The economic environment consists of external factors in a business’ market and the broader economy that can influence a business. You can divide the economic environment into the microeconomic environment, which affects business decision-making such as individual actions of firms and consumers, and the macroeconomic environment, which affects an entire economy and all of its participants. Many economic factors act as external constraints on your business, which means that you have little, if any, control over them. Let’s take a look at both of these broad factors in more detail Macroeconomic influences are broad economic factors that either directly or indirectly affect the entire economy and all of its participants, including your business. These factors include such things as: Interest rates
Currency exchange rates
Consumer discretionary income
Consumer confidence levels
Microeconomic factors influence how your business will make decisions. Unlike macroeconomic factors, these factors are far less broad in scope and do not necessarily affect the entire economy as a whole. Microeconomic factors influencing a business include: Market size
Distribution chain – such as retailer stores
Why Is It Important?
The economic environment of business will play a pivotal role in determining the success or failure of a business. Let’s first consider some macroeconomic factors. If interest rates are too high, the cost of borrowing may not permit a business to expand. On the other hand, if unemployment rate is high, businesses can obtain labor at cheaper costs. However, if unemployment is too high, this may result in a recession and less discretionary consumer spending resulting in insufficient sales to keep the business going. Tax rates will take a chunk of your income and currency exchange rates can either help or hurt the exporting of your products to specific foreign markets. Now, let’s turn our attention to microeconomic factors for a bit. Market size may determine the viability of entering into a new market. If a market is too small, there may not be sufficient demand and profit potential.
This leads us to the concept of demand and supply. If your product is in high demand but there is a low supply of it, you are going to make a tidy profit, but if your product is in low demand and the market is flooded with similar products, you may be facing bankruptcy. The quality and quantity of your competition will affect how well you do in winning customers in the marketplace. Suppliers are the arteries pumping vital supplies and resources to you for production. If you have problems with suppliers, it can clog up those arteries and cause serious problems. Likewise, the type of relationship you have with your distributors, such as retail stores, may influence how quickly your products leave their shelves.
The environment in which a business operates is very complex and has a great deal of influence on how a business performs and whether it will succeed. Macroeconomic factors influence not only a business but also all participants in an economy and include such things as interest rates, inflation, unemployment rates, taxes, discretionary spending, periods of growth and recession. Microeconomic factors also influence the success or failure of a business and include such things as market size, demand, supply, competitors, suppliers, and distributors.