Wednesday, February 24, 2010

Elements of economic environment

Elements of economic environment
Economics environment refers all economics surroundings that influence organization activities.It consists of economic parameters.It is concerned with the nature and direction of economy in which the organizations
Important elements of economic development are :

1. Economic systems :Economic system determines the scope of private sec tore ownership of the factors of production and market forces.The model of economic system are:

• A) -Free market economic :This system is based on private ownership of the factors of production. Profit serves as the driver of economic engine.The competitive market mechanism guides business decisions.There is freedom of choice.Individual initiative is encouraged.

• B) -Centrally planned economy :This system is based on police ownership of the factors of production.The economy is centrally planned.Controlled and regulated by the government.There is no consumer sovereignty.Police enterprises play a dominant role.

C) -Mixed economy :This system is a mix of free market and centrally planned economics.Both public and private sectors coexist.The public sector ha ownership and control of basic industries including utilities.The sector owns agriculture and other industries but is regulated by the state.

2. Economic policies :Policies are guidelines for decision making and action.Economic policies of the government significantly influence and guide organizations.

Key economic policies influencing organization are :
A) Monetary policy-It is concerned with money supply,inflation rates,interest rates and credit availability.It influences the level of spending through interest rates.Cheap money reduces cost,dear money increase cost.Interest rates cost of capital.Foreign exchange rates affect imports and exports.

B)Fiscal policy :It is concerned with the use of taxation and government expenditure to regulate economic activity.Tax on income,expenditure and capital influence business decisions.

C)Industrial policy :It is concerned with industrial licencing location,incentives,facilities,foreign investment,technology transfer and nationalization.

3.Economic conditions :They indicate the health of the economy in which the organization operate.The factors affecting economic conditions are :
  • State of economic development :An economy can be least developed developing and developed.Organizational activities are influence by the stage of economic development.
  • Income :The level of employment affect expenditure,saving and investment.They together influence the economic conditions of organization.
  • Employment:The level of employment affects organization.It determines availability and of labour.
  • Business cycle :The stages of business cycle can prosperity,rescission and recovery .They affects the health organization.
  • Influence :It is rise in price level.influences costs,price and profit of organization.
4. Regional economic groups :They promote cooperation and free trade among members by removing tariff and other restrictions.They provide opportunities to member countries and threats to non-member counties.Example are:
  • SA ARC :South Asian Association for Regional Cooperation.
  • ASIAN :Association of South East Asian Nations.
  • EU :European Union.

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