2. Economic Environment
Economy is one of the major external business
environment.
The business performance is influenced by the
dynamic economic characteristics.
The economic environment of a firm comprises
various external factors like economic conditions,
economic system and economic policies.
3. Economic Resources
The economic resources also known as Factors of
Production are the inputs used in the productions of
goods and services
These resources can be categorized in to four main
categories; Land, Labor, Capital and
Entrepreneurship.
These are among main influencers of the business
performance and Environments show disparity in it.
4. Economic Resources
Land; refers to the “gifts of nature”, or natural
resources not created by humans.
Land includes deserts, fertile fields, forests,
mineral deposits, livestock, sunshine, and the
climate
Labor; refers to the human efforts that is used
in the production process
5. Economic Resources
This includes the skills, knowledge, abilities time and
energy of workers
Capital; refers to the man-made resources used for
the production (machinery, building, equipment)
Entrepreneurship; this involves the ability to
combine the other three resources to produce goods
and services and take risks. They are considered as
the driving force of the economy
6. Economic Systems
An economic system can be referred to as a
system that encompasses the methods of
production, distribution and exchange of goods
and services.
The different economic systems differ on the
basis of means of establishment of ownership.
8. Capitalism Economy
This type of economy is also known as a capitalist
economy or a free-market economy.
This type of economy involves no governmental
interference.
Capitalism is an economic system in which the
industries, trade and production means are
completely owned by private bodies..
9. Features of Capitalism
Private property; it is a fundamental right of all the
individuals to be the owner of private property
Profit institution; €
capitalists earn profits by making
investments. Therefore, the process of
production is oriented towards profit.
Competition; competition is regarded as an indivisible
constituent of a capitalist economy. A capitalist
economy has to face strong competition in the market.
10. Features of Capitalism
Price mechanism: In capitalism, the prices of goods
and services are decided by their demand and
supply.
Business organisation: Presence of large business
organizations with widespread business structures
No Governmental Intervention; there is no
governmental intervention in all economic activities
11. Socialist Economy
Socialism (Socialist or Command economy ) is an
economic system where ownership and regulation
are under the government.
All the activities of production and other
functions like allocation of resources,
distribution of income, investment pattern, etc.,
are under the direction and control of the
government.
12. Features of Socialism
Social ownership: In socialism, there is no private
ownership since all the production means such as
banks, railways, mines, factories, farms, etc., belong
to the society.
Central planning: Under socialism, all the activities
of production and their associated goals and plans
are designed by the Central Planning Authority
13. Features of Socialism
Equality of income and opportunity: Socialism
strives to remove or reduce disparities in income
and wealth and offers equal opportunity to every
individual. Social welfare is one of the crucial
objectives of socialism
Classless society: Contrary to capitalism, socialism
is a classless society, where there is no division of
society into classes like labour class, elite class etc.
14. Mixed Economy
Mixed economy combines the characteristics of
both capitalism and socialism.
It is the aggregate of both public and private
ownership.
mixed economy offers private enterprises the
freedom to function and develop but also permits
government interference in matters for maintaining
economic objectives.
15. Features of Mixed
Economy
€
€
Co-existence of the public and private sector: In a
mixed economy, both public and private sectors operate
independently but strive to achieve a single objective.
Economic welfare: The primary purpose of a mixed
economy is to ensure economic welfare
Economic planning: The Central Government devises
economic plans and direct the functions of both the
public and private firms in view of that
16. Features of Mixed
Economy
Price mechanism: Price system of the economy is
regulated by the price policy framed by the
government; Care weaker sections of the society
Free and Controlled Economic Development; It gives
freedom of occupation and choice as well as controls
and governs the economic activities.
Government intervention: Under the mixed economy,
the government can interfere in order to stabilize
the economy, particularly during a crisis
17. Economic Condition
A country’s economic condition can be explained in
the form of the income distribution, per capita
income, economic resources, and so on.
The country’s economic condition has lot of
implications for business – it has significant
bearing on the nature and size of demand
18. Economic Condition
Countries, and even different regions within a
country, show great differences in economic
conditions
A widely used method of classification of the
economies is on the basis of the per capita income
(i.e., the average annual income per person).
Accordingly, countries are broadly classified as low
income, middle income and high income economies
by the World Bank
19. Economic Condition
Low Income Economies are economies with very low
level of per capita income.
High Income Economies are countries with very
rich income per capita income
Middle Income Economies are subdivided into
lower middle income
20. Economic Condition
Also economies can be classified in terms of;
Developed economies, developing economies and
less developed economies.
Besides income, some other criteria such as the
sectorial distribution of the income and
employment generation, social development
indicators etc., are applied to consider whether an
economy is a developed or developing one
21. Economic Output
The condition of the economy in terms of production
and output is not same through out the time.
The variations of the economy condition is expressed
by the business cycle.
Business cycles are short-run contractions and
expansions of economic activity.
22. Business Cycles
Expansion: This phase occurs when the economy is
growing, characterized by increasing production,
employment, and income levels.
Recession this phase occurs when the economy is
declining, characterized by falling production, rising
unemployment, and decreased consumer spending.
23. Business Cycles
Peak: The peak marks the highest point of the
business cycle, where economic activity reaches
its maximum level.
Trough: The trough represents the lowest point
of the business cycle, where economic activity
bottoms out before beginning to recover.
25. Inflation
When prices of goods and services are rising
over time it is inflation.
When they are falling it is deflation.
The inflation rate is the percentage increase in
the average level of prices.
The inflation affects the purchasing power of the
money and leads higher prices
26. Effects of Inflation
The effects of inflation include;
Reduced purchasing power
Increased product prices
Increased input prices (wages, resources)
Reduced demand for products
Economic downturn
Uncertainty
27. Unemployment
Unemployment refers to the condition in which
individuals who are willing and able to work are unable
to find employment opportunities
Recessions are usually accompanied by high
unemployment rate
Unemployment Rate; percentage of the labor force
that is unemployed and actively seeking employment.
28. Effects of
Unemployment
Unemployment condition can impact business as
follows;
Decreased output
Lower income
Consumer demand cut down
Decline in Revenue
Impact on Small Businesses
29. Economic Policies
There are several economic policies which can have a
very great impact on business.
Important economic policies include;
Monetary policy, industrial policy, trade policy,
foreign exchange policy, foreign investment,
technology policy etc.
30. Monetary Policy
The policy which is Conducted by central bank
to control the supply of money in the economy
Usually by exercising its control over interest
rates and amount of money.
In order to maintain price stability and achieve
high economic growth
31. Types of Monetary Policy
Expansionary Monetary Policy
Increase the money supply to boost economic activity
and Lower Interest rates
Contractionary Monetary Policy
Decrease the money supply to boost economic activity
and Higher Interest rates
32. Objectives of Monetary
Policy
The main objectives of Monetary Policy are;
Price Stability
Exchange Rate Stability
Economic Growth
Full Employment
