What is the economic environment?
The economic environment consists of economic factors that influence consumer buying behavior and the business behavior of organizations; there are many internal and external factors that influence the economy, consumer buying behavior and the business behavior of organizations are interdependent.
For example, if an organization increases the price of a product, people will buy less of it, and similarly, if demand for a product decreases, the company will reduce the production of that product.
elements of the business environment
Private and public sectors: the role of the private and public sectors is very important in attracting investment because when investors put their money in, they see the growth of the industry and the role of the private sector in the economy.
Economic growth: GDP, GNP, and per capita income When an economy's GDP grows, this attracts investment into it and shows investors that the economy is growing.
Transport and communication: the transport and communication system contribute to economic growth, if the transport system is good it increases the number of final goods and if the communication system becomes efficient it connects more people and enables them to do more business.
If an economy has more international debt then investors will be afraid to invest in it and vice versa. if the transport and communication system improves connectivity and communication then the economy will be better connected.
In an economy with higher external debt, it is more important to have a more open economy.
There are no specific types of the economic environment, but the factors that influence and strongly affect the economic environment can be divided into two categories:
Microeconomic environment
Microeconomic environmental factors are those factors that affect an individual organization and do not affect the industry as a whole. Examples of microeconomic factors are demand, competitors, market size, supply chain, suppliers, and supply.
Macroeconomic environment
Macroeconomic environmental factors are those that have an impact on a larger scale and do not affect just one firm but the whole economy; examples of microeconomic factors are inflation.
Factors affecting the economic environment
Annex
An increase in demand for the product will lead to an increase in profits and a decrease in demand for the product will lead to losses, therefore companies use different strategies to increase demand for their products in the market.
market size
An organization's profit margin will be low if the size of the market is small, i.e. the size of the market is the total number of potential buyers in the market, for example, a company producing inhalers for asthma has a small market in which it can sell inhalers to people suffering from asthma.
Suppliers
The firm's production will stop if suppliers suddenly stop supplying raw materials for the production of the product, and similarly production costs will increase if the supplier increases the price of the products.
supplies
Similarly, the production process depends heavily on supplies from suppliers and the production process suffers when supplies become insufficient.
Income represents the total income of an individual or a family, and income influences the purchasing behavior of consumers and hence of the firm.
There is a direct relationship between people's buying habits and their income; for example, people on low incomes tend to buy only goods and services they need to live and do not spend much money on entertainment and luxury goods.
For example, low-income people prefer to spend money on their children's school fees rather than buying an expensive car, while higher-income people tend to spend more on entertainment, services, and luxury goods.
They tend to spend little money on necessities, such as staple foods like wheat, rice, etc., and look for expensive, high-quality branded products.
Therefore, it can be said that the high income of the population is conducive to business and the low income of the population leads to a decline in business.
Inflation rate
The rate of inflation can be defined as the rate at which the production of goods and services increases as rising prices affect people's purchasing power and they start buying less and spending their money only on necessary goods and services.
For example, people go to fewer restaurants and travel less, and inflation affects businesses that provide leisure services and sell brand names, so inflation is undesirable for both consumers and businesses.
Interest rates are rising
Rising interest rates will also affect businesses, especially those that borrow to buy goods, for example, people buy houses and cars mainly on credit, so sales of these goods will fall if interest rates rise.
Therefore, many banks advertise their loan services at lower interest rates than other banks to attract customers, as people always prefer to get a loan at a lower interest rate.
Unemployment rates
Another factor affecting the economic environment is the unemployment rate. Countries with high unemployment have a weaker economic environment.
If the majority of the population is not earning, they do not have enough money to buy goods and services and this creates a negative business cycle in the country.
For example, if people do not buy, businesses do not hire people, reducing their spending, and if businesses do not provide jobs, unemployment increases.
Therefore, one of the main concerns of the government is to create jobs in the country to reduce the unemployment rate in the country and save the economic growth of the country.
Fees
High taxes in the country have a serious impact on the economic environment as people have little income to spend and taxes affect not only consumers but also businesses as high taxes increase production costs.
Companies are therefore forced to increase the prices of their products, as a result of which people buy less and this affects the economic environment.
Tariffs
Tariffs are a type of tax imposed on imported goods and have the opposite effect on the sale of goods compared to taxes - when tariffs are low, people import more goods from foreign countries, and local markets are flooded with cheap foreign products and this affects the sales of local products.
Hence, higher tariff rates are better as they lead to fewer imports of foreign goods and people buying more domestic goods[1]. Tariffs are lower when foreign goods are exported, which in turn reduces pressure on domestic markets.
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