Meaning and Definition of Economic Environment

Environment in general, means the sum total of all physical and social conditions that influence individuals or community. The environment, within which a business is to operate is called the business environment. The environment may be both economic and non-economic. The business management must make full and deep study of the overall total environment which is affected by so may heterogeneous factors or variables. so far as the economic environment is concerned., it is affected by the total or over all economic system of the economy, i.e., whether capitalist or social system. Country's system of economic planning and control, such as Government's fiscal or monetary systems, commercial and industrial policies of the Government, commercial and industrial laws, of the country are all important elements of the economic environment. Every such element affects the functioning of the business.

so the whole economic system prevailing in the country acts as a major determinant of the economic environment. the economic system furthers, comprises the various sub-systems within which the business enterprise work. TheĀ  economic system of a country may be capitalist, socialist or a mixed one. In a capitalist country a system of capital or free enterprise gets developed and the decisions regarding capital or free enterprise gets developed and the decisions regarding various matters involving production, distribution and even consumption are based on the free play of market forces of just demand and supply without much inference by the government. Even the various functions of business management are all governed by free play of market forces.

However, in a socialist economy, almost all business decisions are taken by the Government. So business system does not depend on private enterprise. Business is largely done by the public sector. Even the functional areas of business management are largely looked after by the government officials. But in modern times, even such government controlled economic systems have given way to free forces of market in countries like China and Russia, what to say of our country. So free trade and liberalization are now almost world-wide phenomenon. Mixed economy is a combination of free capitalist and socialist or communist economy. In it the private enterprises co-exist with the public enterprises. Thus the features of both capitalism as well as socialism exist. Te social responsibilities of a business even under private sector assume more importance than the other objectives of business.