Let us say that your colour wholesaler puts the colour for a full head of foils up from $28.00 to $35.00. Today you follow what that does to Five Star's profit, and then to everyone Five Star deals with.
Thirteen sections, about 80 minutes all up. One section is one sitting. Do that one and stop.
Three from the lessons so far. Have a go before you open them.
Three relationships take six sentences. Each relationship takes two sentences, one starting with each participant's name.
“The wholesaler was affected” does not achieve because the sentence gives no direction. Say increased or decreased, and say which money it was: sales revenue, wages, rent, interest or tax.
The cake shop's profit is $200.00 for the week. Sales revenue is 100 cakes × $5.00, which is $500.00. Take the $300.00 of expenses off that and $200.00 is left.
An event is something that happens that has economic significance to an organisation.
All three examples have been the event in a real exam. Good news or bad, an event is a change big enough to move money.
Today's event is a price rise: the colour for one foil job goes up by $7.00.
Everything in the rest of this lesson comes out of that one price rise.
The direct effect is what the event does straight away, with nothing else between the event and the direct effect.
Five Star still does 12 full heads of foils a week, and the colour for each one now costs $7.00 more: $420.00 a week instead of $336.00.
| Before | After | |
|---|---|---|
| Colour | $336.0012 foil jobs × $28.00 | $420.0012 foil jobs × $35.00 |
| Power, water and laundry | $144.0012 foil jobs × $12.00 | $144.0012 foil jobs × $12.00 |
| Sanjay's pay and the rent | $1,560.00 | $1,560.00 |
| Total expenses | $2,040.00 | $2,124.00 |
| Sales revenue | $2,280.00 | $2,280.00 |
| Profit | $240.00 | $156.00 |
Here are two ways to describe the direct effect of the colour wholesaler's price increase:
Write one direct effect, not two opposing ones.
Five Star's expenses increased by $84.00 a week.
Five Star's expenses increased, but its sales revenue increased too. Five Star's sales revenue increases only if Five Star does more foils, and the price rise brought no extra foils.
The direct effect, written“Five Star's expenses increased by $84.00 a week, so its profit decreased from $240.00 to $156.00.”
No direction, no figures“Five Star's expenses were affected by the colour price rise, so its profit was affected as well.”“Affected” gives no direction and no figure. Say that the expenses increased by $84.00 a week, and what the profit fell from and to.
A flow-on effect is a second round of effects following a direct effect.
Press Show the next step to follow the money out from the price rise, one round at a time.
Five Star's expenses increase by $84.00 a week, so its profit decreases from $240.00 to $156.00. The same $84.00 increases the colour wholesaler's sales revenue.
Why this is still the first round: the price rise is one transaction between two participants, Five Star and the colour wholesaler.
The government receives less tax revenue from Five Star, because there is less profit to tax, and more tax revenue from the colour wholesaler, because the wholesaler's profit went up by the same $84.00.
A direct effect is the first round after the event. A flow-on effect is the second round, and it belongs to a different entity from the first.
The direct effect is on Five Star: its expenses increase by $84.00 a week. The flow-on effect is on the government, which receives less tax from Five Star.
The flow-on effect is that Five Star's profit falls.
To write a flow-on effect, say what happened to the money, then say what that change did to the relationship.
Link every flow-on effect to the relationship it changes, and say how both participants in that relationship are affected.
Followed back to the relationship“The government receives less tax revenue from Five Star, so Five Star is putting less towards the roads and services it uses itself. That weakens the relationship: Five Star pays tax, and the government provides those services.”
No relationship“The government receives less tax revenue from Five Star.”The sentence stops at the government. Follow the tax back to the relationship between Five Star and the government.
Money, then strength“The government receives less tax revenue from Five Star, because Five Star's profit fell by $84.00. That weakens the relationship: Five Star pays tax, and the government provides the services Five Star uses.”
Strength, no money“The relationship between Five Star and the government is weaker now.”The sentence says the relationship is weaker but not why. Write the money first: the government receives less tax revenue.
Write the money first and the relationship second, one relationship at a time.
After the price rise, Sierra has to decide what Five Star does next.
Five Star's profit has fallen by $84.00 a week. Press what Sierra could decide, and see what follows.
Each of these choices is a response: a decision Sierra makes because of what the event did. Sierra could have chosen any one of the three choices.
Three different decisions, three different results. If you can name a different thing the person could have done, you are looking at a response, not an effect. What follows a response is called a consequence.
Press Show the next step to walk from the price rise to the consequences of Sierra's decision.
Cut the hours, and leave the hourly rate alone. Sierra cuts Sanjay's hours; what Sanjay earns an hour does not move.
Sanjay works four hours a week less.
Sanjay's wage rate decreases.
Here is one exam answer about a cyclone and an orchard, built up step by step.
Press Show the next step to follow the cyclone from the event to the consequences.
Good: the orchard pays less to get its apples to market.
Bad: the construction firms booked for the delayed projects lose that work, so their workers' hours are cut.
Now, let's look at how the above chain can be written about. Press each grade to see what it adds.
“The cyclone damaged the orchard, so the orchard lost potential income from the sale of their apples.”
Achieved: the event, and what it did to one participant, in money.
Follow each consequence through to future income or profit, purchasing power, or the ability to complete a service, and say how long the impact lasts.
The answer has to explain how a decision changes at least one of three things. The cyclone answer covers two.
💰 Future income or profit“…can rebuild the income the cyclone cost”, “…so their revenue falls”
🛒 Purchasing power“…earn lower wages and spend less at the businesses they buy from”
🔧 Ability to complete a serviceNobody in the answer stops being able to do their work, and that is fine.
The top grade also asks how long the changes last, so the answer ends with for as long as the projects stay delayed.
These seven sentences are all about the colour price rise. Choose what each one is.
That is a direct, first-round effect. The colour price went up and the expense went up. Nothing happened between the event and the effect.
That is a flow-on, second-round effect. The profit had to fall first. You can write the sentence that goes in front of it, and that is what makes it flow-on.
That is a direct, first-round effect, and an easy one to misfile, because it is good news for somebody else. The same price rise that increased Five Star's expense is the wholesaler's extra revenue: one event, two participants, and no step between the event and the effect.
That is a flow-on, second-round effect, and it moves the opposite way to the tax from Five Star. The wholesaler's revenue had to rise first, and then its profit, before there was more to tax. One event can move the same participant's money in both directions at once.
That is a response, a decision Sierra made because the profit fell. Nothing about the event forced it: she could have absorbed the $84.00 or put her own prices up instead.
That is what separates a response from an effect. An effect happens to you; a response is chosen. Responses belong at Excellence, where the decision has to be justified and its consequences discussed.
That is a direct, first-round effect. Revenue did not move and no other expense moved, so the whole $84.00 came straight out of the profit in the same breath as the expense went up.
That is a consequence, because it follows a response rather than the event. Trace it back: the profit fell, then Sierra decided to cut the hours, then his wage income fell, and only then does this happen. Because a decision sits in the chain, it is a consequence of that decision rather than a flow-on effect of the event.
That sentence is still worth writing, because it reaches purchasing power. That sentence belongs in the Excellence part of your answer.
The questions this lesson makes people ask, answered simply.
Because the relationship clause comes after the money, never instead of it. Write the money first and the relationship second.
Money, then the relationship“The Government receives less tax revenue from the orchard, which weakens the relationship where the orchard pays tax and the Government provides infrastructure it depends on.”
Strength instead of money“The relationship between the orchard and the Government is weaker.”The sentence gives the strength of the relationship but no money. Write the money first, then the relationship.
You need enough flow-on effects to cover the relationships the question asks about, which will be at least three. One flow-on effect per relationship, each followed back to that relationship, covers what the question asks.
Yes, a flow-on effect can be good news. The colour wholesaler's sales revenue increases by $84.00 a week, which is a direct effect. The government then receives more tax from the wholesaler, which is a flow-on effect, because the wholesaler's profit had to rise first.
Ask what had to happen first. If something else had to change before the effect, the effect is second round. If only the event came before the effect, the effect is first round.
Second round“The government receives less tax revenue from Five Star.” Five Star's profit had to fall first, so a sentence goes in front of it: “Five Star's profit decreased from $240.00 to $156.00.”
First round“Five Star's expenses increased by $84.00 a week.” Nothing goes in front of that except the event itself, the colour going up from $28.00 to $35.00.
Whether the consequence or the response comes first depends on what starts the chain. A chain that starts with Five Star's own decision has the consequence first: the consequence follows the decision, and a response then deals with the consequence. A chain that starts with an event has the response first: the response is Sierra's decision about the event, and the consequences follow that decision.
The chain starts with a decision: paying for the websiteConsequence: the website's $45.00 a month comes out of the same profit the new bookings are building, so the gain gets smaller. Response: add up the new clients after a year, and stop paying if hardly any came through.
The chain starts with an event: the colour price riseResponse: Sierra cuts Sanjay's hours from forty a week to thirty-six. Consequences: Sanjay is paid for four hours a week less, so his household spends less at the businesses it buys from.
Justify the response with its reason. Then discuss its consequences, good and bad.
The government spends the money to create jobs and reduce unemployment.
The government spends the money, so some people are better off and some are worse off.
Work out what is wrong before you open the answer.
The problem. That is a flow-on effect wearing a direct effect's label. Something had to happen first: the profit had to fall before there was less to tax.
“Five Star's expenses increased by $84.00 a week, so its profit decreased from $240.00 to $156.00.”
The direct effect is the one with nothing between the event and the effect.
The problem. Nothing here is wrong, but the sentence stops one clause short: it never says what this does to a relationship.
One report: students “identified positive and negative consequences for different participants, however then did not link this to a relevant interdependent financial relationship.”
“Because the profit fell, the government receives less tax revenue from Five Star, which weakens the relationship where Five Star pays tax and the government provides the roads and services the salon uses.”
Add the clause. The clause names both sides of the relationship, after the money.
The problem. This is the opposite fault to stopping at the money. The relationship is named, but the money is gone: no amount, no direction, nothing a marker can check.
The report on this exam says Merit answers wrote the direction of the money rather than the strength of a relationship.
“The colour wholesaler receives $84.00 a week more in sales revenue from Five Star, which strengthens the relationship where the wholesaler supplies the colour and Five Star pays for it.”
Write the money first and the relationship second.
The problem. That consequence is true, and it never says what happens to Sanjay's own money. An answer has to explain how the decision could impact “future income or profit, purchasing power, or the ability to complete a service”.
None of those three effects appears in that sentence.
“Sanjay might have his hours cut, so Sanjay's wage income falls. His household then has less purchasing power, and the businesses in town he buys from receive less sales revenue.”
Say what happens to one of the three effects.
The problem. That sentence is a decision with no reason, and “fix the problem” is not a financial statement. To justify a response, give the figures that show what the response saves against what the event cost.
“Cutting Sanjay from forty hours a week to thirty-six saves $96.00 a week against the $84.00 the colour rise costs, so the profit goes to $252.00 rather than $156.00.”
Show the arithmetic that makes it right.
Then compare the two figures: the cut saves $12.00 a week more than the price rise costs.
The problem. That is wrong twice. The arithmetic is wrong first. The cut saves $96.00 a week, and the colour now costs $84.00 a week more. That leaves the profit at $252.00, which is $12.00 more than the week made before the colour went up. The cut overshoots.
And it gives one sign only. Every consequence in it is good, which means the answer has looked at one participant and stopped. Sanjay is paying $96.00 a week for it and he is not in the sentence.
“The profit goes to $252.00, $12.00 more than before, so the cut more than covers the increase. But Sanjay earns $96.00 a week less, which lowers his household's purchasing power, and with four fewer hours at the basin Five Star may not be able to take every booking.”
Correct the figure, then add the other side and what follows later.
These are the words this lesson taught. Read direct effect and flow-on effect together, so you can tell them apart.
An eventThe colour wholesaler putting a job's colour up from $28.00 to $35.00.
Not an event (but a change that moves no money)Sierra repainting the salon's front door. Nothing about the money changes.
A direct effect“Five Star's expenses increased by $84.00 a week, so its profit decreased to $156.00.”
Not a direct effect (but a flow-on effect)“The government receives less tax revenue.” The profit had to fall first, so the tax revenue is the second round.
A flow-on effect“Because the profit fell, the government receives less tax revenue from Five Star.”
Not a flow-on effect (but a direct effect)“The colour cost $84.00 more.” That is the first round, and a flow-on effect is the round after it.
A response“Sierra cuts Sanjay's hours from forty a week to thirty-six.” She could have absorbed the $84.00 instead.
Not a response (but a direct effect)“Five Star's profit decreased to $156.00.” Five Star did not choose that.
A consequence“Sanjay is paid for four hours a week less, so Sanjay's household spends less at the businesses it buys from.”
Not a consequence (but a flow-on effect)“The government receives less tax revenue from Five Star.” That follows the event, so it is a flow-on effect.
Explains purchasing power“Sierra cuts Sanjay's hours from forty a week to thirty-six, so Sanjay earns $96.00 a week less. The shops in town Sanjay buys from then receive less sales revenue.”
Stops short“Sanjay's hours are cut.” True, but the sentence never says what happens to Sanjay's money.
These five tasks are about Bright Street, not Five Star, because you will be given a business you have not seen before. Bright Street Hair Supply mixes shampoo in a rented unit and sells that shampoo to salons, Five Star among them. Written out one after the other, the five answers are one whole answer.
| Bottles sold in a month | 400 |
| Price of one bottle | $13.00 |
| Expenses, each month | $4,740.00 |
| Empty bottles (400 × $1.20) | $480.00 |
| Ingredients | $1,100.00 |
| Wages for two staff | $2,400.00 |
| Rent on the unit | $700.00 |
| Interest to the bank | $60.00 |
Every participant here has one money word that moves, and no two are the same. Drag each word onto its participant, or press a word and then press the participant.
Well done. Every money word is on the participant it moves for. In your answer, name the money first and the relationship second.
The 60 cents a bottle that became Bright Street's extra expense is the plastics company's extra sales revenue, $240.00 a month. One event, two participants, and nothing between the event and the effect, so this is still the first round.
Expenses rose $240.00 a month while nothing else moved, so the whole of that money came out of the profit. That took the profit from $460.00 down to $220.00, and nothing had to happen first, which is what makes this the first round.
There is less profit to tax, so the government receives less tax revenue. The profit had to fall before that could happen, which makes it the second round.
The interest is still $60.00 a month. What changed is Bright Street's profit, so name the $60.00 of interest rather than the $15,000.00 loan: the loan moved once and the interest moves every month.
If Bright Street cuts its two staff from twelve hours a week to ten, their wage income falls. Somebody decided to cut those hours, so this is a response rather than a flow-on effect of the event.
The event: the plastics company puts an empty bottle up from $1.20 to $1.80. Expenses go from $4,740.00 to $4,980.00 a month. Profit falls to $220.00.
a.Describe the direct effect of the event on Bright Street. Write one sentence that names the money and says which way it moved.
“Bright Street's expenses increased by $240.00 a month, so its profit decreased from $460.00 to $220.00.”
Two money words, each with a direction and a figure, and the sentence stops at the first round.
b.Now write one flow-on effect, and finish the sentence with what that effect does to the relationship. Pick the government or the bank.
“Because Bright Street's profit fell to $220.00, the government receives less tax revenue from Bright Street, which weakens the relationship where Bright Street pays tax and the government provides the roads and services the business uses.”
The order earns the mark: the money first, then the relationship, with both sides named.
“Because Bright Street's profit fell to $220.00, Bright Street has less profit to cover the $60.00 of interest it owes the bank each month. That weakens the relationship where the bank lends Bright Street $15,000.00 and Bright Street pays the bank interest.”
The same order: the fall in profit first, then both sides of the relationship, the loan one way and the interest the other.
c.Bright Street decides to put its own price up from $13.00 to $13.60 a bottle. Justify that decision using the figures.
“At $13.60 a bottle, 400 bottles bring in $5,440.00 instead of $5,200.00. Against expenses of $4,980.00 that is $460.00 of profit, exactly what Bright Street made before the bottles went up. The $0.60 rise passes the whole increase on and no more.”
A justification is a decision plus the reason it is the right one. The figures are the reason.
d.Write one positive and one negative consequence of that decision, each for a named participant.
Positively, “Bright Street's profit returns to $460.00, so Bright Street can keep paying the bank its $60.00 of interest and keep both staff on twelve hours a week.”
Negatively, “Every salon that buys from Bright Street now pays $0.60 more a bottle, so Five Star's expenses increase and its profit decreases, and a salon that can buy the same shampoo cheaper somewhere else may stop ordering.”
Each one lands on a named participant's money, and the two point opposite ways, as the question asked.
e.Now look past this month. If the bottle price stays at $1.80, what does that mean a year from now?
“If the salons keep buying 400 bottles at $13.60, Bright Street makes the same $460.00 a month it made before, and a year from now nothing has changed. If enough salons switch to a cheaper supplier, Bright Street's sales revenue falls and its profit falls with it, so Bright Street may have to cut its staff's hours. That lowers those two households' purchasing power, and the businesses they buy from receive less sales revenue in turn.”
The answer follows both ways the year could go, each through to a named participant. The 400 bottles are an assumption, and the answer says so.
Go Sierra, go!
You took one price rise on one plastic bottle and followed it to a government's tax revenue, a bank's interest, a salon's profit and two households' shopping. That is the whole of your first external, and you have now done it once from end to end.