SUBJECT NAME:-BUSINESS

ENVIRONMENT
SUBJECT CODE:- BBA LLB 213
UNIT NO.:- 1
LECTURE NO.:-2
TOPIC NAME :- ECONOMIC
ENVIRONMENT OF BUSINESS

-Prof.(Dr.) Ekta Rastogi

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CONTENTS:
 Economic System: Capitalism
 Macro Economic Scenario
 Importance
 Types of Environment

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 ECONOMIC ENVIRONMENT OF BUSINESS
Economic System ;Capitalism

•Capitalism or capitalist economy is referred to as the economic system where the factors
of production such as capital goods, labour, natural resources, and entrepreneurship are
controlled and regulated by private businesses.
•In a capitalist economy, the production of all the goods and services is dependent on the
demand and supply in the market that is also known as a market economy. It is different
from the central planning system that is also known as a command economy or a planned
economy.
•The main characteristic of a capitalist economy is the motive of earning profit. The
capitalist economy is also characterised by the presence of free markets and lack of
participation by the government in regulating the business.
•The origin of capitalism can be traced back to 18th century England that was undergoing the
industrial revolution at that time. As there is no government intervention in this type of
economy, it is also known as a free market economy.
FEATURES OF CAPITALISM
Private property: This is one of the most important characteristics of capitalism where
private properties like factories, machines, and equipment can be owned by private
individuals or companies.
Freedom of enterprise: Under this system, every individual has the right to make their own
economic decisions without any interference. This is applicable to both consumers and
producers.
Profit motive: The motive of earning profit is one of the most important drivers of a
capitalist economy. In this system, all the companies are looking to produce and sell their
products to consumers to earn maximum profit.
Price mechanism: Under this system, the demand and supply in the market will determine
the production level and correspondingly the price set for the products without any kind of
involvement from the government.
of inheritance.
 EXAMPLES OF CAPITALIST ECONOMIES

Hong Kong
United Arab Emirates
Singapore
New Zealand
Australia
Canada
Switzerland
United Kingdom
United States
Ireland
MACROECONOMIC SCENARIO
Rates of Growth
Steadily rising incomes in a period of high rates of growth increase demand
for various goods, but the rise in the demand for consumer durables is most
notable. This naturally induces business activity in this sector.
It has been observed that in a period of high growth, demand for automobiles,
motorbikes, air-conditioners, music systems, televisions, refrigerators, and such
other articles increases rapidly and industries producing these commodities
register high rates of growth. T
his pushes up growth in capital goods industries and intermediate goods
industriess well
. In a period of slow growth, the industrial sector suffers a setback as the
aggregate demand is very much reduced. This has an adverse impact on
business sentiment and investment is reduced.
The most recent example of this phenomenon has been the year 2008-09
when the rate of economic growth fell in the Indian economy primarily on
account of the global meltdown. As a result, business activity was adversely
affected and industrial growth in this year was just 2.7 per cent (down from
8.5 per cent in 2007-08).
Inflation
Inflation is commonly defined as a persistent and appreciable rise in general
level of prices. For an economy producing below its potential, many economists
have long maintained that inflation of creeping variety will have a positive effect
on output and employment. This implies that inflation of a mild sort increases
aggregate demand which, in turn, opens up fresh opportunities for business
growth. In such as environment not only the demand for existing goods increases
but the business can also introduce new items for which demand may be created
through dynamic marketing

Fiscal Imbalance
Governments in less developed countries not attempt to achieve a high rate of
investment by resorting to deficit financing which, in course of time, results in a
large fiscal deficit. In various developed and developing countries, fiscal deficit
is considered to have reached a stage, where it has become unsustainable and
according to neo-classical economists, unless the governments in these countries
take prompt corrective measures it can have serious implications for business
activity. It is now will established that the fiscal deficit has to be financed by
borrowing and the government borrowing pushes up interest rates. This draws in
foreign portfolio investment and gives and overvalued exchange rate which in
turn adversely affects exports.
Top 10 Countries with the Highest Inflation Rates (Trading Economics Jan
2022)
Venezuela — 1198.0%
Sudan — 340.0%
Lebanon — 201.0%
Syria — 139.0%
Suriname — 63.3%
Zimbabwe — 60.7%
Argentina — 51.2%
Turkey — 36.1%
Iran — 35.2%
Ethiopia — 33.0%
Monetary Policy
“Monetary policy”, according to C. Rangarajan, “is an arm
of macroeconomic policy and, as such as, its role and
importance are determined in any economy be the overall
policy framework and the various instruments available for
implementing policy.” Monetary policy influences cost and
availability of credit and money and is thus of great
relevance to business. The increasing openness of the Indian
economy in recent years, the need to service external debt
and the necessity to improve country’s exports in world trade
in a highly competitive external environment require stability
in the domestic price level and monetary policy is often used
to realise this objectives.
Fiscal Policy
Fiscal policy refers to the process of shaping taxation and public
expenditure in order to dampen the swings of the business cycle and to
contribute to rapid economic growth and high employment and stable
prices. This policy when mismanaged leads to fiscal imbalances which at
times become unsustainable. This has actually happened in India during
the last two decades.
 TEXT BOOKS:
1. Paul J. (4th Ed. 2017), Business Environment, McGraw Hill Education
2. Dhingra, I.C. (8th Ed. 2016), Indian Economy, Sultan Chand & Sons
3. Chaturvedi D.D. , 2016, Business Environment, MKM Publishers,

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REFERENCE BOOKS:

1. Gupta C.B. (1st Ed., 2014), Business Environment, Sultan Chand

2. Ashwathappa , K. (1st Ed. 2012), Essentials of Business Environment,
Himalaya Publishing House

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