How the Economic and Legal Environment Affects Business

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  • 0:07 The External Environment
  • 0:47 The Econmic Environment
  • 3:44 The Legal Environment
  • 4:47 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Businesses do not operate in a vacuum. They are subject to their external environments. In this lesson, you'll learn about the legal and economic environments of business and how businesses are affected by them.

The External Environment

Meet Emmanuelle. She's a real estate broker that wants to leverage her expertise in real estate and start a real estate investment company. She hopes to acquire some properties for rental income and some for a quick flip and quick profit.

As a real estate broker, she's been around the block more than a few times. She knows that she needs to pay careful attention to the current external business environment, which is a set of external factors that can affect her business and of which she has little, if any, control over. Two important environmental factors are legal and economic.

The Economic Environment

Emmanuelle must consider the current economic environment before she decides to make an investment and risk her money in a new business venture. The economic environment of a business is the external microeconomic and macroeconomic factors that can affect it. Let's take a closer look.

Emmanuelle must determine if the current macroeconomic conditions are conducive for her business to succeed. Macroeconomic factors are large scale economic factors that affect all participants in an economy and include such things as unemployment, inflation, interest rates and tax rates. Since Emmanuelle wants to start a real estate investment company, the current macroeconomic environment is very important.

For example, if the unemployment rate is too high, many people will not be able to afford to purchase homes or even pay rent. If interest rates are high, then it will be much more expensive for Emmanuelle to finance the purchases of her investment properties. An increase in taxes can cut into her profits. In fact, property taxes may make a difference between a profit and a loss on rental property. Of course, if taxes, interest rates and inflation are low, the business environment is safer for a new business.

Emmanuelle must also consider the microeconomic factors, which involve the economic decisions that businesses and individuals make. While macroeconomics looks at the big picture, microeconomics looks at individual situations. If you remember that 'macro' means 'big' and 'micro' means small, you should be able to remember the difference between macroeconomics and microeconomics.

One of the most important microeconomic concepts that Emmanuelle must factor into her business decision is the supply and demand for residential dwellings, such as single and multifamily housing units, potential home owners and potential tenants. For example, if the supply of single family houses exceeds the demand, the prices for the homes should be low or in decline. If the supply of rental units is less than the number of tenants looking to rent, rental rates should be high or increasing.

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