ECONOMIC ENVIRONMENT
Economic environment refers to the sum of all economic factors, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth, etc., which acts as a major determinant of the economic environment within which the business enterprise works. Economic environment has always been regarded as a broader perspective and keeps on changing from time to time on account of changes in lifestyle, government policies and regulations.
COMPONENTS OF ECONOMIC ENVIRONMENT
- ECONOMIC SYSTEM
Different nations have different economic systems (capitalism, socialism, and mixed economy) and the prevailing economic system in a nation affect the marketers to a large extent. Business and economic development are closely related. The prime task of business involves determination of people’s needs and wants for which a business undertakes the task of production and distribution of goods and services using factors of production and this overall process results in economic development.
Impact on Marketing Function
In a capitalistic economy, factors of production are privately owned and governed. Decisions regarding various matters involving production, distribution and even consumption are based on free play of market forces of just demand and supply and government of that country does not interfere in the economic activities of the country. Ex: Japan, America.
Under socialistic economy, all the economic activities of the country are controlled and regulated by the government in the interest of the public and does not depend on private enterprise. Ex: Russia
Mixed economy is a combination of capitalistic and socialistic economy. Both public and private sector play key roles in the development of the country. Ex: India.
- INFLATION RATES AND INTEREST RATES
The rate at which the general level of prices for goods and services rises and the value of money falls. The major cause of inflation is too much money is available to purchase few goods and services. An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. Higher interest rates increase the costs. Since the businesses and customer end up paying more interest back to lenders.
Impact on Marketing Function
High rate of inflation rates results in reduced purchasing power of consumers which leads to lower demand for goods and services. Further, high rate of inflation also makes business uncompetitive in the market leading to lower sales for the business. High interest rates result in the fall of overall demand in the country and thus leads to a troublesome situation for the business to find customers willing to buy its products. On the other hand, lower interest rates result to an increase in demand.
- BUSINESS CYCLES
Business cycle is the periodic but irregular up and down movements in economic activity that an economy experiences over a long period of time and includes economic conditions such as prosperity, recession, depression and recovery.
Impact on Marketing Function
In an economy characterized by recession businesses generally won’t do well due to low aggregate demand in the economy. On the other hand, a boom period will lead to higher business profits and revenue for most of the businesses in the economy.
- ECONOMIC GROWTH RATE
Economic growth rate refers to increased capacity of production of goods and services compared from one period of time to another. It is measured by comparing GNP in a year with the GNP in the previous year or in terms of real GDP. Sustained economic growth results in higher real living standards and rising employment.
Impact on Marketing Functions
Economic growth normally has a positive impact on company profits and business confidence. Growing economies provide the means for people to enjoy better living standards and results in increased purchasing power, which leads to increased consumption and sales. Economic growth is important if businesses are to grow and prosper. The real economic growth of one country relative to another is an important indicator of business opportunity.
- ECONOMIC POLICIES
Economic policy refers to set of activities and response of government to influence its economy. This includes policy for maintaining economic growth, monetary policies, Fiscal policy, Foreign Trade policy, foreign investment policy, and industrial policy. Ex: High level of taxes will lead to low disposable income and contraction of demand in the economy. Business will find it difficult to attract consumers.
Impact on Marketing Function
Economic policies are crafted by the government and these economic policies affect all types of business firms in different ways. Some economic policies are favorable for business units, and some are not. the government may grant incentives, subsidies to business organization or decrease the rates of excise or custom duty or the government may increase the rates of custom duty and excise duty, tax rates for another business. All the business enterprises frame their policies keeping in view the prevailing economic policies.
- SAVINGS, DEBT AND CREDIT AVAILABILITY
Spending and expenditures of customers are influenced by savings, debt they owe and availability of credit. On account of employment opportunities income levels have increased in urban India, further consumption in rural India has also grown faster. This growth in consumption was fueled by a rise in household incomes due to greater non-farm job opportunities and government-initiated employment generation schemes. As a result of these people are spending more on entertainment, shopping. Average urban Indian spends 87.4%more than a villager, survey shows. Therefore, spending pattern and credit availability of customer influences marketing plans.
