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Commercial Knowledge > Business Environment > Macro Environment – Economic Environment
Business Environment

Macro Environment – Economic Environment

Macro environment refers to certain external factors that affect a firm and its business. Such factors are not a part of the firm’s immediate surroundings and cannot be controlled by them. One such type of macro factor is the economic environment in which the business operates. Let us have a look.

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Economic Environment

The economic environment is the sum total of the economic conditions and the nature of the economy in which the business has to operate and compete.

This will include the nature of the economy, the direction in which it is progressing, the availability of resources (labour, capital, etc) and the conditions of the market as well. All these factors in combination create the economic environment for a firm.

The economic environment will dictate a lot of the decisions of the firm. The size of the market will depend on the economic environment. The purchasing power of a potential customer will also depend on factors of the economic environment like income levels, savings, credit availability, etc.

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Factors Affecting the Economic Environment

The firm has no control over the economic environment in which it must operate. It is an external macro factor. While it cannot be controlled by the firm it can be studied. So it is important to know the factors which affect the economic environment and how they may impact the firms.

1] Economic Systems

Economic Environment

Source: Wikipedia

The economic system under which the economy operates has a huge impact on its economic environment. Let us take a look at the three economic systems which usually prevail

Capitalist Economy: There are no restrictions in a capitalist economy. The market forces operate freely, demand and supply will decide the prices in the market. There is private ownership of factors of production and private companies.

Socialist Economy: This type of economy is characterized by government control and central planning authority. So there is no private ownership, all means of production are under state control. There are no market forces and the price is also set by the state.

Mixed Economy: Here the best features of both capitalism and socialism combine to give us this system. Market forces are very much in force to decide demand supply and prices. But there is some government oversight to ensure that there are no discriminatory practices.

2] Economic Conditions

The economic conditions of the country also have a huge impact on the firms that exist within the economy. Furthermore, economic conditions are the sum total of many factors that can greatly affect a business. Such factors include GDP of the economy, per capita income, availability of capital, utilization of resources, state of the capital market, interest rates, unemployment levels, etc.

3] Economic Policies

In any economy, the government has some control and/or oversight. Moreover, governments with the help of their planning authorities frame and implement many types of economic policies.

Industrial Policy: These are all rules, laws, notifications, policies, circulars, etc through which the government controls and governs the industrial sector of the economy. This helps them shape the industrial development of the country.

Fiscal Policy: This is the government policy with regard to public expenditure, taxation, and public debt. This also greatly affects the businesses functioning in the economy.

Monetary Policy: This policy will decide the supply of money to the market. Consequently, will decide the levels of savings and investments. It will also control the credit supply in the economy.

Foreign Investment Policy: This deals with keeping the foreign investments in-check for all sectors. So, we can benefit from the new technologies in all sectors.

Import Export Policy: This is how the government controls the export and imports of a country. Also, the import-export policies will lay out the duties, taxes, subsidies, etc. These days there are not many barriers to import and export which positively affects the economic environment.

                                     Let’s learn about the Importance of Business and its environment here. 

Solved Example on Economic Environment

Question: Which type of economy enjoys freedom with respect to demand and supply and also has some governmental restrictions?

Answer: Mixed economy – it has the freedom to run in a market freely but some government policies apply.

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