BBA SEMESTER – IV

BUSINESS ENVIRONMENT

Faculty: Dr. Suneetha Rapaka

UNIT II PART I
UNIT II
Economics environment of business, Elements of economic environment,
economic systems; Industrial policy 1991; Economic reforms, planning
commission Vs NITI Aayog
2.1 Economics environment of Business
The economics environment can be defined as the combination of all the
economic factors such as, inflation, income, employment rate, etc. which
affect the buying behavior of consumers and thus put an impact on businesses.
2.2 Elements of economic environment
Elements of economic environment include the below:
A) Macro factors include:
(i) Gross Domestic Product
(ii) Employment/unemployment
(iii) Inflation
(iv) Government Policy
(v) Reforms in the Banking Sector
(vi) Balance of Trade
(vii) Consumer Confidence
B) Micro factors include
(i) The size of the available market
(ii) Demand for the company’s products or services
(iii) Competition
(iv) Availability and quality of suppliers
(v) The reliability of the company’s distribution chain (i.e., how it gets
products to customers)

(A) Macro factors include:

(i) Gross Domestic Product
Gross Domestic Product is the total value of all products and services
produced in a country. Therefore, the growth of GDP signifies that the
economy of a country is stable and improving. It also means that people
have more disposable income that, in turn, leads to increased demand
for products and services.

(ii) Employment/unemployment
A high level of unemployment in a country means that will result in lower
demand. It affects the commercial aspect of an economy significantly.

(iii) Inflation
When the overall prices of goods and services increase in a given period, it
is known as inflation. It happens when even though the prices of goods and
services are rising the general income level of consumers stays the same.
Therefore, individuals have less money at their disposal. Small businesses
 and cottage industries are also affected as prices of raw goods and labour
increase, resulting in smaller profit margins. Inflation boosts prices and has
the potential to reduce the purchasing power of consumers. People buy
more than they need to avoid paying higher costs tomorrow, which drives
up demand for products and services. Suppliers are unable to keep up. As a
result, most individuals are unable to afford common products and
services. Inflation reduces the value of pensions and savings which in turn
would affect business.

(iv) Government Policy

Government policies also play a huge role in influencing the economy of a
country. Government policy can have a major influence on the economic
environment. This can include fiscal or monetary policy. An example of
monetary policy is a reduction in interest rates on bank loans which
encourages consumers’ demand for loans. An example of fiscal policy
would be when the government decides to reduce income tax. Both of
these policies attempt to gradually increase individual disposable income
and encourage consumers to spend more, thus boosting commercial
activities.

(v) Reforms in the Banking Sector

The banks are considered to be one of the most crucial aspects of the Indian
economy. As a consequence, any reforms in this sector will have a huge impact
on the economy. The banking sector plays a vital role in the betterment of the
economy. By boosting the quality of financial services and increasing money
accessible, banking sector openness may directly improve growth.
 (vi) Balance of Trade
Briefly, Balance of Trade (BOT) is the difference between the money value of a
country's imports and exports of material goods
When the exports are greater than the imports, it leads to a favourable trade
balance. It means there is a high demand for its goods offshores, and that
increases the demand.

(vii) Consumer Confidence

The consumer is confident about his purchasing habits or
decisions when they know they have income stability, and income
is stable when the overall economy of a country is. It also affects
the markets. A stable and growing economy usually boosts a
consumer’s confidence.

(B) Micro factors include:

(i) The size of the available market
The size of the available market determines how successful
a company is.
(ii) Demand for the company’s products or services
Demand for the company’s products or services has a
direct impact on the profits of a company.
(iii) Competition
A company has to face competition and its business
depends on how its competitors are doing their business in
the market.
 (iv) Availability and quality of suppliers
If there are good suppliers, that is an asset to the company.
(v) The reliability of the company’s distribution chain (i.e.,
how it gets products to customers)
If a company’s distribution chain is well established, the
company can easily get its products to the customers and
that would lead to the success of the company

2.3 Economic Systems

What is an Economic System?
An economic system is a means by which societies or governments
organize and distribute available resources, services, and goods across a
geographic region or country.

Types of Economic Systems

(i) Capitalism
(ii) Socialism
(iii) Mixed Economy
Types of Economic Systems
1) Capitalism
Capitalism is an economic system in which the means of production are
privately owned. By means of production, we mean everything—land, tools,
technology, and so forth—that is needed to produce goods and services. As
outlined by famed Scottish philosopher Adam Smith (1723–1790), widely
considered the founder of modern economics, the most important goal of
capitalism is the pursuit of personal profit (Smith, 1776/1910). As individuals
seek to maximize their own wealth, society as a whole is said to benefit. Goods
get produced, services are rendered, people pay for the goods and services they
need and desire, and the economy and society as a whole prosper.
As people pursue personal profit under capitalism, they compete with each
other for the greatest profits. Businesses try to attract more demand for
their products in many ways, including lowering prices, creating better
products, and advertising how wonderful their products are. In capitalist
theory, such competition helps ensure the best products at the lowest
prices, again benefiting society as a whole. Such competition also helps
ensure that no single party controls an entire market. According to Smith,
the competition that characterizes capitalism should be left to operate on
its own, free of government intervention or control. For this reason,
capitalism is often referred to as laissez-faire (French for “leave alone”)
 capitalism, and terms to describe capitalism include the free-enterprise
system and the free market.

Countries which have capitalist economic systems

 Singapore.
 New Zealand.
 Switzerland.
 Australia.
 United States.

Socialism
The features of socialism are the opposite of those just listed for capitalism
and were spelled out most famously by Karl Marx. Socialism is an economic
system in which the means of production are collectively owned, usually by
the government. Whereas the United States has several airlines that are
owned by airline corporations, a socialist society might have one
government-owned airline.

The most important goal of socialism is not the pursuit of personal profit
but rather work for the collective good: the needs of society are considered
more important than the needs of the individual. Because of this view,
individuals do not compete with each other for profit; instead they work
together for the good of everyone. If under capitalism the government is
supposed to let the economy alone, under socialism the government
controls the economy.
The ideal outcome of socialism, said Marx, would be a truly classless or
communist society. In such a society all members are equal, and
stratification does not exist. Obviously Marx’s vision of a communist society
was never fulfilled, and nations that called themselves communist
departed drastically from his vision of communism.
Countries with Communist economic system are below
China
Cuba
Laos (Lao People's Democratic Republic)
North Korea
Vietnam

Mixed Economy
A mixed economy is an economic system in which both the government
and the private sector exercise control over the economy. It is the middle
path between the capitalistic and socialistic economic systems.
A mixed economic system is a system that combines aspects of both
capitalism and socialism.
Most modern economies feature a synthesis of two or more economic
systems, with economies falling at some point along a continuum. The
public sector works alongside the private sector, but they may compete for
the same limited resources. Mixed economic systems do not block the
private sector from profit-seeking, but do regulate business and may
nationalize industries that provide a public good.
India's economy is considered to be of mixed type because both the public
as well as the private exist in the market. Both have the right to operate
and there is no hindrance regarding the operation. Public and private
sectors are the basis of the Indian economy with privatization making a big
difference.
Mixed economies stress profit above all else, including the well-being of
citizens, there tends to be mismanagement at various levels, it creates
economic inequality throughout the population as wealth is not distributed
evenly, inefficiency occurs due to government involvement, and the
working class can be exploited.
However, Mixed Economy has advantages of both capitalist and
communist economic systems.