Economic Environment Factors impacting businesses

July 6, 2021

The economic environment refers to all economic factors that influence consumer and commercial behavior. All external factors that affect the economy, both in the immediate market and the larger economy, make up the economic environment. These factors can have an impact on a business’s performance and success.

Different people have different economic environments. The weather and the price of fertilizers are both important for farmers.

A TV station’s growth in Internet advertising is important, but not the weather. Because the Internet is competing for advertising business, internet advertising matters to TV stations. Advertising media is irrelevant to a farmer.

Factors that influence the economic environment

The economic environment is made up of both macroeconomic and microeconomic factors.

Microeconomic factors

The microeconomic environment is a term that refers to events at the consumer or company level.

The whole economy is not affected by microeconomic factors. Here are some microeconomic factors which may have an impact on a business.

Size of the market.
Buying habits
The distribution chain is how you supply your goods. You can do this by way of distributors, retail stores, or the Internet.

Macroeconomic factors

On the other hand, the macroeconomic environment refers to factors that have an impact on the whole economy. Macroeconomic policy deals with large-scale or general economic factors such as:

Rates of interest
GDP growth GDP is the measure of economic growth GRoss Domestic Product. Also, does the economy appear to be in recession or is it growing? What is the answer?
Exchange rates are the value of currencies in relation to each other.
The amount of discretionary income consumers have (i.e. income after paying taxes, social security, etc.
Consumer confidence levels
Save on your purchase
The economic environment is not something that business people can control. They can however evaluate the market conditions before making a decision to move forward with a plan or project.

Examples of an Economic Environment

An Economic environment is set of economic conditions that have an impact on all businesses and consumers Market. These numbers can vary from one country to another and by industry. It is generally more difficult to start or expand a business when the economic environment is poor. These are the elements that make up an economic environment.

Interest Rates

The cost capital for all businesses is greatly affected by interest rates. This has an impact on capital spending, cost accounting and competition. Businesses may expand when interest rates drop. Businesses may expand or fail if interest rates go up.

Conditions for Credit

Banks’ willingness and ability to lend. Credit is subject to a cycle of easy borrowing followed by tightening. This is due to the liquidity of banks as well as their perception of risk.

Business Cycle

An industry’s rise and fall in supply. Most industries experience a cycle of increased supply, which leads to intense competition and falling prices. If prices drop too low, the supply drops as businesses reduce capital or labor.

Business confidence

What business managers think about the future. Optimism ultimately leads to capital spending and higher competition. Pessimism leads to cutbacks and divestiture.

Consumer confidence

What consumers think about their economic future. Confident consumers tend to spend more, save less, and take on more debt. Pessimistic consumers save more, pay down their debts and spend less.

Debt & Savings

Debt levels of consumers, businesses, and governments. A high level of debt can limit spending and cause bankruptcies for individuals and businesses. It can also affect confidence in the currency of a country and central banks at the government level.

Inflation and Deflation

An increase or decrease in the general price level affects the consumer level. Moderate inflation is a good thing. It encourages consumers and businesses to spend, as everything is getting more expensive. Inflation can cause market damage as consumers and businesses start to accumulate goods. Inflation discourages spending because everything is always cheaper.

Labour Market

Salaries and availability of skilled workers.


Trade with foreign markets without tariffs. This can vary depending on factors like a trade conflict.


The growth for an industry or economy as a whole. This includes periods with negative growth, such as recessions or depressions.


Taxes on business in a country or region. A high tax rate and burdensome administrative tasks such as collecting value-added taxes discourage investment and entrepreneurship.


The demographic of a country has a significant impact on the consumption, labor, and competition. A country that has a high number of young educated people may see higher growth rates.

Economic Security

A country or region’s political and economic stability. A nation that has a low incidence of supply chain disruptions.

Trade Competition

The level of market competition. Sometimes, difficult financial circumstances such as a recession can reduce competition and offer an opportunity for a new enterer. This is especially true if you are driven to innovate in areas where no one else is investing. General Electric, IBM and Apple are companies that were founded during the countries recession. Below is a complete overview of scarcity with some examples.

Characteristics of Economic Environment

Special and General Forces

Both specific and general forces are part of the business environment. Customers, competitors, investors, and others are examples of specific forces. These have an immediate effect on the day-to-day operations of the business, while general forces refer to the social, political and legal forces that indirectly affect the operation of a business.

Inter relatedness

Many elements of a business environment are closely linked. There is a rise in demand for diet colas and fat-free cooking oils, as well as sugar-free products. a rise in awareness of good health among consumers.

Dynamic Nature

The business environment is dynamic by nature. It is constantly changing. Changes in government policies, changes in consumer tastes and preferences, technological advancements, etc., could all be reasons for this. These changes can be caused by external or internal factors.


The business environment is unpredictable because it is impossible to predict what the future holds, especially for fashion industry, film industry, and information technology. Because of its dynamic nature, it is difficult to manage uncertainty.


The business environment is made up of many factors. It is difficult to determine the exact influence of each factor (social, economic or technological). All these factors have an impact on the business enterprise’s functioning.

Managers are constantly challenged to simplify complex issues as much as they can. It is difficult, for example, to distinguish the influence of legal, social, and political forces on a product’s demand. On such a change.

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