Firms
are considered as an economic institution in a market system. The market behavior of the firm reflects the nature of economic decisions taken by the
manager of the firm. Micro-economic
decision-making by the firm has
nevertheless to be made within the broader micro-economic
environment. Economic environment of business has reference to the broad
characteristics of the economic system in which the business operates.
The economic environment
of business is comprised of the economic
conditions, economic policies and the economic
system.
The economic conditions of a country-e.g.,the nature of the economy,
the stage development of the economy, economic resources, the level of income,
the distribution of income and assets,etc.are among the very important
determinants of business strategies.
In a developing country,
the low income may be the reason for the very few demand of a product. The sale
of a product for which the demand is income-elastic naturally increases with an
increase in income. But a firm is unable to increase the purchasing power of
the people to generate a higher demand for its product. Hence, it may have to
reduce the price of the product to increase the sales.
In countries where the
investment and the income are steadily and rapidly rising, business prospects
are generally bright and further investments are encouraged.
In developed economies,
replacement demand accounts for a considerable part of the total demand for
many consumer durables whereas the replacement demand is negligible in the
developing economies.
The economic policy of the government has a very great impact on
business. Some types of business are favourably affected by govt.policy, some
adversely affected, while its neutral in respect of others. For example, an
industry that falls within the priority sector in terms of the govt.policy may
get a number of incentives and other positive support from the govt., whereas those industries
which are regarded as inessential may have the odds against them.
The monetary and fiscal
policies also affect the business in different ways according to the incentives
and disincentives they offer and by their neutrality. According to the
industrial policy of the Govt.of India until July 1991, the development of 17
of the most important industries were reserved for the state. In the
development of another 12 major industries, the state was to play a dominant
role. In the remaining industries, co-operative enterprises, joint sector
enterprises and small-scale units were to get preferential treatment over large
entrepreneurs in the private sector. The govt.policy thus limited the scope of
private business. However, the new policy ushered in since July 1991 has widely
opened many of the industries for the private sector.
The scope of private
business depends, to a large extent, on the economic system. At one end, there
are free market economies or capitalist economies and at the other end are the
centrally planned economies or communist countries. In between these two are
the mixed economies. Within the mixed economy itself, there are wide
variations.
The freedom of private enterprise is the
greatest in a free market economy and is characterized by the following
assumptions:
1.
The factors of production(land,labor,capital) are privately
owned and production occurs at the initiative of the private enterprise.
2.
Income is received in monetary form by the sale of services
of factors of production and from the profits of the private enterprise.
3.
Members of the free market economy have freedom of choice
4.
The free market economy is not planned,controlled or regulated
by the govt. The govt.satisfies collective wants but does not compete with
private firms.
The completely free market economy is however an
abstract system rather than a real one. Today,even the so-called market
economies are subject to a number of Govt.regulations. Countries like the USA,
Japan, Australia, Canada and member
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