ECONOMIC

ENVIRONMENT

© 2024 Dr C. Maambo
TABLE OF CONTENTS
01 02 03

ECONOMIC BUSINESS ECONOMIC

ENVIRONMENT CYCLES POLICIES

04 05

ECONOMIC MARKET
SYSTEMS STRUCTURES
 01

ECONOMIC
ENVIRONMENT
ECONOMIC ENVIRONMENT

• Refers to all economic factors, which have a bearing on the functioning of a

business.

• Government exercises a significant degree of influence over the flow of income and

hence over the level and pattern of output by the public and private sectors.

• Other key influences include a country’s financial institutions and the international

economic organizations and groupings to which it belongs or subscribes.

ECONOMIC ENVIRONMENT:
IMPORTANCE
• Better investment choices

• Better competitive strategies

• Forecasting of marketing trends

• Adjusting economic analysis and interpretation

• Help managers predict events that might affect company’s future performance.
ECONOMIC FACTORS

• Interest rates: The central bank of a country sets the interest rate. An increase in the

interest rate can cause slow economic growth and may also cause stock prices to

drop.

• Exchange rates: The value of a country's currency in terms of another country's

currency. A change in exchange rates affects the price of imported and domestic

goods that rely on imported materials or parts. Understanding exchange rates helps

the company determine whether its business is profitable or not.

ECONOMIC FACTORS cont…

• Tax rates: Refers to the amount companies and individuals pay to the government

after receiving their income. Higher tax rates can cause companies to have less

money to invest and expand their business. Lower tax rates can cause an increase in

economic growth because businesses have more money to invest.

• Inflation: Refers to a broad rise in the prices of goods and services across the

economy over time, eroding purchasing power for both consumers and businesses.
ECONOMIC FACTORS cont…

• Unemployment: Occurs when individuals actively seeking employment cannot find

work. It also affects families' disposable income, reduces consumer purchasing

power, and influences an economy's output.

• Wages: An increase in employee wages can improve individuals' purchasing power

and increase consumer spending. When this occurs, customer demand can exceed

supply, causing manufacturers to increase the price of goods and services.

 02

BUSINESS
CYCLES
PROSPERITY

• The economy experiences relatively rapid growth

• Interest rates tend to be low

• Production increases

• Employment and wages, corporate profits and output, aggregate demand, and the

supply of goods and services, tend to show sustained uptrends

• The flow of money through the economy remains healthy

• There is increase in the money supply

RECESSION

• Unemployment rises during recession

• Total buying power declines-many consumers become more price and value

conscious

• People ordinarily reduce their consumption of the more expensive convenience

foods and save their money (e.g. grow own food, discount purchasing)

• Organizations consider some revision to their marketing activities

• Promotional efforts emphasize value and utility

DEPRESSION

• Extremely high unemployment

• Wages are very low

• total disposable income is at a minimum

• consumer spending is lowest

• Consumers lack confidence in the economy.

• Governments use both monetary and fiscal policies in an attempt to offset the effects

of recession, depression and inflation

RECOVERY

• High unemployment rate begins to decline

• Total disposable income increases

• Consumers ability to buy increases, but their willingness to buy is more cautious

• As the recovery strengthens consumers start spending more

• Organizations should maintain a high flexibility in their strategies in order to be able

to make the needed adjustments as the economy stabilises.

 03

ECONOMIC
POLICIES
FISCAL POLICY

• The use of government spending and taxation to influence the economy.

• Governments influence the economy by changing the level and types of taxes, the

extent and composition of spending, and the degree and form of borrowing.

• Governments can reduce spending and increase taxes as a way to help reduce

inflation.
FISCAL POLICY TOOLS

• Infrastructure spending: When government supports a modern infrastructure,

including infrastructure for transportation and communications, the private sector is

given the resources it needs to grow and succeed in the long-run.

• Education spending: Human capital is perhaps the most important resource a

nation requires for long-run economic growth. Public, government funded schools

and programs to improve skills in the area of labor can contribute to long-run

growth.
FISCAL POLICY TOOLS cont…

• Research and development: Government-funded research and development can

lead to scientific, technological, and medical breakthroughs that may spur new

industries and promote growth across the private sector.

• Incentives for private investment: Creating a tax policy that rewards innovation

and entrepreneurship in an economy will encourage private businesses to invest and

thereby help the economy grow.

MONETARY POLICY

• Refers to central bank activities that are directed toward influencing the quantity of

money and credit in an economy.

• They are the monopoly supplier of their currency, the lender of last resort to the

banking sector, the government’s bank and bank of the banks, and they supervise

banks.

• The overarching objective of central banks is price stability.

MONETARY POLICY TOOLS

• Open Market Operations: The central bank buys bonds from investors or sells

additional bonds to investors to change the number of outstanding government

securities and money available to the economy as a whole.

• Interest rates: The central bank may change the interest rates or the required

collateral that it demands. Bank loans depend on this rate. The interest rate the

Central Bank charges commercial banks and other financial institutions for short-

term loans is known as the discount rate.

MONETARY POLICY TOOLS
cont…
• Reserve requirements: The funds that banks must retain as a proportion of the

deposits made by their customers to ensure that they can meet their liabilities.

• Banks loan funds to customers based on a fraction of the cash they have on hand.

The government requires them to keep a certain amount of deposits on hand to cover

possible withdrawals. This amount is called the reserve requirement, and it is the

percentage that banks must keep in reserve and are not allowed to lend.
MONETARY POLICY TOOLS
cont…
• Influencing Market Perceptions: This tool rests on the concept of influencing

investors' perceptions and involves any sort of public announcement from the

Central Bank regarding the economy.

 04

ECONOMIC
SYSTEMS
ECONOMIC SYSTEMS

• An economic system is the way a society produces, distributes, and consumes goods

and services.

• There are many types of economies around the world.

• Each has its own distinguishing characteristics.

• Each economy functions based on a unique set of conditions and assumptions.

ECONOMIC SYSTEMS cont…

• Society answers three (3) critical questions to determine their economic system:

1. What to produce – what goods and services should be produced?

2. How to produce – what resources will be used in the production of goods

and services?

3. For whom to produce for – who will benefit from the goods and services

produced?
ECONOMIC SYSTEMS cont…

• Economic systems are grouped into:

• Traditional systems focus on the basics of goods, services, and work, and

they are influenced by traditions and beliefs.

• A centralized authority influences command systems

• A market system is under the control of forces of demand and supply.

• Mixed economies are a combination of command and market systems.

TRADITIONAL ECONOMIC
SYSTEM
• Based on goods, services, and work, all of which follow certain established trends.

• It relies a lot on people, with little division of labor or specialization. In essence.

• It is very basic and the most ancient of the types.

• Lacks the potential to generate surplus.

• Due to its primitive nature, it is highly sustainable.

• Due to its small output, there is little wastage.

TRADITIONAL ECONOMIC
SYSTEM cont…
• Who decides what to produce? people follow established trends

• How to produce? according to established trends

• For whom are the goods and services produced for? people in the community

who need them

COMMAND ECONOMIC SYSTEM

• Also known as a planned system.

• There is a dominant centralized authority, the government, that controls a significant

portion of the economic structure.

• The people regulate other less important sectors of the economy, such as agriculture.

• The government comes in and exercises control over the resources.

• They are rigid compared to other systems.

• They react slowly to change because power is centralized.

COMMAND ECONOMIC SYSTEM
cont…
• Who decides what to produce? Government makes all economic decisions

• How to produce? Government decides how to produce the goods and services.

• For whom are the goods and services produced for? Whomever the government

decides to give them to.

MARKET ECONOMIC SYSTEM

• Also know as capitalist economy with very little government interference.

• The government exercises little control over resources, regulation comes from the

people and the relationship between supply and demand.

• A pure market system does not really exist as all systems are subject to some form

of interference from a central authority e.g., enactment of laws by the government.

• It allows private entities to amass a lot of economic power and those who succeed

economically control most of the resources.

MARKET ECONOMIC SYSTEM
cont…
• Who decides what to produce? Businesses base decisions on supply and demand

• How to produce? Businesses decide how to produce the goods and services

• For whom are the goods and services produced for? Consumers
MIXED ECONOMIC SYSTEM

• Also known as dual systems.

• They combine the characteristics of the market and command economic systems.

• They face the challenge of finding the right balance between free markets and

government control because governments tend to exert much more control than is

necessary.
MIXED ECONOMIC SYSTEM
cont…
• Who decides what to produce? Businesses

• How to produce? Businesses but government regulates certain industries

• For whom are the goods and services produced for? Consumers
 05

MARKET
STRUCTURES
MARKET STRUCTURES

• Refers to how different industries are classified and differentiated based on their

degree and nature of competition for goods and services.

• Describes how firms are differentiated and categorized by the types of products they

sell and how those items influence their operations.

• A market structure helps us to understand what differentiates markets from one

another.

• Understanding market structures aids the analysis of issues such as a firm’s pricing

model and its potential to increase profitability.

MARKET STRUCTURE
EXAMPLES
• Perfect competition: Agricultural markets, Bureau De Changes,

• Monopolistic competition: Restaurants, hair salons, boutiques

• Oligopoly: Telecommunications Industry, Airline Industry, Cold Drinks Industry

• Monopoly: Public Utility Companies

PERFECT COMPETITION
• Market structure in which there are many buyers and sellers.

• All the sellers of the market are small sellers in competition with each other.

• If any firm can earn an economic profit, other firms will immediately enter the

market, driving economic profit to zero.

• Each firm is a price taker, meaning that it has no control over the price.

• The products on the market are homogeneous (completely identical).

• There is no concept of consumer preference.

• All consumers and producers are assumed to have perfect knowledge of price,

quality and production methods of products.

ADVANTAGES

• Easy entry

• Easy exit

• Lower prices for consumers

• More options for consumers

• Advertisement is not required

• Knowledge of goods and products is dispersed among all buyers and sellers
DISADVANTAGES

• Shrinking business market share

• Compromised profit margins

• Lack of innovation

• No price stability

• Wasteful competition

• Inability for firms to exploit economies of scale

MONOPOLISTIC COMPETITION

• Characterized by many buyers as well as sellers.

• Though products are homogenous, sellers sell slightly differentiated products

making them price setters to an extent.

• Consumers have the preference of choosing one product over another.

• Consumers are willing to pay a bit more for products and services with unique

features.

• Sellers use marketing to increase customer preference and to grow brand loyalty.
ADVANTAGES

• Greater product variety

• Easy entry into market

• Easy exit from market

• Improved customer service

• Encourages innovation in branding

• Leads to product differentiation resulting in choice

DISADVANTAGES

• Results in higher prices

• The firm is not efficient

• Firms cannot achieve economies of scale

• Profits are confined to the normal minimum

• Value of product or service may not be at par with the price

• Firms cannot achieve profits needed for investment and research

OLIGOPOLY

• Consists of a small number of large companies that sell differentiated or identical

products.

• Their competitive strategies are dependent on each other.

• Oligopolies are price setters rather than price takers.

• The companies within an oligopoly collaborate because they recognize that working

together is more beneficial than competing against each other.

• They may create agreements to share the market, working like monopolies and

leading to supernormal profits.

OLIGOPOLY cont…

• 3 -5 dominant firms is the norm

• Oligopolistic firms that collude in formal price fixing arrangements are said to be

part of a cartel.

• A cartel is when a few firms come together and act like a monopoly. Instead of

competing against each other they collude (work together). This is illegal, but it is

often difficult to prove.

• Collusion requires an agreement among firms to restrict output and achieve the

monopoly price, encouraging anti competitive behavior in the market.

CONDITIONS THAT FAVOR
COLLUSION
• There are only a few firms who know each other well.

• Firms are willing to share reliable information on general and production costs.

• They produce similar products using closely related processes.

• There is a dominant firm in the market.

• Barriers to entry are high.

• No government measures exist to prevent collusion.

• The promise of bigger profits provide an incentive for oligopolists to collude.

ADVANTAGES

• High potential to receive big profits

• A limited number of companies makes it easier for customers to compare and

choose products

• Better quality of products and services since brands need to survive in the market

• more competitive prices

• Better customer support

• Price stability within the market

DISADVANTAGES

• High barriers to entry for new participants

• Anti-competitive behavior limits competition

• Companies may defect from the collusion agreement

• Illegal price fixing

• Creates appearance of choice without really giving one

• Inefficient allocation of resources

MONOPOLY

• A single company represents the whole industry, with no competitor, it is the sole

seller of products in the entire market.

• A single company sells a product that's unique and unavailable anywhere else,

meaning consumers have to purchase from the company if they want that product.

• It has the power to control the market and set prices for its goods, making it a price

setter.

• Consumers have no alternatives and must pay the price set by the seller.
SOURCES OF MONOPOLIES

1. Government granted exclusive rights: government granting a company exclusive

rights to provide goods or services.

2. Intellectual property ownership: copyrights and patents

3. Control of resources: A company having access to a scarce resource

4. Mergers and Acquisitions: Allow companies to drive down prices to a point where

competitors simply cannot survive

ADVANTAGES

• Enables it to achieve economies of scale

• Employs professional managers who make more efficient use of available resources.

• Can grow a market which did not exist previously

• Can still make substantial profit without operating at high efficiency.

• Allows the monopolist to set the price and make substantial profits.

• Profits made can be channeled towards R&D and investment.

DISADVANTAGES

• Lacks customer focus

• Higher prices

• Less choice for consumers

• No incentive to innovate due to no competition

• No incentive to be efficient

• Provision of low-quality goods to save cost of production

THE END