Economic Environment of a Business Review

Economic Environment of a Business

The objective of this work is to summarize the economic environment of a business including information relating to microeconomics, macroeconomics, and international trade aspects

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The business organization is a “micro-economic unit” and the business environment is that which makes provision of the “macro-economic context within which firm operates.” (Reddy, ) The business environment can be categorized into the ‘economic’ and non-economic’ and the ‘micro- and macro-environment. (Reddy,, paraphrased) The firm is an economic institution in a market system with the behavior of the firm reflecting the result of the decisions that were economic in nature that the manager of the firm made.

The economic environment of a business in today’s globalized business society is complex in nature. There is an inherent link between the business sector and it relationship with the government, capital market, household sector and the international business sector — all of which serve to influence the trends and the economy structurally. It is related that the business economic environment affects the non-economic environment and likewise the the economic environment.

I. Business Economic Environment is both Exogenous and Endogenous

The economic environment is stated to be “both exogenous and endogenous” according to Reddy ( ). Reddy writes interdependent as well are the educational-cultural environment and the economic environment of business. The political-legal environment and the economic environment of business are stated to be inherently related and to the degree that often, the political economy of business is considered. The economic environment of business is stated by Reddy ( ) to refer to the economic systems of a country.” It is noted that G. Grossman stated, “The set of institutions that characterizes a given economy comprises its economic system.” (in Reddy, 2004)

Economic Systems as Group of Economic Institutions

Reddy (2010) states that an economic system can be described as a group of economic institutions that brings into being an organization through the operation of which the various resources scarce relative to the needs for themare utilized to satisfy human wants. Decisions that are economic during the course of business include those concerning the manner in which:

(1) resources are to be distributed among the various fields of production;

(2) methods of production to be followed; and (3) the patterns for distributing the rewards of production among members of society. (Reddy, 2010)

The determination of the approach in decision-making is dependent upon the type of economy the system is operating in including the capitalist, socialist and mixed systems.

II. Development of Capitalism

In some countries a system of capitalism or ‘free’ enterprise has developed according to Reddy ( ) who states that in the capitalist system referred to as a ‘laissez-faire’ system characterized by non-governmental intervention in economic affairs. (Reddy,, paraphrased) The Capitalist system is characterized by the following: (1) promotion and encouragement of private ownership of property as the means by which individuals produce or distribute goods and services; (2) has the mindset that disallows government trespass; (3) the price of commodities and services are determined in the market; and (4) the market rewards individuals who can successfully establish and operate an organization for meting economic needs with profits; (5) the consumer is the sovereign and a free agent who can demand any commodity or service permitted by his income; (6) a primary element of important in capitalism is that of competition and in fact capitalism thrives in the competitive environment. Where there is no competition there is no free enterprise. In the ‘Socialist’ economic business environment all resources are state-owned and all major business and production facilities are state owned and government-operated with national goals determining economic decisions rather than market conditions. The socialist economic system is guided by the economic planning system in which the government makes economic decisions that are of great import.

III. Business Ownership Rights In the Capitalist Economy

Private ownership is stated to be one of the “distinguishing features of business under capitalism” which means that individuals own businesses and certain freedoms exist for the :

(1) the business owner’s right to receive the business profits;

(2) the business owner’s right to start any business that is lawful and to liquidate the same;

(3) the business owner’s right to invest or to refrain from investing;

(4) the business owner’s right to make contracts;

(5) the business owner’s right to buy from and sell to whomever they please;

(6) the business owner’s right to set whatever prices they wish and to receive that amount. (Reddy, )

IV. Business Economic Activities

Economic activities performed by the business or organization toward the goal of maximization of profit include:

(1) production;

(2) distribution; and (3) sales. (Palwar, 2010)

These activities are of the nature that involve transformation of inputs into outputs, supply of these in the market place and exchange of the products with the buyers for money.” (Palwar, 2010) Constraints on business organizations include such as restraint on resources — land, labor, capital entrepreneurship, raw materials and finances.” (Palwar, 2010) Business activities include:

(1) lower;

(2) middle; and (3) higher activities. (Palwar, 2010)

Lower levels of activities are those associated with “ of the firm — Production, scheduling, ordering input supplies, scheduling overtime hours.” (Palwar, 2010) Middle levels of activities include the firm’s current operations including demand forecasts, investment appraisal and risk analysis, cost estimation and analysis, pricing of the product and discount to be offered, choice of suppliers, and lower level recruitments.” (Palwar, 2010) Higher levels of activities include those with are long-term plans and decisions based on strategy. Included is “diversification of product lines, launching of new products, expansion of production base, competitive strategies such as advertising, research and development, packaging and marketing.” (Palwar, 2010) Finally, it is necessary to consider the interactions of the Capitalist market during the course of doing business in the international marketplace. Globalization has changed the very fabric comprising the business economic environment and has made the economic environment more challenging to understand and even more complex to give an accurate accounting of the activities and processes of the business in the economic environment.


Palwar, V.K. (2010) Economic Environment of Business 2nd Ed. PHI Learning Pvt. Ltd. Retrieved from: http://books.google.com/books?id=hNBEId591wYC&dq=Economic+Environment+of+a+Business&source=gbs_navlinks_s

Reddy, R.I. (2004) Business Environment. APH Publishing. Retrieved from: http://books.google.com/books?id=NQv9vKgF_3MC&dq=Economic+Environment+of+a+Business&source=gbs_navlinks_s

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