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INTRODUCTION :
Economic environment refers to all those economic factors which have a bearing on the functioning of the business unit.
Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods.
Economic System
An economic environment system refers to the organization arrangements and process through which a society makes its production and consumption decision. It is the method used by society to produce and distribute goods and services. Types of Economic System
Capitalism Socialism Mixed Economy
It comprises of all Institutions, Organizations and Policy mechanisms by which the people of a country manage and utilize the countrys resources to obtain things they need.
BASIC UNITS OF ECONOMIC SYSTEM: Household Firm Industry Government
FIRM
Unit of Ownership, Management and Control. A business unit owns and controls one or more factory, branch/office and is engaged in production and/or distribution of some product/services. Household represents demand side, whereas Firm represents Supply side. Person who launches a firm is called Entrepreneur. Entrepreneur takes decisions regarding size, location of plant/office- nature & quality of product, factors & means of production, fixation of price, sales promotion, distribution channel, source of finance etc.
INDUSTRY
Meaning: All firms producing same or similar products. According to P.S. Florence; An industry is a group of firms tending to specialize in the same transactions or series of transactions. Single unit of production, whereas Industry comprises of all the firms producing the same type of product. e.g; Mercedes Benz is a firm, while all the firms producing cars constitutes Car industry.
GOVERNMENT
All public Agencies, State bodies and other units which govern the country.
GOVERNMENT
CENTRAL GOVERNMENT STATE GOVERNMENT
CENTRAL GOVERNMENT
STATE GOVERNMENT
FUNCTIONS
How to produce For whom to produce Choice b/w Current needs & Future needs
SOCIALISM
CAPITALISM
CAPITALISTIC ECONOMIC SYSTEM
ECONOMIC SYSTEM
Features of Capitalism
Private ownership Free enterprise Consumer liberty Freedom to choose of occupation Freedom to save and invest The market system Competition Absence of central plan Limited role of government
Advantages of Capitalism
Provides optimum allocation of resources, development of enterprise, invention and use of new technology etc. due to individual freedom Provides freedom to save and invest, result in higher growth rate because saving made by sacrificing the consumption are invested for growth. In capitalism consumers liberty to buy or not to buy goods and freedom of enterprise leads to competition. Therefore, price and other factors are set to equilibrium by market forces, i.e., demand and supply, etc Rational talents are better utilizing due to individual freedom and therefore productivity Increases.
Limitations of Capitalism
Right to property and freedom of enterprise will lead to accumulation of wealth and income disparities Theoretically, expressed that there will be free competition but generally larger firms will take advantage, which will lead to monopoly Absence of central planning results in no definite guidelines for national development. Cut-throat competition among individual may result in imperfection in market & adoption of unfair practices Once the upward and downward cycle starts there is no situation to normality. This results in price hike, inflation, deflation, unemployment etc.
Socialism
Socialism means an economic system in which the means of production are owned by the state. In most important aspect of this type of economy is that all major decision related to the production, distribution, commodity and service prices are all made by the govt. Govt. is the final authority to take decision regarding production, utilization of the finished industrial products and the allocation of the revenues earned from their distribution
Features of Socialism
Abolition of private property Collective ownership of means production Central planning Elimination of unfair gaps in income Provision of necessaries of life
of
Advantages
Elimination of wastage of resources Elimination of concentrate of wealth Elimination of unequal distribution wealth Provision of necessaries of life Immunity from Economic crisis Elimination of unemployment
of
Disadvantages
End of liberty Weakening of the will to work Error in planning Failure in practice
MIXED ECONOMY
Where both Public & Private sectors exist. Some resources and enterprises controlled by the State, other economic activities are left to the private initiative. Private sector allowed to work for private motive but under certain regulations decided by the government. Extent of State participation & regulation may vary from time to time.
b) Middle income economies( Second world): Per capita income b/w $1006$12,275
c) High income economies (First world) : Per capita income above $12,275 But Cost of living is different in different countries. For example USA is much more expensive as compared to India . So a concept of PURCHASING POWER PARITY is developed . It helps in converting income of country into another country income . For example :PPP between USA and India is 3 , which means what 300 rs buys in USA can be bought for Rs 100 in India. So we can also say $1000 income in India= $3000 earned in USA .
3) Structure of Economy :
An economy consists of the PRIMARY,SECONDARY AND TERTIARY Sector Normally ,as an economy develops the share of service sector rises in GDP and employment and primary sector decreases. After a certain stage the share of manufacturing sector also declines. In developed countries 70% of GDP is in service sector.
Country
Primary
Secondary
Tertiary
1.1%
4) ECONOMIC POLICIES
There are several economic policies like - Trade policy, monetary policy, fiscal policy, income tax policy etc.
Some businesses are favourably affected by government policy, some adversely affected, while it is neutral in respect of others.
Monetary Policy
Monetary policy refers to the process by which the central bank or monetary authority of a country controls the supply of money, often target Government appointed central bank, RBI in India, usually administers monetary policy. It is the process by which central bank of a country controls
Supply of money Availability of money Cost of money/rate of interest
The Central Bank does this by issuing fresh bonds and treasury bills in open market.
CRR
By increasing the CRR, the RBI decreases the lending capacity of the bank to the extent of the increase in the ratio.
Fiscal Policy
The term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures. Government spending policies that influence macroeconomic conditions are known as fiscal policies.
Exchange Stability
Balanced Regional Development
Regulatory Role
By regarding the countries, persons or business firm through the several policies and act. E.g. Industrial licensing policy, MRTP (Monopoly Restricted Trade Practices) By regulating the conduct of business firm through laying down general standard E.g. 8 hours of week, prohibition, of child labor etc. Regulating and result of business that is profit and dividend through limiting the profit utility, ceiling of dividend, high tax imposition on excess profit, etc. By regulating the relationship between various part of business. Government regulation of the economy broadly divided into direct control and indirect control
Promotional Role
The promotional role played by the government is very important in developed countries as well as developing countries. Following are the main objectives behind the promotional role of the government.
To assist and develop industrial, agricultural labor and consumer interest. By providing various fiscal monetary and other incentive government can promote overall economic development. E.g.. Tax holiday for 5 years, tax free dividend etc. By establishing financial institution such as IFC,ICICI,IDBI, SFC, etc.
Entrepreneurial Role
In many countries, states also play the role of an entrepreneur where state establish the business and bear the risk. The government act as on entrepreneur because of the following reason: To balance economic ups and down such as inflation and deflation. To take over on profitable business to services are required to general public. To prevent the wastage of natural resources such as coal fuel petroleum products steel etc. To prevent monopoly or oligopoly.
Planning Role
Especially in developing countries, the states place a very important role as a planner. The need for economic planning is implied in the famous scarcity definition of economics. As Robbins point out in the scarcity of the scares resources. Hence proper planning is required for optimum allocation of scares resources.
It is characterised by HIGH consumer spending, high business confidence, investments and profits!
There is a lot more output