Economic Environment

You may now consider a firm as an economic institution in a market system. The market behavior of the firm reflects the nature of the economic decisions taken by the manager of the firm. Micro-economic decision making by the firm has nevertheless to be made within the broader macro-economic environment. Economic environment of business refers  the broad characteristics of the economic system in which a business firm operates. 

The present-day economic environment of business is a complex phenomenon. The business sector has economic relations with the government, the capital market, the household sector and the foreign sector. These different sectors together influence the trendsetter structure of the economy. The form and functioning of the economy varies from country to country. The design and structure of an economy system is conditioned by socio-political arrangements. Such arrangements are relevant from the standpoint of macro-economic decision in asking. 

For example. in a democratic set-up, people exercise an influence, direct or indirect, through the systemic of casting votes. the nature of the decisions taken by the government a Parliamentary system. most decisions are processed by the Cabinet Ministers. whereas under a presidential font of government the President acts as the real manager of the State : It is he who takes or makes decisions. Similarly, macro-decision-making is more decentralized in a federal form of government than in a unitary form of government. 

You may argue that the decisions being referred to are political decisions. True, but it must be emphasized that political decisions have far-reaching economic implications. After all, the government is the manager of economy. The nature of government ownership, control and regulation of economic activities of a country provides form and shape to the nature of economic organisations. In a capitalist society, the private sector, induced by the profit-motive and guided by the indication of a free-market mechanism, takes the major economic decisions of investment, production and distribution. In a socialist society, such decisions are taken by the government which is guided by the social welfare motive and central planning. In a communist  society, economic  decisions. including that of consumption. are taken by the State in the interest of the community as a whole. In a mixed economy. private. public, joint sectors and the like, all have some say in the major decisions that influence the functioning of an economy. 

All modern economies, whether capitalist, socialist, communist or mixed, have certain fundamental economic  problems to deal with.each and every econ only, including the so-called 'Affluent Society', most of the resources are scarce. Consequently, choices concerning the resource use have to be made together by individuals, by business corporations, and by the society. It is the social choice and community preference which give substance to the question of macro-economic decisions. From the standpoint of resources, tile basic economic problem of every economy is that of just allocation of resources and subsequent optimum production. There are many aspects to this problem ? What to produce ? How to produce ? For whom to produce ? When to produce ? Every economy has to decide on the quality and quantity of the goods ,old the services to be produced. It has to decide on the nature of technocratic and technique of production in view of factor endowment. It has to decide on the course and pattern of distribution of goods and services produced. It has to decide on the timing of production. Yokohama note that similar decisions are taken by individual firms and there is no end to such decisions. The process of decision-making differs depending on how these problems are solved in different economics. This is what constitutes the functioning of the economy or the nature of economic environment. At the cost of over-simplification, certain points can be made about the organisation and functioning of modern economics : 

• (a) In most of the economies, both 'free market mechanism' and 'centralised planning' exist in different degrees. By 'free market mechanism' or 'price mechanism', we mean a free play of the market forces of demand and supply to determine an equilibrium solution of the allocation problem. Market mechanism determines commodity prices, factor prices and income distribution. By 'planning', we mean a programmable of action that shows consistency and feasibility for attaining a set of targets in view of a set of objectives through a set of instruments. In the present day world around us, planning is combined with free pricing to arrive at macro-economic decisions yielding Maximilian good for the maximum number. Thus, the economy in which a business firm operates today is not an exclusively free economy making an indiscriminate use of prices and the markets, rather it is directed by a system of planning, control, regulation and co-ordination. 
• (b)  In lost of the economies, positive intervention by government in day-to-day economic affairs is on the increase. Planning is a form of governmental intervention. Besides this, the government can also intervene through a system of controls and regulations. The welfare state principle induces the government to enforce minimum wages, commodity control, fair trade-practices. etc. through legislation. The basic objectives of such economic legislation and policies are : growth, efficiency and equity. It is the interfering role of modern government that has made most of the business firms socially responsible. 
• (c)  Modem economies are not 'closed', but 'open': they are actively engaged in international trade and co-operation. So, the international transmission effect today is stronger than ever before. Though there are disparities in the levels of income and standards of living over space and time, there is a conscious effort to develop the poor nations. The maintenance of steady growth in developed countries is dependent on the acceleration of growth in under-developed countries. This idea has given new dimensions to issues like the role of multi-national corporations, the ecological balance, the recycling of petrol-dollars and transfer it technology. The technological revolution is making strident moves. In order to keep their dynamism, the economies are determined to develop science and technology,  and to balance environment and ecology, and this is going to Act as a unifying force for the world economic order. These facts determine the environment and set the constraints within which the modern business firm must operate. The management cannot overlook the market or the non-market environment. No management can ignore the function of markets, the objectives of national planning, the policies of the government or their social responsibilities, or the rate, pattern and structure of economic changes, or the forms of international co-operation. Progressive management must keep itself continuously informed about the magnitude and direction of changes in national as well as international economic environment. Of course, both economic and non-economic environment have an important bearing on economic decision-making by the management.