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What Is the Economic Environment in Business? - Definition, Importance & Factors

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  • 0:01 Economic Environment Defined
  • 1:27 Why Is the Economic…
  • 3:00 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
The economic environment in which a business operates has a great influence upon it. In this lesson, you'll learn about the economic environment in business, including its various factors and importance. A short quiz follows.

Economic Environment Defined

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
  • Taxes
  • Inflation
  • Currency exchange rates
  • Consumer discretionary income
  • Savings rates
  • Consumer confidence levels
  • Unemployment rate
  • Recession
  • Depression

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
  • Demand
  • Supply
  • Competitors
  • Suppliers
  • Distribution chain, such as retail stores

Why Is the Economic Environment Important?

The economic environment of a 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 the 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.

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