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Types of the economic environment and its components

What is the economic environment 

The economic environment consists of economic factors that affect the purchasing habits of consumers and the business behavior of companies, there are many internal as well as internal factors that affect the economy, the buying habits of consumers and the business behavior of organizations are interrelated.

For example if an organization increases the price of a particular product, people will start buying less from the organization and similarly when the demand for a particular product goes down, the company reduces the production of the product. 

elements of the economic environment 

  • Private and Public Sector : The role of the private and public sector is very important in order to get investment , because when investors invest their money, they see the growth of the industry and the role of the private sectors in the economy.
  • Growth : Growth rate of GDP, GNP and per capita income When the GDP of an economy increases, it brings investment in the economy and shows the growth of the economy to investors.
  • Transportation and Communication: The transportation and communication system helps to increase the growth of the economy, when the transportation system is good it will increase the final goods, when the communication system becomes efficient it will connect more people and give them opportunities to do more business.
  • International Debt: Also important in the growth of the economy, if the economy has more international debt then investors are afraid to invest in the economy and vice versa.

Types of economic environment

There are no specific types of the economic environment, but the factors affecting the economic environment and that greatly affect it can be divided into two categories:

  • Microeconomic environment

Microeconomic environment factors are those factors that affect the individual organization and do not affect the entire industry. Examples of microeconomic factors are demand, competitors, market size, distribution chain, suppliers and supply. 

  • Macroeconomic environment

Macroeconomic environment factors are those that affect at a greater level and not only affect one company but affect the entire economy, examples of microeconomic factors are inflation , unemployment, interest rates, taxes, tariffs, customer confidence, etc.

Factors affecting the economic environment

  • the demand

Increased demand for a product results in more profits while decreased demand for your product leads to a loss, so companies use a different strategy to increase the demand for their products in the market.

  • market size

An organization's profit margin will be low if the market size is small, meaning market size is the total number of potential buyers in the market, for example a company that produces asthma inhalers has a small market size where it can sell inhalers to people with asthma.

  • Suppliers

The company’s production will stop if its suppliers suddenly stop providing supplies of raw materials to produce a product and similarly the cost of production will also increase with the increase in the price of supplies by the supplier.

  • supplies

Likewise, the production process is highly dependent on the supplies provided by the supplier, and the production process will suffer if there is a scarcity of supplies.

  • income

Income is the total income of an individual or the entire family, and income affects the buying habits of consumers and thus affects a business.

There is a direct relationship between the buying habits of an individual and his income, for example people with low income tend to buy only goods and services necessary for living and do not spend much money on entertainment and luxury things.

For example, a low-income person prefers to spend money to pay tuition fees for the education of his children rather than buying an expensive car, on the other hand, people with a higher income tend to spend more money on entertainment, services, and luxury goods.

They tend to spend low money on necessities of living such as staples like wheat grains, rice, etc., and seek high quality and expensive branded goods.

Therefore, it is right to say that high income of people is good for business and low income of population causes loss of business.

  • Inflation rate

The rate of inflation can be defined as the rate at which the process of goods and services increases, with the rise in prices the purchasing power of individuals is affected, and people begin to buy less and spend their money on only necessary goods and services.

For example people go out to eat less and travel less, inflation affects businesses that deal in leisure services and sell branded goods, so inflation is not desirable by both consumers and businesses.

  • interest rates increase

Increasing interest rates also affect businesses, especially those businesses where people ask for a loan to buy goods, for example people mostly buy homes and cars with loans, so the sales of these goods decrease as the interest rate increases.

That is why many banks advertise their loan services at lower rates than other banks in order to attract customers because people always prefer to get a loan at a lower interest rate.

  • Unemployment level

Another factor affecting the economic environment is the level of unemployment. Countries with a high level of unemployment have a weaker economic environment.

If most of the population does not earn they will not have enough money to spend on purchasing goods and services, and this creates a bad economic cycle in the country.

For example, if people do not buy, companies will not hire people in order to reduce costs, and if companies do not provide jobs, the level of unemployment will rise.

Therefore, one of the government's most important concerns is creating job opportunities in the country in order to reduce the level of unemployment in the country so that the country's economic growth can be saved.

  • taxes

The country’s high taxes affect the economic environment badly, people will have low income to spend, taxes not only affect consumers but also businesses as high taxes lead to higher cost of production.

So companies are obligated to increase the cost of the products they sell, and as a result people start buying less and thus the economic environment is affected.

  • Tariffs

Tariffs are a type of tax that is levied on imported goods, tariffs put an opposite effect on sales of goods as compared to taxes, people will import more goods from foreign countries if there are low tariff rates, local markets will be flooded with cheap foreign products and this will affect the sales of products local.

So higher tariff rates are better, as a result there will be less import of foreign products and people will buy more local products. [1]


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