The prevailing economic environmental factor of an organization determines its profitability and ability to cope with future changes that come across. The social environment deals with people’s behavior and the community in general, the relationship of the people and the organizations, the available occupations, and the education level of the society. These contribute to the well-being of the society as well as determine the nature of harmony in the region.
The government’s ability to contain law and order, the people’s perception of the laid down law, and the response of the government to lawbreakers, government efficiency, and the pursuit of containing corruption is a vital component that stimulates the economic environment.
The country’s money supply influences business transactions, if the inflation is high, business is affected. The bank lending rates inhibit investment as many firms may not afford to borrow. The money market structure determines the business trend.
The government budget is vital in contributing to the business ventures as any government is a consumer. In case of the budget deficit, the business activities are halted due to accumulated unpaid dues. The existing taxation policy is vital, where there are direct and indirect taxes, they rob the business much of their income inhibiting growth and operations. The openness of the economy to foreign investors allows capital inflow allowing robust economic activities. The government approach to business may be encouraging or discouraging and this has a dire effect on investment. A high gross domestic product means increased purchasing power. The employment dynamics may influence business positively or negatively.
The educational policy of any country determines the social well-being of people especially because this may result in social problems like robbery, criminal acts among others. This would affect the operations of the business and consequently the profitability and returns to shareholders. A favorable balance of payment is an encouragement to business.
However, countries whose economy is in transition are marred with inhibitory regulations and legal frameworks. Economic productivity, wealth, and income distribution will always affect individuals and firms. Political instability, new technology, and social challenges influence the economic patterns. Improved education, health, environmental awareness, and individual’s nature allows for growth.
The world economy has become a global market acting as a single unit; the deregulation of trade barriers is a boost to business. Technological advancement has led to low production cost coupled with efficiency and effectiveness while workers demographics has promoted the economy, as explained by Samuelson and Nordhaus.
We have three types of economic systems. In the market economy, the customers and their purchasing power drive the economy. The government has the minimal role of providing laws and regulations for stability. The economy is controlled by the forces of supply and demand, usually, the buyers have the right to determine what to buy, how much to buy, and from whom will buy. The producers decide the goods to produce how much to produce, in what quantity, and for whom to produce. In this case, the market knowledge and information is distributed equally to all so that they can make the necessary decisions.
In the planned economy, all production decisions are made by the government, and resources are utilized in production without even distribution. This entirely means that the government controls all decisions in regard to production, use, and who gets the goods; how the revenues earned are distributed. The private organizations and state-owned corporations are directed on what to produce, how to produce and for whom to produce, however, surplus production and the unemployment rate is usually kept at low levels. This type of economy has some benefits like any available revenue or wages, bonuses are distributed equally to all. This system eradicates the profit motive and capitalism, which creates a wide gap between those that have and those without. A mixed economy utilizes the elements of both planned and market economies.
In the market economy, most resources are allocated as per demand and supply and price mechanism which control production. If the demand is high more resources are allocated and vice versa. In the planned economy, almost all resources are allocated to production at the expense of other areas. The demand and supply do not necessarily influence the allocation for the visible hand of the state are at work. In the mixed economy, the resources are allocated through forces of supply and demand as well as by government intervention. The priority areas are given preference. In a mixed economy, the state and the private entrepreneurs take part in decision-making and activities relating to the production, distribution, and selling of goods and services. The aim of government involvement is to provide essential goods and services to citizens as well as ensure the members are not exploited. Moreover, there are certain investments that are too sensitive to be left in the hands of an individual like security. Other fields require a large capital outlay that private Organisations cannot afford.