Business environment

The Concept

MEANING OF BUSINESS ENVIRONMENT: The term business environment

means the sum total of all individuals, institutions and other forces that are

outside the control of a business enterprise but that may affect its

performance.

• The economic, social, political, technological and other forces, which

operate outside a business enterprise, also form part of the business

environment.

• The organisation must be aware of the external forces and institutions

and must be dynamic to adapt itself to the changing external environment.

• The organisation must set goals and formulate plans and procedures

based on the changing external business environment.

NATURE OF BUSINESS ENVIRONMENT

Complexity Totality of external forces

Nature of Business
Relativity Specific and general forces
Environment

Uncertainty Inter-relatedness

Dynamic
NATURE OF BUSINESS ENVIRONMENT

1. Totality of external forces: Business environment is the sum total of all

the forces and factors external to a business firm.

2. Specific and general forces: Business environment includes both

specific and general forces. Specific forces include investors, competitors,

customers etc. who influence business firm directly while general forces

include social, political, economic, legal and technological conditions, which

affect a business, firm indirectly.

3. Inter-relatedness: Different elements or parts of a business environment

are closely interrelated. For example, increased awareness for health care

has raised the demand for healthy oil free food and healthy lifestyle.

4. Dynamic: Business environment is dynamic in which it keeps on

changing with the change in technology, shift in consumer preferences etc.

5. Uncertainty: Business environment is largely uncertain, as it is difficult

to predict the future happenings. Such as, frequent environmental changes

in the field of technology and fashion industry.

6. Complexity: Business environment is complex phenomenon, which is

easier to understand in parts, but it is difficult to understand in totality.

Since the business environment consists of various interrelated and

dynamic forces, it is difficult to understand the constituents of a given

environment.

7. Relativity: Business environment is a relative concept whose impact

differs from country to country, region to region and firm to firm.

Significance of Business Environment

 Identification of Opportunities: It enables the firm to identify

opportunities and get the first mover advantage. The positive external

changes provide opportunities to a business organisation to improve

its performance.

 Identifying Threat: It helps the firm to identify threats and provide

early warning signals. Adverse changes in the external factors act as

„threats‟ to the business which hinders performance. Early

identification of threats helps managers to make strategies to convert

threats into opportunities.

 Tapping Useful Resources: Business utilizes the resources of the

external environment as inputs like finance, labour etc., and supplies

its output to the environment in the form of goods and services, taxes,

etc.

 Coping with Rapid Changes: The business environment is extremely

dynamic so the managers need to develop strategies not only to cope

 with the changes but also to use them as their strengths to improve

their market shares.

 Planning and Policy Formulation: Clear understanding and analysis

of the business environment help businesses to formulate its future

plans and strategies to cope with all the external changes.

 Improves Performance: The continuous monitoring of the business

environment and changing business practices from traditional

methods help business in improving their present performance and

also continue to retain its market position in the long run.

IMPORTANCE OF BUSINESS ENVIRONMENT

1. Business environment enables the firm to Identify opportunities to

get the first mover advantage: Environment provide various opportunities

for business success. Understanding it helps an organization in identifying

advantageous opportunities and exploiting benefits prior to competitors.

2. It helps the firm to Identify threats and early warning signal:

Environmental awareness can help managers of an organization to identify

various threats on time and serve as an early warning signal. For example,

Bajaj Auto made considerable improvements in its two wheelers when other

companies entered the auto industry.

3. It helps in tapping useful resources: Business Environment is a source

of various resources such as man, machine, money, raw material, power etc.

to a business firm. By understanding the business environment an

enterprise can design policies to acquire the required resources and convert

them into output that environment desires.

4. It helps in coping with rapid changes: Business environment is very

dynamic were changes are taking place at a fast pace. Changes such as

turbulent market conditions, less brand loyalty etc. In order to cope with

significant changes managers must understand, examine, and develop a

suitable course of action.

5. It helps in assisting in planning and policy formulation:

Understanding and analysis of business environment can be the basis for

planning & policy formulation in an organisation.

6. It helps in improving performance: The enterprise that continuously

monitor the environment and adopt suitable business practices are the

ones, which not only improve their performance but also continue to

succeed in the market for a long period.

DIMENSIONS OF BUSINESS ENVIRONMENT

1. Economic Environment: It has immediate and direct impact on a

business. Rate of interest, inflation rate, change in disposable income of

people, monetary policy, stock market indices etc. are some economic

factors, which could affect business firms. Increase or decrease of the

economic factors result in opportunities or constraints on a business

enterprise.

2. Social Environment: Business environment includes various social

forces such as customs, beliefs, literacy rate, educational levels, lifestyle,

values etc. Social trends present various opportunities and threats to

business enterprise. Example the celebration of Diwali, Eid and Christmas

in India provide financial opportunities for confectionery manufacturers,

garments businesses and many other related businesses.

3. Technological Environment: It includes forces relating to scientific

improvements and innovations, which provide new ways of producing goods

and services and new methods and techniques of operating business. A

businessman must closely monitor the technological changes taking place in

the industry as it helps in facing competition and improving quality of the

product. Example, demand for LED smart HD tv‟s instead of LCD tv‟s, Use of

artificial intelligence in various companies etc.

4. Political Environment: It includes political conditions such as general

stability and peace in the country and the attitude of the elected government

representatives hold towards businesses. Political stability builds confidence

among business community while political instability and bad law & order

situation may bring uncertainty in business activities. Example: Bangalore

is called as the silicon valley of India due to the favorable political conditions

provided by the state government to the IT industries.

5. Legal Environment: It includes various laws and legislations passed by

the Government, administrative orders, court judgements, decisions of

various commissions and agencies at every level of the government center,

state or local. Businessmen have to act according to various legislations and

their knowledge is very necessary. Example: Advertisement of Alcoholic

beverages is prohibited.
Environmental Scanning

Environmental scanning is a constant and careful analysis of the internal

and external environment of an organization in order to

detect opportunities, threats, trends, important lessons, and weaknesses

which can impact the current and future strategies of the organization.

Identification of these variables can either be used to build strategies either

to expand the business or to minimize their impacts on the growth of the

business.

Definition

According to William.F.Glueck, “Environmental Scanning consists of

identifying and analyzing environmental influences individually and

collectively to determine their potential effects on an organization and the

consequent problems and threats.”

Importance of Environmental Scanning

 Goal Accomplishment: The objectives of an organization cannot be

fulfilled unless it adapts itself to the environmental changes. One has

to adjust the strategies to fit in the changing demands of the

environment.

 Threats and Weakness Identification: For an organization to grow, it

must minimize its threats and identify the weaknesses. This is made

possible with the help of environmental scanning with which better

strategies can be developed.

 Future Forecast: Environmental changes are often unpredictable. An

organization cannot anticipate all the future events but based on the

analysis, it can make better strategic decisions in the future. Hence,

environmental analysis helps to forecast the prospects of the

business.

 Market Knowledge: Every organization must be aware of the ongoing

changes in the market. If it fails to incorporate strategic changes due

to changing demands, it will not be able to achieve its objectives.

 Focus on the Customer: Environmental scanning and analysis make

an organization sensitive towards the changing needs and

expectations of the customer.

 Opportunities Identification: With the analysis of the current

environment an organization will be able to identify the possible

opportunities and take necessary steps.

Scope of Environmental Scanning

Business environment of an organization can be divided into two types of

environment external environment and internal environment. there are

different components associated with both the environments. Let us learn

about them one by one.

#1 Internal Environmental components:

Internal environmental components are the components which lie within the

organization and changes in these components impacts the overall

performance of the organization. There are various internal environmental

components such as different resources like human resources, capital

resources, technological resources, etc., Objectives, Organizational

structure, Value system, corporate structure, and labor union, etc.

These components play an important role in structuring the future of an

organization therefore, it is important to analyze these components as a part

of environmental scanning.

#2 External Environmental components:

External components are the components which exist outside the walls of an

organization. Even though these components are not part of the

organization, they still impact the business of the organization. The external

environment can be divided into two categories such as Micro environmental

components and macro environmental components.

 A) Micro Environmental components:

Micro environment components consist of components such as Competitors,

suppliers, industry, organization, consumers, and market, etc.

B) Macro Environmental Components:

Macro environmental components consist of components such as

Demographical environment, Economic environment, political environment,

cultural environment, technological environment, etc

Nature of Environmental Scanning

1. Continuous Process- The analysis of the environment is a continuous

process rather than being sporadic. The rapidly changing environment

has to be captured continuously to be on track.

2. Exploratory Process- Scanning is an exploratory process that keeps

monitoring the environment to bring out the possibilities and

unknown dimensions of the future. It stresses the fact that “What

could happen” and not ”What will happen”.

3. Dynamic Process- Environmental scanning is not static. It is a

dynamic process and depends on changing situations.

4. Holistic View- Environmental Scanning focuses on the complete view

of the environment rather than viewing it partially.

Techniques of Environmental Scanning

1. SWOT Analysis- SWOT analysis is an acronym for Strengths,

Weaknesses, opportunities and threats analysis of the environment.

Strengths and weaknesses are considered as internal factors whereas

opportunities and threats are external factors. These factors

determine the course of action to ensure the growth of the business.

2. PEST Analysis- PEST stands for Political, economic, social and

technological analysis of the environment. It deals with the external

macro-environment.

3. ETOP- ETOP stands for the Environmental Threat Opportunity profile.

It helps an organization to analyze the impact of the environment

based on threats and opportunities.

4. QUEST- QUEST stands for the Quick Environmental Scanning

technique. This technique is designed to analyze the environment

quickly and inexpensively so that businesses can focus on critical

issues that have to be addressed in a short span.

Process of Environmental Analysis/Scanning

Environmental scanning is a process where deep analysis of an environment

is done in order to learn about the new opportunities and threats on the

basis of which new strategies can be prepared.

#1 Research:

Environment scanning is conducted to learn about the latest trends of the

industry and the lurking threats so that opportunities can be exploited and

precautionary steps can be taken to reduce the impacts.

Research is an old method that has been used by various industries to learn

about the industry in detail. Even there is a different department named as

“Research and Development (R&D) department to conduct all research.

#2 Getting the opinions of experts:

In this method, the management of the organization take the opinion

experts who have deep knowledge about the industry and can easily decode

its latest trends and recognize the first appearance of the opportunities.

#3 SWOT analysis:

SWOT stands for Strength, Weaknesses, Opportunities, and

Threats. This is a strategic technique opted by an organization to

 learn about its internal strengths and weaknesses. It is important to

learn about business competition and project planning.

SWOT analysis is a technique to learn to identify internal and external

factors which can be helpful in achieving the goal of an organization.

#4 PEST analysis:

PEST analysis is done to learn about the external macro environmental

factors. PEST stands for P: Political, E: Economic, S: Social, T:

Technological. These external macro environmental factors put an impact on

the business of the organization and it is important for an organization to

keep a track of them.

Political factors are regulated by the government and the changes in the

political factors can put a great impact on the business environment, for

example, the change in the tax policy or employment laws, etc.

#5 Analysis of industry

There is a different organization in an industry which can be your direct

or indirect competitors. They are part of the microenvironment.

Environmental scanning is done to learn and understand the business

strategies of your competitors in order to plan strategies to give competition

to them.
Examples of Environmental scanning

The PepsiCo company is planning to shift its investment from producing

beverages to producing healthier and functional foods using the knowledge

from the environmental scanning and market research.

They are planning to collaborate with various food companies to produce

healthy food and beverages by following the demand of the time as more and

more people are now preferring healthy drinks and foods and not cold

drinks and fast food.

Interaction between Internal and External Environment
 Comparison/Difference Chart

BASIS FOR
INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT
COMPARISON

Meaning Internal Environment refers External Environment is a

to all the internal forces and set of all the external forces

conditions present within the that have the potential to

company, which can affect affect the organization's

the company's working. performance and

profitability.

Nature Controllable Uncontrollable

Comprise of Strengths and weaknesses Opportunities and threats

Affects Company only All companies operating in

the industry

Bearing on Business Strategy, functions Business survival, growth,

and decisions reputation, expansion, etc.

Internal Environment

Definition of Internal Environment

Internal Environment is that part of the business environment which is

concerned with the different factors present within the organization. It

comprises of conditions, forces, members and events which has the

capability to influence the company‟s decisions and operations.

These factors are:

 Value System: Value system can be defined as a set of rules and

values adopted by the firm, as a standard guide, so as to regulate the

conduct in any type of circumstances.

 Vision and Mission : Vision refers to the overall picture of what the

enterprise wants to attain, whereas mission talks about the

organization and its business, and the reason for its existence

 Management structure and Internal Power Relationship:

Management structure implies the organizational hierarchy, the way in

which tasks are delegated and how they relate, a span of

management, relationship amidst various functional areas, the

composition of the board of directors, shareholding pattern and so

forth.

On the other hand, internal power relationship describes the

relationship and cordiality between the CEO and board of directors.

Further, the degree of support and contribution received from the

employees and other members of the organization strengthens the

organization‟s decision making power and its organization-wide

implementation.

 Human Resource: Human resources are the most important asset of

the organization, as they play a critical role in making or breaking the

organization. The skills, competencies, attitude, dedication, morale

and commitment, amounts to the company‟s strengths or weakness.

  Tangible and Intangible Assets: The tangible assets refers to the

physical assets which are owned by the company such as land,

building, machinery, stock etc. Intangible assets amount to the

research and development, technological capabilities, marketing and

financial resources etc.

Definition of External Environment

External Business environment comprises of all the extrinsic factors, forces

and conditions, often existing outside the company‟s boundaries but they

have a significant influence on the operation, performance, profitability and

survival of the business enterprise.

For the purpose of continuous and uninterrupted functioning of the

business, the enterprise has to act, react or adjust according to these

factors. These factors are not under the control of the enterprise. The

elements of the external environment are divided into two categories:

Micro Environment

These factors directly influence the company‟s operations, as it covers the

immediate environment that surrounds the company. The factors are

somewhat controllable in nature. It includes:

 Competitors: Competitors are the business rivals, which operate in

the same industry, offering the same product and services, and cater

to the same audience.

 Suppliers: To carry out the production process, the raw material is

required which is provided by the suppliers. The behaviour of the

supplier has a direct impact on a company‟s business operations.

 Customers: Customers are the target audience, i.e. the one who

purchases and consumes the product. The customers are given the

most important place in every business, because, the products are

created and promoted for customers only.

 Intermediaries: There are a number of individuals or firms that help

the business enterprise in the promotion, selling, distribution and

delivery of the product to the end buyer, which are called as

marketing intermediaries. It includes agents, distributors, dealers,

wholesalers, retailers, delivery boys, etc.

 Shareholders: Shareholders are the actual owners of the company, as

they invest their money in the company. They get their share in the

profits also, in the form of a dividend. In fact, they have the right to

vote at the company‟s general meeting.

  Employees: Employees refers to the company‟s staff, who are hired to

work for the company to help the company reach its mission.

Therefore, it is very important for the firm, to employ the right people,

retain and keep them motivated so as to get the best out of them.

 Media: Media plays an important role in the life of every company

because it has the capability to make the company‟s product popular

overnight or it can also defame them, in just one go. This is due to the

fact that the reach of media is very large and so every content which is

going to air on any form of media can affect the company positively or

adversely depending on what kind of information it contains.

Macro Environment

Macro environment affects the entire industry and not the firm specifically.

That is why these factors are completely uncontrollable in nature. The firm

needs to adapt itself according to the changes in the macro-environment, so

as to survive and grow. It includes:

 Economic Environment: The economic conditions of the region and

the country as a whole has a significant bearing on the company‟s

profitability. This is because the purchasing power, saving habits, per

capita income, credit facilities etc. depends greatly on the country‟s

economic conditions, which regulates the demand for the company‟s

products.
 Political and Legal Environment: The political and legal

environment consists of the laws, rules, regulations and policies

which the company needs to adhere. The changes in these laws and

government may affect the company‟s decisions, open doors of new

opportunities for the business or pose a threat to the business.

 Technological Environment: Technology is ever-changing, as

everyday a new and improved version of something is launched which

is created with the state-of-the-art technology. This can be a plus

point if the company is the first mover in the race, subject to the

success of the product. However, if it turns out as a failure, it will

prove as a wastage of time, money and efforts. Further, every company

has to keep itself updated with the changing technology.

 Socio-Cultural Environment: Socio-cultural environment consist of

those factors which are concerned with human relationships such as

customs, traditions, beliefs, values, morals, tastes and preferences of

the society at large. The company must consider these factors on

various matters such as the hiring of employees, advertising the

product and service, decision making etc.

  Demographic Environment: As the name suggests, the demographic

environment covers the size, type, structure, education level, and

distribution of population in a geographical area. The knowledge of

this environment will help the firm in deciding the optimal marketing

mix for the target population.

 Global Environment: Due to liberalization domestic company‟s can

offer their products and services for sale to other countries. In fact,

there are many companies which are operating in a number of nations

worldwide. Hence, such companies have to follow the laws prevalent

in these countries as well as they have to adhere to international laws

and guidelines. Further, the responses and the company‟s norms

must be in alignment with the global environment

Capitalism

The economic system in which businesses are owned and run for profit by

individuals and not by the state.

Capitalism or capitalist economy is referred to as the economic system

where the factors of production such as capital goods, labour, natural

resources, and entrepreneurship are controlled and regulated by private

businesses.
In a capitalist economy, the production of all the goods and services is

dependent on the demand and supply in the market that is also known as a

market economy. It is different from the central planning system that is also

known as a command economy or a planned economy.

The main characteristic of a capitalist economy is the motive of earning

profit. The capitalist economy is also characterised by the presence of free

markets and lack of participation by the government in regulating the

business.

The origin of capitalism can be traced back to 18th century England that

was undergoing the industrial revolution at that time. As there is no

government intervention in this type of economy, it is also known as a free

market economy.

Features of Capitalism

Let us discuss the important features of capitalism or capitalist economy.

1. Private property: This is one of the most important characteristics of

capitalism where private properties like factories, machines, and

equipment can be owned by private individuals or companies.

2. Freedom of enterprise: Under this system, every individual has the

right to make their own economic decisions without any interference.

This is applicable to both consumers and producers.

3. Profit motive: The motive of earning profit is one of the most

important drivers of a capitalist economy. In this system, all the

 companies are looking to produce and sell their products to

consumers to earn maximum profit.

4. Price mechanism: Under this system, the demand and supply in the

market will determine the production level and correspondingly the

price set for the products without any kind of involvement from the

government.

5. Consumer sovereignty: In this system, the market is controlled by

the demands of the consumer. It regulates the level of production

undertaken by the companies, and the consumer is free to decide

which products to purchase.

6. Free trade: In this system, the low tariff barriers exist that promote

international trade.

7. Government interference: In a capitalist economy, there is no

government interference in the daily activities of the business. The

customers and producers are free to make their own decisions

regarding any product or service.

8. Flexibility in labour markets: In capitalism, there is a flexibility in

hiring and firing of the workforce.

9. Freedom of ownership: In this system, an individual can accumulate

any amount of property and use it according to his will. After his

death, the same property is passed on to the successors by the right

of inheritance.
Advantages of Capitalist Economy

The following are the advantages of capitalism.

1. There is more efficiency in the capitalist economy as the products are

produced according to the demand of the consumers.

2. There is less intervention from the government or bureaucratic

interference.

3. There is better scope for innovation as companies look to obtain a

major part of the market with their offerings.

4. It discourages any form of discrimination so that the trade can take

place between two parties without any barriers.

Disadvantages of Capitalist Economy

1. Capitalism leads to inequalities in income.

2. In capitalism, firms can get monopoly over workers and consumers.

3. A high profit-earning motive of a capitalist economy is to use

resources in such a way that it leads to environmental problems by

destroying the natural balance.

Examples of Capitalist Economies

 Hong Kong

 United Arab Emirates

 Singapore

 New Zealand

 Australia
  Canada

 Switzerland

 United Kingdom

 United States

 Ireland

Socialism

Socialism is an economic system where the means of production, such as

money and other forms of capital, are owned to some degree by the public

(via the state). Under a socialist system, everyone works for wealth that is in

turn distributed to everyone.

The political idea that is based on the belief that all people are equal and

that money and property should be equally divided.

A socialist economic system operates on the belief that what is good for one

is good for all. Everyone works for their own good and for the good of

everyone else. The government decides how wealth is distributed among

public institutions.

There are government-run healthcare and educational systems for

taxpayers. Socialist systems emphasize more equal distribution of wealth

among the people.

According to the socialist view, individuals do not live or work in isolation

but live in cooperation with one another. Furthermore, everything that

people produce is in some sense a social product, and everyone who

contributes to the production of a good is entitled to a share in it. Society as

a whole, therefore, should own or at least control property for the benefit of

all its members.

Pros

Reduces income inequality: In socialism, wealth is distributed among the

population, and relative poverty is reduced.

Social stability and infrastructure: With programs such as universal basic

income, universal health care, and tax-funded education, individuals may

be less likely to fall upon hard times.

Greater rights for workers and individuals: Socialism protects workers

from exploitation, because they own the means of production. There are

often strict labour laws in place as well.

Cons

Depends on cooperation: In socialism, the idea is that everyone is working

together toward the same goals. However, there is no guarantee that

individuals will always want to cooperate with each other.

Government may abuse power: The government decides how wealth

should be distributed, but a corrupt government could mean that resources

and wealth are not distributed fairly.

Fewer rewards for innovation: Socialism doesn‟t depend on competition,

which means that workers and businesses might not be interested in

continually improving their products and services.

Capitalism vs Socialism

Capitalism Socialism

Ownership of Means of production Means of production owned by

Assets owned by private government or cooperatives

individuals

Income Income determined by free Income equally distributed

Equality market forces according to need

Consumer Prices determined by Prices set by the government

Prices supply and demand

Efficiency and Free market competition Government-owned businesses

Innovation encourages efficiency and have less incentive for efficiency

innovation and innovation

Healthcare Healthcare provided by Healthcare provided free or

private sector subsidized by the government

Taxation Limited taxes based on High taxes necessary to pay for

individual income public services

The United States is generally considered to be a capitalist country, while

many Scandinavian and Western European countries are considered

socialist democracies. In reality, however, most developed countries—

including the U.S.—employ a mixture of socialist and capitalist programs.

Mixed Economy A mixed economy combines the best features of capitalism

and socialism. Thus mixed economy has some elements of both free

enterprise or capitalist economy as well as a government controlled socialist

economy. The public and private sectors co-exist in mixed economies.

Features of Mixed Economy:

A mixed economy possesses the following features:

1. Public Sector:

The public sector is under the control and direction of the state. All

decisions regarding what, how and for whom to produce are taken by the

state. Public utilities, such as rail construction, road building, canals, power

supply, means of communication, etc., are included in the public sector.

They are operated for public welfare and not for profit motive. The public

sector also operates basic, heavy, strategic and defence production

industries which require large investment and have long gestation period.

But they earn profits like private industries which are utilised for capital

formation.
2. Private Sector:

There is a private sector in which production and distribution of goods and

services are done by private enterprises. This sector operates in farming,

plantations, mines, internal and external trade, and in the manufacture of

consumer goods and some capital goods. This sector operates under state

regulations in the interest of public welfare. In certain fields of production,

both public and private sectors operate in a competitive spirit. This is again

in the interest of the society.

3. Joint Sector:

A mixed economy also has a joint sector which is run jointly by the state

and private enterprises. It is organised on the basis of a joint stock company

where the majority shares are held by the state.

4. Cooperative Sector:

Under a mixed economy, a sector is formed on cooperative principles. The

state provides financial assistance to the people for organising cooperative

societies, usually in dairying, storage, processing, farming, and purchase of

consumer goods.

5. Freedom and Control:

A mixed economy possesses the freedom to hold private property, to earn

profit, to consume, produce and distribute, and to have any occupation. But

if these freedoms adversely affect public welfare, they are regulated and

controlled by the state.

6. Economic Planning:

There is a central planning authority in a mixed economy. A mixed economy

operates on the basis of some economic plan. All sectors of the economy

function according to the objectives, priorities and targets laid down in the

plan. In order to fulfill them, the state regulates the economy through

various monetary, fiscal and direct control measures. The aim is to check

the evils of the price mechanism.

7. Social Welfare:

The principal aim of a mixed economy is to maximise social welfare. This

feature incorporates the merits of socialism and avoids the demerits of

capitalism. To remove inequalities of income and wealth, and unemployment

and poverty, such socially useful measures as social security, public works,

etc. are adopted to help the poor. On the other hand, restrictions are placed

on the concentration of monopoly and economic power in the hands of the

rich through various fiscal and direct control measures.

Merits of Mixed Economy:

A mixed economy possesses certain merits which are as under:

(1) Best Allocation of Resources:

Since a mixed economy incorporates the good features of both capitalism

and socialism, the resources of the economy are utilised in the best possible

manner. The price mechanism, the profit motive, and the freedoms of

consumption, production, and occupation lead to the efficient allocation of

resources within the economy. But where the possibility of mal-allocation of

resources appears, the state regulation and control rectifies it. Thus

shortages are avoided, productive efficiency increases, and cyclical

fluctuations are eliminated.

(2) General Balance:

A mixed economy maintains a general balance between the public sector

and the private sector. There is competition as well as cooperation between

the two sectors which are conducive for achieving a high rate of capital

accumulation and economic growth. Further, an estimate of the successes

and failures of the two sectors can be made by comparing their respective

performances, and corrective measures are adopted accordingly. Thus the

inconsistencies of the private enterprise economy and the „paper guesses‟ of

the planned economy are avoided in a mixed economy. By maintaining a

higher level of production in the two sectors, the state is able to achieve the

targets laid down in the plan.

(3) Welfare State:

A mixed economy contains all the features of a welfare state. There is no

exploitation either by the capitalists as under a free enterprise economy or

by the state as under a socialist economy. The workers are not forced to

work, Workers are provided monetary incentives in the form of bonus and

cash rewards for inventions. Labour laws are passed fixing minimum wages,

hours of work, and laying down the working conditions of workers in

factories and on farms.

Social security is also provided to workers in the event of unemployment,

disablement, death, illness, etc. The production and sale of noxious articles

are banned, while those of essentials are increased for the benefit of the

people at large. Legislative measures are adopted to remove the

concentration of economic power in the hands of the few rich, and to lessen

inequalities of income and wealth.

Demerits of Mixed Economy:

A mixed economy has also certain defects which are discussed below:

(1) Non-Cooperation between the Two Sectors:

The experience of the working of mixed economies reveals that the public

sector and the private sector do not see eye to eye with one another. The

private sector is treated like a step-child and groans under the various

restrictions imposed upon it by the state. The private sector is taxed heavily,

while the public sector is given subsidies and preference over the former in

the supplies of inputs. Thus a sense of bitterness and non-cooperation

develops between the two sectors.

(2) Inefficient Public Sector:

The public sector of a mixed economy is a big burden on the economy

because it works inefficiently. Bureaucratic control brings in inefficiency.

There is over-staffing of the personnel, red-tapism, corruption and nepotism.

As a result, production falls and losses emerge.

(3) Economic Fluctuations:

The experience of the working of the mixed economic system in the

developed countries also reveals that they have not been able to remove

economic fluctuations. This is because of the improper mixture of capitalism

and socialism. The private sector is allowed to operate freely under a loose

system of government regulations and controls. The public sector also does

not operate under the rigid conditions which are laid down under a planned

economy.

It has to depend for its supplies of raw materials, intermediate products and

factors on the vagaries of the market mechanism. If in the market, the prices

of inputs are increasing due to their shortages, the public sector will be

equally experiencing these shortages and price increases. Hence economic

fluctuations which are a characteristic feature of a capitalist economy are

equally experienced in a mixed economy.

Indian economy is considered a mixed economy as it has well defined areas

for functioning of public and private sectors and economic planning. Even

countries such as USA, UK, etc. which were known as capitalistic countries

are also called mixed economies now because of active role of their

government in economic development.