Economic Environment Chapter 5

The Economic Environment

• Refers to all economic factors that affect the functioning of a business unit
• Includes factors that affect consumer purchasing power and spending patterns
• Depends on the economic environment to sell finished goods

Economic Systems

• Three fundamental questions: what to produce, how to produce, and for whom to produce
• Goals of an economic system: stability, full employment, and growth
• Types of economic systems:
  • Market/Capitalist: individuals control production, little government intervention, markets decide what to produce
  • Command/Planned: government controls production, two types: Communist and Socialist
  • Mixed: combines elements of command and market economies, most economies have mixed systems

Market/Capitalist Economic System

• Advantages: freedom of choice, encourages competition, professionalism, and speedy decision-making
• Disadvantages: market forces can cause hardships, profit motive can lead to harm, disregards public goods, and widens the gap between rich and poor

Command/Planned Economic System

• Advantages: provision of social services, equitable distribution of resources, planned resource utilization, and avoids monopolies
• Disadvantages: high inefficiencies, positions filled by political appointments, bureaucratic procedures, and high taxes

Economic Conditions

• Factors that affect businesses: inflation, income, exchange rate, interest rates, and unemployment levels
• Inflation: persistent increase in prices, leads to increased costs and prices
• Income: affects purchase behavior and firm sales
• Exchange Rate: affects prices of imported raw materials
• Interest Rates: affects borrowing costs and business costs
• Unemployment Levels: affects spending power of individuals and firm sales

Market Structures

• Degree of competition: perfect competition, monopolistic competition, oligopoly, and monopoly
• Perfect Competition: many small firms, identical product, price takers
• Monopolistic Competition: many sellers, slightly differentiated products
• Oligopoly: few large firms, influence prices
• Monopoly: one producer, price maker

Government Policies

• Monetary Policy: government influences money supply using interest rates
• Fiscal Policy: government uses expenditure and taxation to control the economy

Economic Cycles

• Phases: prosperity, recession, depression, and recovery
• Business growth occurs during prosperity phase

Demographic Environment

• Focuses on the population and its characteristics, with people being important as producers and consumers.
• Demography refers to the collection and analysis of population characteristics.
• The Demographic Environment is the study of human populations in terms of size, density, location, age, gender, race, occupation, and other statistics.

Demographic Environment Issues

• Birth and death rates: the ratio of births to deaths affects the population size and market.
• Rate of migration: mobility of customers in or out fluctuates the population and market.
• Population age mix: changes in age profile lead to changes in consumption patterns.
• Labour: the proportion of the working population to the total population has a great influence.
• Household changes: reducing family size due to delayed marriage, fewer children, reducing population and demand for goods and services.

Social and Economic Implications

• Population growth: increases market size, demand for investment funds, and pressure on natural resources.
• Population decline: leads to reduced demand for educational and hospital building programs, food, and social services.

Social-Cultural Environment

• Refers to the relationship between the organization and society, including culture.
• Culture includes behavior, attitude, way of living, beliefs, faith, laws, and customs that differ across countries and regions.

Social-Cultural Environment Characteristics

• Core cultural values: persistent beliefs and values held by people in society.
• Secondary cultural values: expressed in people's relationships.
• Subcultures: groups with shared values emerging from common life experiences or circumstances.

Social-Cultural Environment Elements

• Belief System: includes religion, superstitions, and power structures.
• Aesthetics: relates to arts, music, folklore, drama, and dance.
• Language: closely related to aesthetics, influencing how people interpret meaning from expressions.
• Social Institutions or structures: organized social groups, such as extended families and units.

This quiz covers the concept of economic environment, its components, and its impact on business operations. It includes topics such as economic systems, conditions, policies, and market structures.