ECONOMIC ENVIRONMENT

Business fortunes and strategies are influenced by economic characteristics and economic policy dimensions. Business operates within the framework of countrys economic system. The exact nature, organization and operation, production and distribution activities of business depend on it. MEANING: A system designed to utilize her resources for the purpose of satisfying the needs and wants of people. W.W. LOUCKS; An economic system consists of those instructions which a given nation or group of nations has chosen or accepted as means through which their resources are utilized for the satisfaction of human wants.

Structure Nature of economy Stage of development of economy Economic Resources Level of economy Distribution of Income & Assets Global economic linkages Economic Policies/ Reforms etc.

Industry Agriculture Infrastructure Financial & Fiscal Sectors Removal of Regional imbalances Price & Distribution Controls Per Capita Income & National Income Human Resources

It comprises of all Institutions, Organizations and Policy mechanisms by which the people of a country manage and utilize the countrys resources to obtain things they need.
BASIC UNITS OF ECONOMIC SYSTEM: Household Firm Industry Government

BASIC UNITS OF ECONOMIC SYSTEM (contd.) HOUSEHOLD

Simplest yet most significant. Limited means but multiple needs. Problem of allocation of scarce resources. A household decides what part of income to consume and what to save.

FIRM
Unit of Ownership, Management and Control. A business unit owns and controls one or more factory, branch/office and is engaged in production and/or distribution of some product/services. Household represents demand side, whereas Firm represents Supply side. Person who launches a firm is called Entrepreneur. Entrepreneur takes decisions regarding size, location of plant/office- nature & quality of product, factors & means of production, fixation of price, sales promotion, distribution channel, source of finance etc.

BASIC UNITS OF ECONOMIC SYSTEM (contd.)

INDUSTRY
Meaning: All firms producing same or similar products. According to P.S. Florence; An industry is a group of firms tending to specialize in the same transactions or series of transactions. Single unit of production, whereas Industry comprises of all the firms producing the same type of product. e.g; Mercedes Benz is a firm, while all the firms producing cars constitutes Car industry.

GOVERNMENT
All public Agencies, State bodies and other units which govern the country.

GOVERNMENT
CENTRAL GOVERNMENT STATE GOVERNMENT

BASIC UNITS OF ECONOMIC SYSTEM (contd.) GOVERNMENT (CONTD.)

Maintenance of Law & Order Provides public Services (e.g Education, Health, Water, Electricity, Telephone, Public transport etc.) Several government/ public enterprises: e.g: Indian Oil Corporation, State Bank of India, Steel Authority of India (SAIL)

CENTRAL GOVERNMENT

STATE GOVERNMENT

Characteristics of Economic System

CHARACTERISTICS OF AN ECONOMIC SYSTEM

Dynamic Scarcity of Resources

National Entity

Interdependence

Need Satisfaction

Institutional

FUNCTIONS OF ECONOMIC SYSTEM

What to produce Economic Growth

FUNCTIONS
How to produce For whom to produce Choice b/w Current needs & Future needs

TYPES OF ECONOMIC SYSTEM

MIXED ECONOMY CAPITALISM

TYPES OF ECONOMIC SYSTEM

SOCIALISM

MIXED ECONOMY
Where both Public & Private sectors exist. Some resources and enterprises controlled by the State, other economic activities are left to the private initiative. Private sector allowed to work for private motive but under certain regulations decided by the government. Extent of State participation & regulation may vary from time to time.

CAPITALISM
CAPITALISTIC ECONOMIC SYSTEM

ECONOMIC SYSTEM

FREE MARKET ECONOMY

CAPITALISTIC ECONOMIC SYSTEM

Characterized by Free Enterprise & Profit motive.
Decisions of Production Decisions of Distribution PRICE MECHANISM

Decisions of Exchange

Decisions of Consumption

CAPITALISTIC ECONOMIC SYSTEM (contd.)

Self-Interest guides all the economic activities. Factors of production (Land, Labor, Capital etc) are privately owned and production takes place at the initiative of private enterprise. People having freedom of choice concerning occupation, savings and investment. Found in USA, U.K, Japan, Canada etc. Though a completely free market economy is rare.

SOCIALISM
Also called Communist Economic System/ Free Enterprise economy or Laissez Faire. State owns and controls all means of production. Decisions pertaining to production, distribution. State focuses on maintenance of law and order in the country, defending country from foreign war and provides fair justice to people, leaving trade and industry to take their own course. BASIC PRODUCTION UNITS: Households and Firms.

Economic System of Market Economy

Government regulation of economic activities depends to a large extent on nature of economic system. More progress if economy is Laissez Faire