of dominance and anti-competitive agreements, not size alone.
Confusing a cartel with a merger. Fix: A cartel is an agreement between firms that stay separate. A merger combines firms into one.
Saying a quota is a tax on imports. Fix: Remember a tariff is a price tool (a tax). A quota is a quantity tool (a limit).
Treating a free trade area and a customs union as the same. Fix: Look for the common external tariff. If members share one, it is a customs union. If each sets its own, it is a free trade area.

Exam tips

In objective tests, decide the policy type first. Many wrong options are simply the wrong type of policy.
For multiple response questions, select exactly the number stated and check each option against both policy type and effect.
In Section B tasks, finish each point with a business consequence: costs, demand, profit, cash flow or risk.
Use cautious words such as 'tends to' and 'is likely to'. Effects depend on the sector, the firm and demand sensitivity.
Link policy to PESTEL. Government policy is usually a political or economic factor in the external environment.
Always tie the factor to the scenario. A generic definition earns little in a multi-task question.
Read the word 'political' carefully. If the scenario is about a named law, check whether the question expects legal instead.
In multiple response questions, select exactly the number stated and remember each option may be a different PESTEL heading.