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Business Environment consists of all those factors that have a bearing on the business, such as the strengths, weaknesses, internal power relationships and orientations of the organisation; government policies and regulations; nature of the economy and economic conditions; socio-cultural factors; demographic trends; natural factors; and, global trends and cross-border developments
Business Environment can be considered at 3 levels Internal Environment Micro Environment Macro environment
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INTERNAL ENVIRONMENT
Value System Mission and objectives Management Structure and Nature Internal power Relationship Human resource Company Image and Brand Equity Miscellaneous factors
MICRO ENVIRONMENT
Suppliers Customers Competitors Marketing Intermediaries Financiers Publics
MACRO ENVIRONMENT
Economic Factors Social Factors Demographic Political National Technological Global
BUSINESS ENVIRONMENT
ECONOMIC ENVIRONMENT
MEANING
The economic environment is an amalgamation of various economic factors, such as total employment, productivity, income, wealth, inflation and interest rates. These factors influence the spending patterns of individuals and firms.
Inflation and deflation: Inflationary and deflationary pressures alter the purchasing power of money. This has a direct impact on consumer spending, business investment, employment rates, government programs and tax policies. Interest rates: Interest rates determine the cost of borrowing and the flow of money towards businesses. Exchange rates This impacts the price of imports, the profits made by exporters and investors and employment levels (also through the impact on the tourism industry). Monetary and fiscal policy: This helps in attaining full employment, price stability and economic growth
ECONOMIC SYSTEM
An economic system is the system of production, distribution and consumption of goods and services of an economy. Set of principles and techniques by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources. Composed of people and institutions, including their relationships to productive resources
Economic system can be broadly divided into Laissez- Faire Capitalism Socialism Mixed Economy
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LAISSEZ- FAIRE
Laissez faire means, 'allow to do'. Government abstention from interference in the actions of individuals, especially. in commerce; general noninterference or indifference. Laissez faire was a synonym for strict free market economics during the early and mid-19th century. From the French diction, laisser-faire, laissez faire, laissez aller and laissez passer, means "let do, let go or let pass. laissez faire is an injunction against government interference. Laissez faire is an economic doctrine that government should not interfere in the economic or social regulation of society unless absolutely necessary.
Laissez faire assumes that the competitive system of free markets is the best means of allocation of scarce resources between alternative uses. Government intervention in the market place to regulate economic activity is seen as illegitimate and inefficient. The Laissez faire doctrine lost popularity in the middle of the twentieth century, with the rise of the welfare state and extensive public ownership of parts of the economy, but has regained favor in the 1980's and 1990's.
CAPITALISM
It is an economic system in which the means of production, are privately owned and utilization of productive resources ,Individual freedom to make production and consumption decisions and minimal state. It is also known as Free Enterprise economy and Market Economy. It is categorized into two i.e. is 1. Laissez-Faire capitalism where government intervention in the economy is absent or negligible 2. Modern ,Regulated or Mixed Economy where there is a large amount of intervention.
FEATURES
Private Ownership Free Enterprise Consumers sovereignty Freedom of choice of occupation Freedom to save and invest The market system Competition Absence of central plan Limited role of government
MODERN CAPITALISM
Modern capitalist economies are mixed or regulated systems. Such regulated market economies include the U.S., Canada, Australia, U.K, Italy, France, Germany and many more. According to R.S.Musgrave and P.B.Musgrave a substantial share of the nations product goes to satisfy public wants, a substantial part of the private income originates in the public budget, and public tax and transfer payments significantly influence the state of private income distribution.
MERITS
Freedom of enterprise Encourages initiative and entrepreneurship Encourages R&D and innovation Encourages fast economic development
DEMERITS
Severe competition brought about by capitalism as its major drawback. Capitalist economy can give rise to unfair competition. Capitalism may lead to a depletion of the resources on Earth, as it requires continuous economic growth. Capitalism makes an economy money-oriented. Business corporations look at the economy with a materialistic point of view. Profitability remains their only primary business goal. Business giants take over smaller companies. Employment rights are compensated with the sole aim of higher productivity
SOCIALISM
A theory or system of social organization that advo cates the vesting of the ownership and controlof th e means of production and distribution, of land, capi tal etc., in the community as a whole. Features: 1. Government Control 2. Central Authority 3. Restriction on consumption 4. Fixation of wages and prices 5. Distribution of Income
MERITS
Democratic socialism strives to achieve the tradeoff between free enterprise system and state capitalism. It seeks to prevent concentration of economic power and achieve fair distribution of wealth and income. Use of national resources for the benefit of the society as a whole. National Planning and resource allocation with a view to clearly defined objectives and priorities. Government direction and control to serve the interest of the society.
DEMERITS
Socialism is unrealistic. Virtually impossible to achieve equality within modern societies. Socialism might redistribute some of the wealth of the richest members of society yet it does not eliminate poverty. Instead of improving the living standards for all socialism actually lowers the income of the richest to be nearer the income levels of the poorest. Socialism is actually economically inefficient as it puts of f entrepreneurs from generating wealth because they u sually have to pay higher taxes. As socialism provides the poorest with higher levels of income via social security payments it deters them from working hard, if at all.
DEMERITS
No consumer sovereignty No innovation and talents utilized as private enterprises are not allowed. Central planning done so limited scope for accommodating different views and and making critical evaluation. People may lack incentive to work hard in the absence of private property The absence of freedom of choice of occupation is unfair
MIXED ECONOMY
Mixed economy is an economic system that includes a variety of private and government control, or a mixture of capitalism and socialism.
Features: Coexistence of Public, private, joint & cooperative sector Effective government control of the economy through policies, guidelines and laws. Substantial presence of public sector in important industries/sectors. competition
MERITS
Achieve faster growth Countervailing force Prevent concentration economic power Fostering economic development Public sector plays special role in the development of priority sectors and backward areas Public sector plays an important role in infrastructure developement
MONETARY POLICY
Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks It brings about a change in the economy by changing money supply and interest rate
A knowledge of the measures of money stock in an economy would help us to understand monetary policy better. The Reserve Bank of India employs four measures of money stock, namely, M1, M2, M3 and M4.
M1: The measure of money stock designated by M1 is usually described as the money supply. M2: M2 is M1 + Post Office Savings Bank Deposits. M3: M3 is M1 + Time Deposits with the banks. In other words, M3 is money supply plus fixed deposits with the banks. M3 is usually referred to as aggregate monetary resources. M4: M4 is M3 plus the total Post Office Deposits.
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There are three general or quantitative instruments of credit control, namely, The Bank Rate Open Market Operations Variable Reserve Requirements.
The central bank has the power to vary this reserve requirement; and the variation in the reserve requirements affect the credit creating capacity of commercial banks.