Business Environment (Mkt-510)
Assignment Number-1
Economic System and Business Environment
Prepared for Prepared by
Professor Dr. Serajul Haque Tasfia Mahmud
Dept of Faculty of Business Studies ID: 41633070
University of Dhaka Course: Mkt 510
Date: 29-06-2016
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Economic System and Business Environment
Introduction:
Business Environment can be defined as the way that a countrys resources are owned and the way that
country takes decisions as what to produce, how much to produce and how to distribute what has been
produced determine the type of economic system that particular countrys practises. It is an organized
way in which a state or nation allocates its resources and apportions goods and services in the national
community. Economy is the system of trade and industry by which the wealth of a country is made
and used. An economy is a system that attempts to solve the basic economic problems. The function of
the economy is to allocate scarce resources among unlimited wants. Economics is the study or social
science of human behaviour in relation to how scarce resources are allocated and how choices are
made between alternative uses Economics studies mankinds activities, which are production,
distribution (or exchange) and consumption of goods and services that are capable of satisfying human
wants and desires. Branches of economics are: 1. Microeconomics this is the branch of economics
that is concerned with the behaviour of individual entities such as market, firms and households e.g.
how individual prices are set, how prices of land, labour, capital are set, inquires into the strength and
weakness of the market mechanism. 2. Macroeconomics is the branch of economics that is
concerned with the overall performance of the economy e.g. studies the effect of unemployment on the
economic, growth, inflation etc. 3. Econometrics Application of mathematics to economic theories.
The branch of economics that uses the methods of statistics to measure and estimate quantitative
economic relationships. External environment is the forces and institutions outside of the organization
that can potentially affect the performance of the organization. Internal environment is the factors in
the immediate environment of the company that affect the performance of the company.
Discussion:
Business environment is a set of factors that influence the activities of organization directly and
indirectly. Economic system is a set of institutions for allocating resources and making choices to
satisfy human wants. Resource allocation is the assignment of resources to specific tasks to determine
the basic economic choices, which are what to produce, how to produce, and for whom to produce for.
Resources may be allocated by markets, by planning or mix systems in a market economy, goods and
resources are allocated according to the decisions of individual producers and consumers. In a
Planning economy, goods and resources are allocated according to the central directions of a
government agency.
Scarcity: Society's material wants are unlimited and insatiable. However, there is a limited amount of
economic resources. This creates scarcity, where the demand for goods and services exceeds the
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supply. Economists view things through a special economic perspective, and as part of this, they view
the world through the lens of scarcity.
Results of Scarcity: As a result of scarcity, we are forced to make many important decisions on a
regular basis. Some of the questions we are forced to consider are explained in the diagram:
What to produce?
How to produce?
For whom to produce?
One of the most important problems that scarcity creates is the economizing problem. That is the
problem of having to decide how to make the best use of limited resources to satisfy virtually
unlimited wants. Scarcity also forced us to sacrifice certain goods and services in exchange for other
goods and services. This brings us to the topic of opportunity costs.
Opportunity costs are when in order to obtain more of one thing; society must give up the chance to
get the next best thing. The sacrifice is the opportunity cost of the choice. For there to be scarcity
things must be limited and wanted. there is plenty of erskinite and it is not scarce because nobody
wants it.
Goods and services are scarce. These are the things that we want. Goods are tangible things that satisfy
our wants (like boats, computers, cars, etc.), services are intangible things that satisfy our wants. This
brings us to another important principle in economics. This then brings use to a third important idea:
Because of scarcity we must make choices. Some economists call this the "economizing problem". We
can't have everything that we want so we have to choose.
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Our goal is to make choices that reduce scarcity as much as we can. Because of unlimited wants we
can never eliminate scarcity, but it can be reduced by the right choices. Another way to say this is that
we want to get the maximum satisfaction possible out of our limited resources. We don't want to make
just any choice; we want to make the best choice.
Economic Systems:
Three types of economic systems exist, each with their own drawbacks and benefits; the Market
Economy, the Planned Economy and the Mixed Economy.
An economic system is loosely defined as country's plan for its services, goods produced, and the exact
way in which its economic plan is carried out. In general, there are three major types of economic
systems prevailing around the world.
1. Centrally Planned Economy Also called command economy is one where all economic decisions are
made by the government. The government decides what to produce, how it is to be produced and how
it is to be allocated to consumers. This involves a great deal of planning. Planned economies tend to be
run by governments who, in theory at least, want to see greater economic equality between consumers.
By state planning, goods and services can be produced to satisfy the needs of all the citizens of a
country, not just those who have the money to pay for goods. On the other hand, a planned economy
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aims at using all available resources for developing production instead of allotting the resources for
advertising or marketing.
2. Market Economy also called free-market economy is one where decisions are made through the
market mechanism. The forces of demand and supply, without any government interference, determine
how resources are allocated. What to produce is decided upon by the level of profitability for a
particular product. Buyers cast their spending votes in the market place. How production should be
organized is equally determined by what is most profitable. Firms are encouraged through the market
mechanism to adopt the most efficient methods of production. For whom production should take place,
production is allocated to those who can afford to pay. Consumers with no money cannot afford to by
anything. The absence of central planning is one of the major features of this economic system. Market
decisions are mainly dominated by supply and demand. The role of the government in a market
economy is to simply make sure that the market is stable enough to carry out its economic activities
properly.
3. Mixed Economy It is one where some goods and services are produced in the free-market sector of
the economy, but others are produced by the state i.e. it is mixture of a pure free-enterprise market
economy and a pure command economy. Some resources are allocated via the market mechanism and
some via the state. 4. Traditional or Subsistence Economies It is one where there is little specialization
and little trade. People tend to live in family groups, and these families grow most of their own food,
make their own houses, gather their own fuel and provide their own leisure activities i.e. to a great
extent they are self sufficient. It is a traditional economy because it is the type of economy that has
existed all over the world since man began being economically active. What, how and for whom to
produce are decisions that are answered by looking to the past. If a society has managed to survive for
some time, then what was done in the past must have been successful. No two traditional economies
are the same, so it is impossible to describe typical economic mechanisms by which resources are
allocated.
Flow of Economic System
The activity helps us understand the relationship among consumers and producers. The economic
relationship between households and businesses in often said to create a circular flow of economic
activity. In a market economy, households are the owners of of resources and supply land, labor, and
capital to businesses in exchange for income in the form of wages, rents, interest, and profits.
Households then use their income to purchase finished goods and services supplied by businesses.
Businesses then use the money from sales to pay resource owners for the services businesses receive
by employing the resources. This relationship forms an interdependent economic system.
flow helps to explain and prove the assumption that voluntary trade creates wealth. It also shows how
trade is influenced by the economic system in which people participate
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Flow chart of economy
Implication of economic system
In every nation, no matter what the form of government, what the type of economic system, who
controls the government, or how rich or poor the country is, those three basic economic questions must
be answered. Once a commodity is produced, some mechanism must exist that distributes finished
products to the ultimate consumers of the product. The mechanism of distribution for these
commodities differs by economic system.
Capitalism: Capitalist economic system, individuals own all resources, both human and non-human.
Governments intervene only minimally in the operation of markets, primarily to protect the private-
property rights of individuals. Free markets in which suppliers and demanders can enter and exit the
market at their own discretion are fundamental to the capitalist economic system. The individual
receives compensation for the use of resources by others. This, combined with inherited wealth of the
person, determines an individual's spending power. The accumulated spending power and the
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willingness of individuals to allocate resources to consumption determine demand. The availability
and costs of resources, together with the potential for profits of firms, determine supply. In a market
system the demand of consumers combined with the supply of producers determines what and how
much will be produced. Because of the economic competitiveness of the market system, the lowest-
cost production method will be used. If anything other than the lowest-cost production method was
being used, a competing firm would have an incentive to enter production to earn a greater profit and
could afford to sell at a lower price, thus driving the original firm out of production. Consumers could
then purchase more of the product at a lower price, allowing their limited resources to purchase more.
Production will be allocated to those with available resources and a willingness to purchase the output
of production. These purchases then become information for suppliers in determining what and how
much to produce in the future. Thus, pure capitalism is an economic system based upon private
property and the market in which in principle individuals decide how, what, and for whom to produce.
Socialism: Socialist economic system, individuals own their own human capital and the government
owns most other, non-human resources that are, most of the major factors of production are owned by
the state. Land, factories, and major machinery are publicly owned. A socialist system is a form of
command economy in which prices and production are set by the state. Movement of resources,
including the movement of labour, is strictly controlled. Resources can only move at the direction of
the centralized planning authority. Economic decisions that about what and how much, how and for
who are all made by the state through its central planning agencies. In theory, socialism is an economic
system based upon the individual's good will toward others, rather than a function of his or her own
self-interest. Socialism attempts to influence individuals to take other people's needs into account and
to adjust their own needs in accordance with what's available. In socialist economies, individuals are
urged to consider the well-being of others; if individuals don't behave in a socially desirable manner,
the government will intervene.
Communism: Communist economic system, all resources, both human and non-human, is owned by
the state. The government takes on a central planning role directing both production and consumption
in a socially desirable manner. Central planners forecast a socially beneficial future and determine the
production needed to obtain that outcome. The central planners make all decisions, guided by what
they believe to be good for the country. The central planners also allocate the production to consumers
based on their assessment of the individual's need. Basic human needs and wants would be met
according to the Marxist principle, "From each according to his ability to produce, to each according to
his need." Countries have scarce resources. The economic systems of countries are designed to allocate
those resources, through a production system, to provide output for their citizens. Market economies
leave the answers to these questions to the determination of the forces of supply and demand while
command economies use a central planning agency to direct the activities of the economy. Pure
capitalist economies are market economies in which the role of government is to ensure that the
ownership of the resources used in production are privately held.
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Conclusion
In practice, of course, these problems tend to be solved in a variety of ways, including barter, price
signals and the market, queuing and rationing, government instruction and corruption, and examples of
each of these solutions can be found in most, if not all, societies, at all times. Normally, however, one
or other main approach to resource allocation tends to predominate and this allows analytical
distinctions to be made between different types of economic system. Going through all the analytics,
explanations & comparisons the Business Environment is successfully identified, covering all the areas
of economic systems attempts to allocate and make effective use of resources, economic structures, the
impact of social welfare and industrial policy initiatives on organizational.
References
Paul, Samuel . Managerial Economics: Concepts and Cases, 13 edition. McGraw-Hill
Education(Asia). 2012-2013
Worthington, Ian. The Business environment. Fifth edition, Pearson. 2011-2012
Kew, John. Business Environment: Managing in a Strategic Contex. Seventh edition, Pearson.
2012-2013
