Lecture 4 - Economic Environment for Business | Business Environment - Business Basics PDF Download

 Page 1


 
 Institute of Lifelong learning, University of Delhi   1 
 
 
                                              
 
 
 
                                            NME 
Business Environment 
Lesson: Economic Environment for Business: Structure 
and Conditions of Economic Systems 
             Lesson Developer: Priyanka Chaddha 
          College/University: Bharati College,  
                          University of Delhi 
 
 
 
 
 
 
 
 
Page 2


 
 Institute of Lifelong learning, University of Delhi   1 
 
 
                                              
 
 
 
                                            NME 
Business Environment 
Lesson: Economic Environment for Business: Structure 
and Conditions of Economic Systems 
             Lesson Developer: Priyanka Chaddha 
          College/University: Bharati College,  
                          University of Delhi 
 
 
 
 
 
 
 
 
 
 Institute of Lifelong learning, University of Delhi   2 
 
 
Lesson: Economic Environment for Business: Structure and 
Conditions of Economic Systems 
 
Table of Contents:  
1: Learning Outcomes 
2: Introduction to Business Environment 
2.1: Meaning of Business Environment 
2.2: Features of Business Environment 
3: Introduction to Economic Environment 
3.1:  Meaning of Economic Environment 
3.2: Types of Economic Environment 
3.3: Importance of understanding Economic Environment 
4: Components of Economic Environment 
5: Economic System 
5.1: Types of Economic System 
5.2: Impact of Different Economic Systems on Economic 
Environment 
6: Impact of Economic Factors on Business Environment 
7: Recent Developments in Economic Environment in India 
Summary 
Exercise 
Glossary 
References 
 
 
1. Learning Outcomes 
After studying this lesson, you should be able to: 
? explain the meaning of Business Environment, 
? identify and understand the various elements of Business 
Environment, 
? understand the meaning of Economic Environment and its relevance 
for Business Environment, 
? examine the importance of understanding the Economic 
Environment, 
? list the components of economic environment, 
? explain the different types of economic system and their impact on 
business environment, 
Page 3


 
 Institute of Lifelong learning, University of Delhi   1 
 
 
                                              
 
 
 
                                            NME 
Business Environment 
Lesson: Economic Environment for Business: Structure 
and Conditions of Economic Systems 
             Lesson Developer: Priyanka Chaddha 
          College/University: Bharati College,  
                          University of Delhi 
 
 
 
 
 
 
 
 
 
 Institute of Lifelong learning, University of Delhi   2 
 
 
Lesson: Economic Environment for Business: Structure and 
Conditions of Economic Systems 
 
Table of Contents:  
1: Learning Outcomes 
2: Introduction to Business Environment 
2.1: Meaning of Business Environment 
2.2: Features of Business Environment 
3: Introduction to Economic Environment 
3.1:  Meaning of Economic Environment 
3.2: Types of Economic Environment 
3.3: Importance of understanding Economic Environment 
4: Components of Economic Environment 
5: Economic System 
5.1: Types of Economic System 
5.2: Impact of Different Economic Systems on Economic 
Environment 
6: Impact of Economic Factors on Business Environment 
7: Recent Developments in Economic Environment in India 
Summary 
Exercise 
Glossary 
References 
 
 
1. Learning Outcomes 
After studying this lesson, you should be able to: 
? explain the meaning of Business Environment, 
? identify and understand the various elements of Business 
Environment, 
? understand the meaning of Economic Environment and its relevance 
for Business Environment, 
? examine the importance of understanding the Economic 
Environment, 
? list the components of economic environment, 
? explain the different types of economic system and their impact on 
business environment, 
 
 Institute of Lifelong learning, University of Delhi   3 
 
 
? comprehend the evolution of mixed economy from the capitalist and 
socialist economic system, 
? state the role of economic factors in the economic growth of India. 
 
2. Introduction to Business Environment: 
 
2.1: Meaning of Business Environment 
 
Bayard O Wheeler defines business environment as “the total of all things external to 
firms and industries, which affect their organization and operation”.  
 
Keith Davis defines business environment in his landmark book “The challenges of 
Business” as “Business environment is the aggregate of all condition, events and 
influences that surround and affect it”. 
 
According to Arthur M Weimer, “Business environment encompasses the climate or set of 
conditions, economic, social, political or institutional in which business operations are 
conducted”. 
 
In simple terms, Business Environment consists of all those factors and forces that affect 
the business. The term „business environment? primarily connotes the various external 
forces, factors and institutions that are beyond the control of business which vehemently 
affect the functioning of business enterprises. The various factors which constitutes 
towards the favorable business environment for any nation are Economic environment, 
Political environment, Natural environment, Technological environment, Demographic 
environment, Socio-cultural environment and International environment. Business 
Environment is therefore dependent on many other environments for its smooth and 
efficient functioning. These environments keep on changing from time to time causing 
positive or negative impact on the overall business environment. Business leaders have 
to be aware with the total business environment in order to sustain in the market for an 
indefinite period of time as the success or failure of their business activities depends on 
its ability to cope up with the business environment. A prudent business decision or any 
major investment decision is positively correlated to the various elements of the business 
environment. It is interesting to understand here that business not only gets influenced 
by its environment but at the same time influences it. Business gets influenced by the 
government policies, taste and preference of the customers, socialistic pattern of the 
society, etc. and at the same time influences its environment like customers with its 
products and services. 
 
 
 
 
Page 4


 
 Institute of Lifelong learning, University of Delhi   1 
 
 
                                              
 
 
 
                                            NME 
Business Environment 
Lesson: Economic Environment for Business: Structure 
and Conditions of Economic Systems 
             Lesson Developer: Priyanka Chaddha 
          College/University: Bharati College,  
                          University of Delhi 
 
 
 
 
 
 
 
 
 
 Institute of Lifelong learning, University of Delhi   2 
 
 
Lesson: Economic Environment for Business: Structure and 
Conditions of Economic Systems 
 
Table of Contents:  
1: Learning Outcomes 
2: Introduction to Business Environment 
2.1: Meaning of Business Environment 
2.2: Features of Business Environment 
3: Introduction to Economic Environment 
3.1:  Meaning of Economic Environment 
3.2: Types of Economic Environment 
3.3: Importance of understanding Economic Environment 
4: Components of Economic Environment 
5: Economic System 
5.1: Types of Economic System 
5.2: Impact of Different Economic Systems on Economic 
Environment 
6: Impact of Economic Factors on Business Environment 
7: Recent Developments in Economic Environment in India 
Summary 
Exercise 
Glossary 
References 
 
 
1. Learning Outcomes 
After studying this lesson, you should be able to: 
? explain the meaning of Business Environment, 
? identify and understand the various elements of Business 
Environment, 
? understand the meaning of Economic Environment and its relevance 
for Business Environment, 
? examine the importance of understanding the Economic 
Environment, 
? list the components of economic environment, 
? explain the different types of economic system and their impact on 
business environment, 
 
 Institute of Lifelong learning, University of Delhi   3 
 
 
? comprehend the evolution of mixed economy from the capitalist and 
socialist economic system, 
? state the role of economic factors in the economic growth of India. 
 
2. Introduction to Business Environment: 
 
2.1: Meaning of Business Environment 
 
Bayard O Wheeler defines business environment as “the total of all things external to 
firms and industries, which affect their organization and operation”.  
 
Keith Davis defines business environment in his landmark book “The challenges of 
Business” as “Business environment is the aggregate of all condition, events and 
influences that surround and affect it”. 
 
According to Arthur M Weimer, “Business environment encompasses the climate or set of 
conditions, economic, social, political or institutional in which business operations are 
conducted”. 
 
In simple terms, Business Environment consists of all those factors and forces that affect 
the business. The term „business environment? primarily connotes the various external 
forces, factors and institutions that are beyond the control of business which vehemently 
affect the functioning of business enterprises. The various factors which constitutes 
towards the favorable business environment for any nation are Economic environment, 
Political environment, Natural environment, Technological environment, Demographic 
environment, Socio-cultural environment and International environment. Business 
Environment is therefore dependent on many other environments for its smooth and 
efficient functioning. These environments keep on changing from time to time causing 
positive or negative impact on the overall business environment. Business leaders have 
to be aware with the total business environment in order to sustain in the market for an 
indefinite period of time as the success or failure of their business activities depends on 
its ability to cope up with the business environment. A prudent business decision or any 
major investment decision is positively correlated to the various elements of the business 
environment. It is interesting to understand here that business not only gets influenced 
by its environment but at the same time influences it. Business gets influenced by the 
government policies, taste and preference of the customers, socialistic pattern of the 
society, etc. and at the same time influences its environment like customers with its 
products and services. 
 
 
 
 
 
 Institute of Lifelong learning, University of Delhi   4 
 
 
Figure 1: Elements of Business Environment 
 
2.2. Features of Business Environment: 
1. Business Environment is the sum total of all the factors external to the business 
firms which vehemently affects the functioning of a business enterprise.  
2. The various factors that business environment has to deal with includes the 
customers, the suppliers, creditors, government agencies, technological and legal 
conditions, the cultural and the social environment, etc. 
3. Business Environment is dynamic is nature. A business enterprise cannot sustain 
for long, if it cannot adapt to changing technology, needs and demands of the 
customer. 
4. Success depends on proper planning and forecasting. Forecasting in the 
contemporary volatile business world has become a difficult and challenging task to 
managers and policy makers across the world. 
5. The business environment differs from place to place, region to region, and country 
to country. Political environment in India is different to the political environment of 
China. Similarly business environment in Japan is different to that of the 
communist country like Cuba. 
6. Innovation is the new magic word for sustaining in a contemporary business 
environment. No business can survive in a long run without innovation. 
 
3. Introduction to Economic Environment: 
3.1. Meaning of Economic Environment: 
Page 5


 
 Institute of Lifelong learning, University of Delhi   1 
 
 
                                              
 
 
 
                                            NME 
Business Environment 
Lesson: Economic Environment for Business: Structure 
and Conditions of Economic Systems 
             Lesson Developer: Priyanka Chaddha 
          College/University: Bharati College,  
                          University of Delhi 
 
 
 
 
 
 
 
 
 
 Institute of Lifelong learning, University of Delhi   2 
 
 
Lesson: Economic Environment for Business: Structure and 
Conditions of Economic Systems 
 
Table of Contents:  
1: Learning Outcomes 
2: Introduction to Business Environment 
2.1: Meaning of Business Environment 
2.2: Features of Business Environment 
3: Introduction to Economic Environment 
3.1:  Meaning of Economic Environment 
3.2: Types of Economic Environment 
3.3: Importance of understanding Economic Environment 
4: Components of Economic Environment 
5: Economic System 
5.1: Types of Economic System 
5.2: Impact of Different Economic Systems on Economic 
Environment 
6: Impact of Economic Factors on Business Environment 
7: Recent Developments in Economic Environment in India 
Summary 
Exercise 
Glossary 
References 
 
 
1. Learning Outcomes 
After studying this lesson, you should be able to: 
? explain the meaning of Business Environment, 
? identify and understand the various elements of Business 
Environment, 
? understand the meaning of Economic Environment and its relevance 
for Business Environment, 
? examine the importance of understanding the Economic 
Environment, 
? list the components of economic environment, 
? explain the different types of economic system and their impact on 
business environment, 
 
 Institute of Lifelong learning, University of Delhi   3 
 
 
? comprehend the evolution of mixed economy from the capitalist and 
socialist economic system, 
? state the role of economic factors in the economic growth of India. 
 
2. Introduction to Business Environment: 
 
2.1: Meaning of Business Environment 
 
Bayard O Wheeler defines business environment as “the total of all things external to 
firms and industries, which affect their organization and operation”.  
 
Keith Davis defines business environment in his landmark book “The challenges of 
Business” as “Business environment is the aggregate of all condition, events and 
influences that surround and affect it”. 
 
According to Arthur M Weimer, “Business environment encompasses the climate or set of 
conditions, economic, social, political or institutional in which business operations are 
conducted”. 
 
In simple terms, Business Environment consists of all those factors and forces that affect 
the business. The term „business environment? primarily connotes the various external 
forces, factors and institutions that are beyond the control of business which vehemently 
affect the functioning of business enterprises. The various factors which constitutes 
towards the favorable business environment for any nation are Economic environment, 
Political environment, Natural environment, Technological environment, Demographic 
environment, Socio-cultural environment and International environment. Business 
Environment is therefore dependent on many other environments for its smooth and 
efficient functioning. These environments keep on changing from time to time causing 
positive or negative impact on the overall business environment. Business leaders have 
to be aware with the total business environment in order to sustain in the market for an 
indefinite period of time as the success or failure of their business activities depends on 
its ability to cope up with the business environment. A prudent business decision or any 
major investment decision is positively correlated to the various elements of the business 
environment. It is interesting to understand here that business not only gets influenced 
by its environment but at the same time influences it. Business gets influenced by the 
government policies, taste and preference of the customers, socialistic pattern of the 
society, etc. and at the same time influences its environment like customers with its 
products and services. 
 
 
 
 
 
 Institute of Lifelong learning, University of Delhi   4 
 
 
Figure 1: Elements of Business Environment 
 
2.2. Features of Business Environment: 
1. Business Environment is the sum total of all the factors external to the business 
firms which vehemently affects the functioning of a business enterprise.  
2. The various factors that business environment has to deal with includes the 
customers, the suppliers, creditors, government agencies, technological and legal 
conditions, the cultural and the social environment, etc. 
3. Business Environment is dynamic is nature. A business enterprise cannot sustain 
for long, if it cannot adapt to changing technology, needs and demands of the 
customer. 
4. Success depends on proper planning and forecasting. Forecasting in the 
contemporary volatile business world has become a difficult and challenging task to 
managers and policy makers across the world. 
5. The business environment differs from place to place, region to region, and country 
to country. Political environment in India is different to the political environment of 
China. Similarly business environment in Japan is different to that of the 
communist country like Cuba. 
6. Innovation is the new magic word for sustaining in a contemporary business 
environment. No business can survive in a long run without innovation. 
 
3. Introduction to Economic Environment: 
3.1. Meaning of Economic Environment: 
 
 Institute of Lifelong learning, University of Delhi   5 
 
 
Economic environment has a profound impact on the conduct of businesses all around the 
world. The economic environment is very complex and dynamic in nature and it includes 
all major variables of the economy which has a significant impact on the growth and 
development of the economy. It includes the inflation rate, the interest rate, income, 
employment, consumer behavior and the distribution of wealth. It has significant 
influence on the long term survival and growth of each and every business enterprise. 
Any change in any of the parameter mentioned above results in either a massive exodus 
of demand and supply of a particular good from one country to another or vice-versa. 
Thus, the economic environment is of paramount importance for the growth and 
development of any economy. 
Economic environment is very volatile and complicated in nature as it keeps on changing 
from time to time with the change in governmental policies, legal structure, and political 
situations of an economy. The economic environment is closely related to political 
environment and the legal environment of the economy. Any change in the political 
environment or a legal environment has a significant impact on the economic 
environment. Thus the Government also plays a critical role in facilitating a conducive 
economic environment for any country as most of policy making rests in the hands of 
government. Any change in the policy framed by the government is likely to have a 
significant impact on the business environment. For example, reduction of 1% of sales 
tax by the government on a particular commodity may increase the demand of that 
particular commodity in the home country, whereas increase in custom duty or excise 
duty on some imported goods may decrease the demand of the product. Any change or 
reform in an economy has to be properly debated and examined by giving emphasis on 
each and every aspect of the decision, considering the entire stakeholders who are likely 
to have an impact of it, before it is implemented or enforced.  
3.2. Types of Economic Environment: 
Mainly, the economic environment has been subdivided into two parts: 
a. Microeconomic Environment 
b. Macroeconomic Environment