Economic Environment & System

1. Economic Environment & System

2. Introduction: Business being an economic activity, and a business firm being an economic unit, business decision- making thus is an economic decision making process. Business enterprises are dependent upon the economic environment for making the decision. The economic environment of business refers to all those economic factors that have effect on the functioning of business. The managers & management have to respond to the changes in economic environment to be successful in business.

3. Structure of Economic Environment: • The economic environment of business firm can be divided into 2 categories: • Domestic • Foreign • Domestic Economic environment : It refer to economic environment within the geographic boundary of the country. It include following factors: • Economic system of the country. • Economic planning • Industrial policies • Size & nature of unemployment. • Distribution of income in country.

4. Foreign Economic environment: It refers to economic environment in the host country. It include following factors: • The size of the market in the host country. • The distribution income in the host country. • The nature & level of development of the economy. • The rate of inflation & price policy of the host country. • The agreement & treaties signed between the host & home country. • The economic system in the host country. • The taxation policy in the host country. • The industrial & monetary policy of the host country.

5. Economic System: • An economic system consist of rules & goals that govern economic relationship among people in the society. There are different type of ownership like ownership by private individual, ownership by government & ownership by private individual & government. These different type means of ownership give rise to different type of economic system. Through out the world there are basically three type of economic system: • Capitalism • Communism/ Socialism • Mixed economy

6. Capitalism: • The capitalistic system of economic management is featured by private ownership. All the source of production & distribution are under the control of private ownership. Capitalistic economy has perfect competition & no interference of government in the economic activity of the country. • Features: • Complete freedom for an enterprise. • Profit motive. • Tough Competition. • Limited role of government. • Freedom of consumer choice • Market determined prices.

7. Problem of Capitalism : • Unequal distribution of wealth • Exploitation of labour • Wasteful expenditure on advertisement • Sellers Monopoly • High level of Inflation

8. Socialism: • Socialism is the reverse of capitalism. In socialism government has the total control over economic activity. There is competition , no individual freedom & state decide the term & level of employment in the country. The main motive of the government is to provide benefit to the public. The state also direct consumption, allocation of resources, distribution of income & investment in the economy. • Features of communism • Equitable distribution of income. • Govt. ownership on means of production. • Encourages employment. • Better utilization of resources. • Economic laws are made which strength the economy & society.

9. Limitation • No consumer freedom. • Red tapism leads to delay in decision making. • Political dictatorship. • Bureaucratic attitude of govt. employee.

10. Mixed economy: • Mixed economy is that in which both government & private individual participate. Both the sector corporate with each other to achieve the economic as well as social welfare objective. e.g. Indian economy • Features: • Mixture of socialism & capitalism. • Economic planning • Individual freedom • Division of industrial undertakings: • Existence of social welfare and private profit motive

11. Limitation: • Lack of Support by private Sector • Delay in Policy Implementation • Public sector lacks behind as govt. employees don’t work hard.