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UNIT 3
Economic Environment
Definition
The economic environment consists of external factors in a business' market and the broader
economy that can influence a business. You can divide the economic environment into the
microeconomic environment, which affects business decision-making such as individual actions
of firms and consumers, and the macroeconomic environment, which affects an entire economy
and all of its participants. Many economic factors act as external constraints on your business,
which means that you have little, if any, control over them. Let's take a look at both of these
broad factors in more detail
Macroeconomic influences are broad economic factors that either directly or indirectly
affect the entire economy and all of its participants, including your business. These
factors include such things as:
o Interest rates
o Taxes
o Inflation
o Currency exchange rates
o Consumer discretionary income
o Savings rates
o Consumer confidence levels
o Unemployment rate
o Recession
o Depression
Microeconomic factors influence how your business will make decisions. Unlike
macroeconomic factors, these factors are far less broad in scope and do not necessarily
affect the entire economy as a whole. Microeconomic factors influencing a business
include:
o Market size
o Demand
o Supply
o Competitors
o Suppliers
o Distribution chain - such as retailer stores

The economic environment of business will play a pivotal role in determining the success or
failure of a business.
Let's first consider some macroeconomic factors. If interest rates are too high, the cost of
borrowing may not permit a business to expand. On the other hand, if unemployment rate is
high, businesses can obtain labor at cheaper costs. However, if unemployment is too high, this
may result in a recession and less discretionary consumer spending resulting in insufficient sales
to keep the business going. Tax rates will take a chunk of your income and currency exchange
rates can either help or hurt the exporting of your products to specific foreign markets.




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Characteristics of Indian Economy

1. Developing economy
Indian economy is a developing economy in which Agriculture is the back bone of Indian
economic. 60% of Indias population are on the below poverty line. Mineral resources are
not fully utilized. We are selling iron ore by trucks and getting blades by packets.
Majority of the people of India are leading a poverty line. Indian economic is affected by
it. Countries which are on the part of progress and which have their potential for
development are called developing economic. So India is termed as developing economic
by modern views
2. Low per capita income
Developing economy is characterized by low per capital income. India per capital income
is very low as compared to the advanced countries. For example the capital income of
India was 460 dollar, in 2000. Where as their capita income of U.S.A in 2000 was 83
times than India. This trend of difference of per capita income between developing and
advanced countries is gradually increasing in present times. India not only the per capita
income is low but also the income is unequally distributed. This mal-distribution of
income and wealth makes the problem of poverty in critical and acute and stands an
obstacle in the process of economic progress
3. Heavy Population Pressure
The Indian economy is facing the problem population explosion. It is clearly evident
from the total population of India which was 102.67 cores in 2001 census. It is the second
highest populated country China being the first. Indias population has reached 110 cores.
All the developing countries are characterized by high birth rate which stimulates the
growth of population; the fast rate of growth of population necessitates a higher rate of
economic growth to maintain the same standard of living.
4. Pre-dominance of Agriculture
Occupational distribution of population in India clearly reflects the backwardness of the
economy. One of the basis characteristics of an developing economy is that agriculture
contributes a very large portion in the national income and a very high proportion of
working population is engaged in agriculture
5. Unemployment:
There is larger unemployed and under employment is another important feature of Indian
economy. In developing countries labor is an abundant factor. It is not possible to provide
gainful employment the entire population. Lack of job opportunities disguised
unemployed is created in the agriculture fields. There deficiency of capital formation.
6. Low Rate of Capital Formation
In backward economics like India, the rate of capital formation is also low. capital
formation mainly depends on the ability and willingness of the people save since the per
capita income is low and there is mal-distribution of income and wealth the ability of the
people to save is very low in developing countries for which capital formation is very
low.
7. Poor Technology
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The lever of technology is a common factor in developing economy. India economy also
suffers from this typical feature of technological backwardness. The techniques applied in
agriculture industries milling and other economic fields are primitive in nature.
8. Back ward Institutional and social frame work
The social and institutional frame work in developing countries like India is hopelessly
backward, which is a strong obstacle to any change in the form of production. Moreover
religious institutions such as caste system, joint family universal marriage affects the
economic life of the people.
9. Under utilization of Resources
India is a poor land. So our people remain economically backwards for the lack of
utilization of resources of the country.
10. Price instability
Price instability is also a basis feature of Indian economy. In almost all the developing
countries like India there is continuous price instability. Shortage of essential
commodities and gap between consumption aid productions increase the price
persistently. Rising trend of price creates a problem to maintain standard of living of the
common people.
















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What do you mean by Economic Environment? What are the different factors of economic
environment that effect business
(OR)
Evaluate Economic Environment in India
(OR)
What are the Components of Economic Environment?
Ans : Economic environment refers to all those economic factors which have a bearing on
business. Business depends on economic environment for procurement of inputs & sale of its
output.
The major factors of economic environment effecting business are discussed as below:
a) Growth Strategy of the nation
b) Economic Systems
c) Economic Planning
d) Major sectors of the economy, such as Agriculture, Industry and Infrastructure
e) Economic Reforms
f) Human Capital
g) Income & GDP
h) Distribution of Income & Assets
i) Global linkages
a) Growth Strategy: The growth strategy followed in India until 90s was Soviet Model,
with little/marginal participation by private sector. This strategy contributed to overall
growth of the economy, but was subjected to severe criticism for its poor focus on
agriculture, neglect of export and trade opportunities and excessive protectionism. There
has been a major turnaround in the growth strategy in the post-liberalization era.
b) Economic Systems: Major economic systems adopted in various countries include.
Capitalist Model, in which the private enterprises have major control over resources;
Socialism, in which the tools of production are organized, owned and managed by
government; and Communism which goes further to abolish all private property and
property rights to income. Though India adopted Mixed Economic System to facilitate
existence of public and private sectors, the role of private sector was very limited. The
scenario had drastically changed in 90s with the phenomenon of Liberalization,
Privatization & Globalization.
c) Economic Planning: India has been planned economy with the central and state
governments playing a lead role in determining priorities and allocation of funds &
resources across various sectors and regions. However the objectives of economic
planning such as rising production & income, full employment, equitable distribution of
income and wealth, and equality & justice could not be achieved to the right extent due to
lapses in policies and their implementation.
d) Production, Agriculture & I nfrastructure: These are the vital components of the
structure of the economy. Great emphasis was laid on development of Industry; with due
priority to agricultural sector. However the scenario has been rapidly changing in the last
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two decades, as the service sector growing phenomenally and contributes 51.6% of GDP,
while Agriculture and Industry contributes 22.7% and 25.7% respectively.
e) Economic Reforms: Economic Reforms helped dismantling license, permit, quota Raj,
which was taken over by the phenomenon of liberalization, privatization & globalization.
Controls are largely slashed/ rationalized, restrictions on FDI & MNCs are
removed/relaxed, prices are deregulated (still few price controls exist). Protectionism
given way for market oriented policies. Various economic policies that have profound
influence on business include: Industrial policy, Foreign Investment policy, Foreign
Exchange Policy, EXIM Policy and Monetary and Fiscal Policy.
f) Human Capital: Of late, required attention is being paid to development of skilled and
competent manpower in India. The nations excessive population, once viewed to be a
burden on the economy, is being shaped into vital resource, which makes India a most
attractive manufacturing and outsourcing destination for MNCs. However the problem of
unemployment is still in dangerous proportion, especially in the unorganized
sector/among unskilled laborers. Programs like Mahatma Gandhi National Rural
Employment Guarantee Scheme go in the right direction, if properly implemented.
g) I ncome & GDP: They are the most vital indicators of a nations economic progress.
Indias position on these parameters has been improving over the time in money terms.
The situation is even better in terms of purchasing power Parity. India ranks 10
th
in terms
of Gross National Income in the world, but stands 4
th
in terms of purchasing power
Parity. The rate of economic Growth in India in new millennium has been highly
impressive and the future looks to be very promising.
h) Distribution of I ncome & Assets: The rising employment, Income, FDI and the like do
not compensate for widening inequalities between rich and poor in the society. The
number of Millionaires & Billionaires is growing but the fact that the farmers, weavers
and other vulnerable & disadvantaged sections committing suicides cannot be ignored.
The growing inequalities between rich & poor nations has been alarming, as 20% of
world population in developed countries control 80% of income/resources while 80%
people fight for remaining meager income.
i) Global Linkages: It includes elements such as magnitude and nature of cross-border
trade and investments, and membership of WTO, IMF, World Bank, Trading Blocs, etc.
India has been the active member in various international bodies. Its cross-border flows
are rising, but Indias contribution in Global Trade is dismally low at about 1%.
To conclude, the economic environment in India is turning out to be positive and
promising as Indian firms are increasingly exploiting global opportunities, and MNCs are
being increasingly inclined to do business in India.



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ECONOMIC RESOURCES

Economic resources are the assets (things of value) which an economy (or business) may have
available to supply and produce goods and services to meet the ever-changing needs and wants
of individuals (in the case of a business) and society (in the case of society as a whole.)
The number of goods and services being produced in todays world is quite large that it would be
very difficult, if not impossible to produce a complete list all inputs used in their production. For
the purpose of analysis, land, labour, capital and entrepreneur are the inputs for economic
resources.

1. LAND
Land is a factor of production refers not only to agricultural land, but to all other resources
provided freely by nature. It includes minerals, fishing-ground, water ways, and forests. Land is
often said to have some distinct features of its own. This includes:
1. It is a provision of nature since nobody has done anything to bring it into existence. This
explains why land is said to have no cost of production.
2. It is limited in supply, unlike other factors of production
3. Production activities which depend greatly on land are subject to diminishing returns to
scale at a certain level of scale of production.

2. LABOUR
Labour is used to describe all human efforts utilized in the production process. This can be
manual or mental. The manual type is classified as unskilled labour because it requires little or
no education or training. This services are found among cleaners, messengers, clerks and so on.
The mental type involves skilled labour because educational training is involved. It is found
among medical doctors, pilots, engineers and so on.
Labour can be transferred from one place to another. This is known as mobility of labour.
There are two types of mobility of labour:
- Occupational mobility of labour
- Geographical mobility of labour
Occupational mobility of labour refers to the ease of labour in which labour can change
employment from one industry to another. E.g. farming to tailoring.
Geographical mobility of labour refers to physical movement from one place to another. E.g.
rural to urban. Factors affecting this movement could be family considerations, economic
considerations,

3. CAPITAL
Capital can be defined as the stock of wealth created by man to be used mainly in the production
of final goods and services. Capital includes plants, machines, industrial buildings and so on. The
term financial or liquid capital is used specifically to refer to money. The financial capital is used
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to for the purpose of paying wages, and buying other inputs. Social capitals are the
infrastructures like roads, hospitals, markets, schools, railways etc.
Following are the factors of capital:
a) Fixed Capital:
It includes new technologies, factories, buildings, machinery and other equipments.
b) Working Capital:
It is the stock of finished goods or components or semi-finished goods or components.
These goods or components will be utilized in near future.
c) Capital productivity:
New features of capital building, machinery or technology are commonly used to
improve the productivity of the labor. Such as the new ways of farming helps to enhance
the productivity of the agriculture sector and give more valuable jobs in this sector which
motivates people to come out for work.
d) Infrastructure:
It is a stock of capital that is used to maintain the whole economic system. Such as roads,
railway tracks, airports etc.

4. ENTREPRENEURSHIP
The entrepreneur hires and organizes the other factors of production. He decides on what to
produce, how to produce, and in what quantity to produce. The entrepreneur bears the risk of
production. He earns profit for effective management of resources or suffers a loss for laxity and
efficiency.