 BUSINESS

ENVIRONMENT
(LECTURE 1 )

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 Learning Outcome (s) November 14, 2021
Compulsory page

At the end of the lecture, students will be able to :

– explain the economics problems facing

businesses
– analyze how basic economic questions are
answered by businesses in different Economic
Systems
– PEST analysis

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Business

Definition :

 The organized effort of individuals to produce

and sell , for a profit , the goods and services
that satisfy society’s needs

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Economic Problems facing a business

 Every economy is endowed with what we call

resources, which are inputs used in the
production of goods and services for
consumption to satisfy our needs and wants
 The basic economic problem of any society is
the relative scarcity of resources in relation to
the unlimited needs and wants of consumers

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Resources

 Resources = All inputs that can be combined

in many different ways to produce goods and
services of various types to help satisfy
people’s unlimited needs and wants
 Often referred to as the factors of production
 Resources include land, labour, capital and
enterprise
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ECONOMIC PROBLEM

SCARCITY

CHOICES

OPPORTUNITY COST
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 Basic Economic Questions

Scarcity Choices must be made

Due to scarcity, all firms need to solve the basic

economic questions :
1. What To Produce?
2. How much to produce?
3. How To Produce?
4. For whom will they be produced?

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 Basic Economic Questions

What to produce?
 refers to type of goods and services produced
How much to produce?
 refers to the amount of goods and services produced
How to produce?
 refers to the method of production
For whom to produce?
 Refers to the potential customers

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Types of Economic Systems
 Every economy has to decide on what goods and services
to produce and how much to produce. The economic
decisions will determine the allocation of resources.
 There are three types of economic systems
– Capitalism
– Command Economy
– Mixed Economy

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 Types of Economic Systems

 Capitalism

– An economic system in which :

• individuals own and operate the majority of
businesses that provide goods and services
• Derived from Adam Smith’s laissez-faire in which a
society’s best interests are served by individuals
pursuing their own self-interest
• Limited role of government

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 Types of Economic Systems

 Command Economy

– Economic systems in which :

• Key industries (e.g., transportation, utilities, and banking) are
owned and controlled by the government
• Small-scale private businesses may be permitted and
workers may choose their own occupations
• Production is based on national goals, and distribution is
controlled by the state
• Intent is the equitable distribution of income, elimination of
poverty, social services to all who need them, elimination of
the economic waste of capitalistic competition

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 Types of Economic Systems

Mixed Economy

– There are both public and private sector. Private sector

provides the public goods and infrastructure so that economic
activities can be carried out effectively by the private sector.

– Economic freedom. Consumers and producers have the

freedom.

– The government try to reduce income inequality by imposing

progressive tax system where higher income earners are taxed
more than the lower income earners. In this way, the gap
between the rich and poor will be narrowed.

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 Types of Economic Systems

 Capitalism
– Businesses have the freedom to decide what to
produce,
– Businesses produce products that are demanded by
consumers because “customer is the king”.
– The market determines quantities sold and price.
– Businesses face high competition
– Innovation is essential to compete with rivals.

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 Types of Economic Systems

 Command economies
• the government decides what will be produced,
how it will be produced, who gets what is
produced, and who owns and controls the major
factors of production
• Businesses have no freedom .

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 Types of Economic Systems

Mixed economy
– Businesses
• Produce goods and services according to consumers
demand.
• Use revenues to purchase factors of production
• Government supports business by providing
subsidies/infrastructure.
• Government protects local businesses from foreign
competition.

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 The Current Business Environment
– Today, businesses operating globally are
challenged by various external factors such as
political, economic, social and technological
factors.

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PEST analysis

The changing external business environment can

be audited by using PEST analysis. PEST
analysis helps global businesses to develop
future business strategy

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PEST analysis
 PEST
– Political / legal factors
– Economic factors
• the microeconomic environment
• the macroeconomic environment
– Social / cultural factors
– Technological factors use for auditing the
business environment
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Political / (legal)  Political stability
 Form of
government, e.g.
democratic,
authoritarian
 Level of freedoms,
e.g. freedom of
expression and
association
 Incentives to
foreign investors
 Competition law
and policy
 Employment law 1– 19
Political Risks
 In Venezuela, President Hugo Chavez
confiscated a major oil field owned by the
French petroleum firm Total.
 Confiscated = seize foreign assets without
compensation

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Environmental Law
 Finland, France, Norway and New Zealand
prohibit cigarette advertising on television.
 In Mexico, environmental standards are looser
or less well-enforced but the government is
reluctant to strengthen these standards for fear
that MNCs will reduce their investment

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 Corruption

 During the regime of President

Suharto in Indonesia, both domestic
and foreign investment was
controlled by gate-keepers in the
public service who sold investment
and manufacturing licenses to
willing foreign investors. These
investors then bribed Indonesian
officials in order to get fiscal
concessions, such as tax
exemptions and duty-free imports
of machinery, free land and, above
all, cheap labour without
safeguards under labour laws and
social security legislation.

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Legal System
In India, the Factories Act and the Minimum
Wages Act strictly regulate the use of child
labour in factories and industrial enterprises.
However, employers evade their statutory
obligations by contracting work out to so-called
master craftsmen who employ children within
their homes without fear of prosecution.

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ECONOMIC
 Level of economic
development
 Trends in GDP
 Rate of inflation
 Wage levels and level of
unemployment
 Strength of currency and
convertibility
 Rates of taxation

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Economic factors
 In the late 1990s, The United States, Japan and
most European nations employed a more
favorable policy toward foreign investments.
 Banks in Indonesia and Thailand are
considered the most vulnerable which is one of
the major causes of financial crisis in 1997.
 High inflation in Zimbabwe

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Socio-cultural
 Growth rate of population,
and age distribution of
population
 Language(s)
 Main religious and cultural
groupings
 Educational attainment
levels
 Role of women
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 An American company attempted to sell golf
balls in Japan. The company designed an
attractive package containing four golf balls.
The Japanese love to play golf but the business
failed. It was later discovered that in Japanese,
the number four has the same pronounciation
as the Japanese word for death. Never sell
anything in sets of four in Japan.

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Technology  Government spending on R&D
 Legal regime for patent
protection
 Energy availability and costs
 Transport infrastructure and
costs
 Innovation system, including
availability of skilled workforce
 Level of technology transfer

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 Last Updated:November 14, 2021

4.57 billion internet users in March 2020

 7.6% of North Americans
 15.9% of Europeans
 50.3% of Asians
 11.5% of Africans
(Source: Internet world stats,2020)

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 November 14, 2021

References:
Griffiths, A. and Wall, S. Eds. (2011). Applied
Economics.
Financial Times Prentice Hall

Pride, W.M, Hughes, R.J, Kapoor, J.R (2010),

Introduction
to Business, South-Western CENGAGE Learning

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 Conclusion/Summary November 14, 2021
Compulsory page

 All businesses will be facing economic problems

and international firms operating in various
countries will be exposed to different economic
risks due to different economic systems.

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 November 14, 2021
Compulsory page
Key terms:
Term Definition
Business The organized effort of individuals to produce and sell,
for a profit, the goods and services that satisfy society’s
needs
Capitalism An economic system in which individuals own and
operate the majority of businesses that provide goods
and services
Command An economic system in which the government decides
Economies what will be produced, how it will be produced, for
whom available goods and services will be produced,
and who owns and controls the major factors of
production.
An economics systems in which both private sectors
Mixed Economies and government work together in solving the basic
economic problems
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