Chapter 2 The Economic Environment of Business
The Economic Environment
In broad terms, the economic environment refers to the conditions of the
economic system in which an organization operations.
Factors of Production – the base businesses make economic choices
Natural Resources - land and raw materials
Labour - workers
Capital - buildings, machinery, tools and equipment
Information resources - knowledge workers with specialized
education, skills and experience
Entrepreneurship - individuals who starts up businesses
An economic system based on competition in the marketplace and private
ownership of the factors of production (resources).
Also known as market economy / private enterprise system
Freedom of choice
An economic system established by government ownership of virtually all
resources and economic decision making by central government planning.
Also known as command economy
An economic system in which the basic industries are owned either by the
government itself or by the private sector under strong government control.
Economies that combine features of other economic systems.
For example, an economy where the government owns certain industries
but others are owned by the private sector.
The study of how a society uses scarce resources to produce and distribute
goods and services.
The sub-area of economics that focuses on individual parts of the
economy such as households or companies.
The Laws of Supply and Demand
The result of the decisions from buyers on whether or not to purchase a good or service.
The result of the decisions of sellers whether to produce and
offer a good or service for sale.
The Law of Supply and Demand
More of a good will be demanded (by society) as the price
drops, and more of a good will be supplied (by producers) as
the price rises.
The quantity of a good or service demanded equals the
The sub-area of economics that focuses on the economy as a whole
by looking at data for large groups of people, companies, or products.
An increase in a nation’s output of goods & services.
The Business Cycles
Upward and downward changes in the level of economic
A decline in GDP that lasts for at least two
Gross Domestic Product (GDP)
The total market value of all final goods and
services produced within a nation’s borders
Gross National Product (GNP)