Download Economics Environment of Business

Economics Environment of Business
Economics Environment
 The definition of economic environment is the environment
in which businesses operate that is dependent on the sum
total of economic factors.
 Economic factors include income, employment, inflation,
interest rates, consumer behavior and distribution of wealth.
All of the economic factors have effects on the economic
environment, which in turn affects the business market.
Economic factors affecting business
 At what stage of the business cycle is the economy
 Inflation rate
 Prevailing interest rates
 Unemployment level
 Labor costs
 Levels of disposable income and income
distribution
 Taxes
 Tariffs
 The economic environment is constantly changing because of
changes to economic factors. Economic factors are both
controllable and uncontrollable.
 The controllable factors, such as price, income and interest
rates are politically controlled.
 Uncontrollable factors, such as consumer wealth and
distribution of wealth, fluctuate and vary, making them
difficult to predict. Both the controllable and uncontrollable
factors cause changes in the market and consumer demand.
The failure to account for economic factors leads to financial
consequences for businesses and the economy as a whole.
 The
economic environment is divided into the
macroeconomic environment and the microeconomic
environment.
 The microeconomic environment is affected by factors like
market size, supply and demand, which affects business
actions and decision-making.
 The macroeconomic environment is affected by factors like
exchange rates and taxes, which affects the entire economy
on a broader level. Both divisions of the economic
environment plays an important part in the success or failure
of the market.
Economics Systems
 1)In the free market economy all resources are owned privately. The
consumers and firms decide the allocation of resources. Government has
no control over the economy. Consumer needs are met and necessity
goods like education and health are not available for everyone. Eg. Cuba
2)In the command economy all resources are owned by the
government. The government decides the allocation of resources; that is
what to produce, how to produce and for whom to produce. Firms are
not very efficient as they do not earn profits. Eg. China
3)In the mixed economy resources are owned both privately and by
the government. It is the combination of the above economies.
Important sectors like health, medical, education are under the
government and less important ones are under private ownership. Eg.
India,Singapore etc. Most countries follow this economy system.
Meaning of Privatization
 The transfer of ownership, property or business
from the government to the private sector is
termed privatization. The government ceases to
be the owner of the entity or business
 Privatization is sought to be achieved through
any or more of the four important routes: sale
to outside owners, management-employee buyout, equal-access voucher privatization, and
spontaneous.
Nature of Privatization
 Privatization may be understood as the process
whereby activities or enterprises that were once
owned and operated by government and its
employees are now performed, managed by
private business and individuals, often with much
better results in terms of cost and quality service.
THE OBJECTIVE OF PRIVATIZATION
 Greater efficiency
 Revealing the true and full cost of the service provided
 Promotion of technological advancement
 Development of capital markets
 Broadening the wealth and achieving widespread private
ownerships in society
 Curbing inflation
 Raising extra-revenues for the government
 Eliminating hidden unemployment and reducing thepower of
public employee unions
Privatization Routes
 Sale to Outside - disinvestment
 Management-Employee Buy Out
 Equal-access Voucher Privatization
 Spontaneous Privatization
Economic Trends: Income
Sr. No.
Industry
Percentage change over previous year
at constant (2004-05 prices)
at current prices
2011-12
3.6
2012-13
1.8
2011-12
12.2
2012-13
12.1
1
Agriculture, forestry & fishing
2
Mining & quarrying
-0.6
0.4
2.5
11.7
3
4
Manufacturing
Electricity, gas & water supply
2.7
6.5
1.9
4.9
11.2
10.5
7.7
18.3
5
6
Construction
Trade, hotels, transport &
communication
5.6
7.0
5.9
5.2
15.1
18.5
13.9
12.8
7
Financing, insurance, real estate &
business services
11.7
8.6
18.7
17.3
8
Community, social & personal
services
6.0
6.8
14.9
16.0
Total GDP
6.2
5.0
15.0
13.3
Economic Trends: Savings and Investments
Trade and Balance of Payment
 Balance of Trade
 Balance of Payments
 Current Account
 Capital Account
Money
Monetary Policy
 The actions of a central bank,
currency board or other regulatory
committee that determine the size
and rate of growth of the money
supply, which in turn affects
interest rates. Monetary policy is
maintained through actions such as
increasing the interest rate, or
changing the amount of money
banks need to keep in the vault
(bank reserves).
Fiscal policy
 Fiscal policy is how the government manages its budget. It
collects revenue via taxation that it then spends on various
programs