UNIT 2: ECONOMIC ENVIRONMENT-I Structure 2.0 Learning Objective 2.1 Introduction 2.2 Economic Environment 2.3 Economic System 2.4 Types of Economic System 2.4.1 Capitalist Economy 2.4.2 Socialist Economy 2.4.3 Mixed Economy 2.5 Summary 2.6 Keywords 2.7 Learning Activity 2.8 Unit End Questions 2.9 Suggested Readings 2.0 LEARNING OBJECTIVES After studying this Unit, you will be able to Explain the significance of Economy and Economic System Highlight the features of Capitalist, Socialist and Mixed Economy Analyze the basis of classification of economic system Co-relate the economic development with the type of economic system adopted by different countries 2.1 INTRODUCTION The function of economy is dependent on the correlation and existence of socio-cultural and political factors. All business activities are conducted according to the prevailing economic system of the country. Economic activity is part of our daily life like a simple activity of buying food pack from the grocery shop that involves transaction of money to exporting a big consignment of medicines to foreign land that involves lots of formalities and procedure. 27 CU IDOL SELF LEARNING MATERIAL (SLM) Economic activities differ from region to region within the country and from country to country. Presence of natural resources, skilled and unskilled labour and gove government policy all are the deciding factor for different types of business undertakings. India is an agricultural land, because since long time Indian were primarily engaged in agricultural activities for their livelihood and then slowly different allied in industries dustries came into existence like poultry, pesticide and fertilizers, etc. The development and growth of different industries is possible when economic system is inclined for the same. Economic system organizes all essential economic institutions, economic resources and economic initiatives together for production of goods and services that will satisfy the needs and wants of the people of country and sets interchange of money for availing different form of utility. 2.2 ECONOMIC ENVIRON ENVIRONMENT Economic Environment ment is characterized by the nature of economy that effect the different functions, operation efficiency and competitive environment of the business. There are different elements of Economic Environment, viz., economic system of the country, the objectives objective of economic planning, the objectives of economic planning, available like man, money, etc. which are necessary for business to operate. The functions, operations and strategies confront various challenges because of the economic environment and also thee market conditions like market size and structure, customer’s purchasing power, availability of the credit, etc. are influenced to an extent by economic environment. Factors affecting ffecting the Economic Environment Environment: Different factors of Economic Environment wh which ich is very important for any business to succeed and survive effectively are as follows: 1] Economic Systems: The activities concerned with the production of goods and services and distribution of the same among masses in the society or specific geographi geographical cal area are termed as economic activity as there is an involvement of resources, transactions and exchange of money for the same. Decision Making structure like Government and Institutions that influence the economic activity of the government makes up th the Economic System. Economic System Mixed CU IDOL SELF LEARNING MATERIAL (SLM) Economy Capitalist Socialist 28 Fig 2.1: Types of Economic System The most three popular economic system are as follows: Capitalist Economy: The main characteristics of capitalist economy is privatization and free market.Private firms control the factors of production, prices, demand and supply in the market. Wealth accumulation is an important economic objective. Government acts a supporting system to the market force that regulates social justice. Socialist Economy: All the elements of economic activity and production is under the complete control of government. Nature of Supply,quantity of distribution and prices are all under the control of state. All the functions of business are decided by central planning. Important industries will be under the complete control of state and private enterprises exists but all the production decision will be under the control of state. Example France and Sweden. Mixed Economy: The advantageous features of both capitalist and socialist economy is together applied in this system. Government undertakes economic planning and influences various market force through Acts and its provisions, while private enterprises undertake economic activity freely but maintain social objective as an important aspect with profit motive. 2] Economic Conditions: Factors like GDP of the economy, per capita income, availability of capital, utilization of resources, state of the capital market, interest rates, unemployment levels, etc. are the subsets of economic condition. Firms are always interested to monitor the GDP and unemployment rate. Economic categories can be divided into leading, coincident or lagging. Business expects more investment as economic conditions are optimistic or else negative. 3] Economic Policies: Government is the main administrator of the economy. With the aid of economic planning, the government apply different economic policies and control various factors to ensure stability of the Economic Environment. Industrial Policy: The rules, regulations, Acts, Initiatives, industrial programs, Special Economic Zones are the different ways to encourage and administer the industries of the country. This ensures the proper direction to the growth of Industrial sector. 29 CU IDOL SELF LEARNING MATERIAL (SLM) Fiscal Policy: Government expenditure and spending are based on the fiscal policy instruments. Fiscal policy includes the taxation slabs, division of public expenditure by government and public debt. Fiscal policy influences strategic decisions of business as well. Monetary Policy: Monetary Policy is the main identity of Central Bank of the country that ensures proper supply of money in the market. Monetary policy provides framework for the savings and investments. Also, monitors the credit supply in the economy. Foreign Investment Policy: Foreign investments provides ease in technology transfer and presents many opportunities for domestic business, educational institutions and employment opportunities. Import Export Policy: Import and export is the main source of foreign exchange and it is very important for country to stand strong in the global market. Also, Balance of Payment helps to build country’s brand image in International Market. Import and Export improves the industrial structure, economic development and lifestyle. 2.3 ECONOMIC SYSTEM Important features of Economy are as follows: Economy is man-made. Economic institutions are designed, terminated, modified and restructured. After Independence, Zamindari system got eliminated from our land and now we have more comprehensive laws and acts related to land matters. USSR has adopted communism in 1917 over capitalism and then finally adopted mixed structure in 1989. The structure and pattern of economic activities keeps on changing. Manufacturing and utilization are the main activities of an economy and money acts as channel for interchange. Manufacturer and customer adopt dual role i.e., they are same individual. As manufacturer they manufacture goods and services and consumes the same as well. Privatization is gaining more popularity now-a -days as an intervention of government is not much required. 2.4 TYPES OF ECONOMIES There are different types of Economic System which are adopted across the World. This classification is based on inclination of power and authority, administration of an economic activity, emphasis placed on different objectives and means to achieve all. 30 CU IDOL SELF LEARNING MATERIAL (SLM) The dominance on the means of production or resources or ownership either to Government or to private business owners or joint form between Government and Private Player forms the basis is of classification of the economic system. Economies are described on the basis of autonomy, profit motives and social welfare. Economic system is classified as follows: Economic System Capitalist Socialist Mixed Economy Fig 2.2 2.2: Types of Economic System 2.4.1 Capitalist Economy: Adam Smith,, the father of modern economy has given the supporting theory and framework for Capitalist Economic System. The main feature of this system are principle of laissez faire is followed, autonomy is in the hands of private entrepreneurs or business owners, m market forces are the deciding factor justifies the uncontrollable nature of the economic system will help the economy to utilize its full capacity for growth and there will be sky high development. So, as per this system, government has no role or no invol involvement vement in economic activities. Highlights of Capitalist Economy are as follows: (i) Privately owned property: Right to own, buy, sell, transfer any property which an individual has earn or inherited. The property can be used for production of goods and services ervices and thus profit earned will be enjoyed by the person and his family. There are no legal bindings involved in it. It also has been proved that when Individual has complete charge of its property then they put more hard work and dedication to make it fruitful and gain good returns for the same. Alternatively, if property is owned by the state then the efficiency of individual contribution gets reduced and benefits are not completely enjoyed. The popularity of capitalism is because of this important feature where individual enjoys the property and after death that is passed to legal heirs. 31 CU IDOL SELF LEARNING MATERIAL (SLM) (ii) Liberty of enterprise: A very important aspect of Capitalist is Liberty. Entrepreneurs, group of owners are free to choose any business or industry and decide upon various factors of production. They can select any market for selling their goods and services. Owner and group of investors bear all the risk of uncertainty, liability for profit and loss. Employees and workers are free to select any industry or occupation for their livelihood. There are no formalities involved for business and employees for entry and exit from specific industry. Liberty is allowed till no harm is made to any society, group or state. Such economic system has very distinct industries from consumer and capital goods, services of different types, untapped and unfamiliar sectors, Technology oriented business, etc. Such factors are responsible for accelerated economic development and wide variety of industries. (iii) Consumer’s Predominance: Consumer wish is the command for business. Consumer dominates the quality and quantity of goods produced. Consumer enjoys freedom of choice, saving or spending money. Even the prices of goods and services are dependent on the interactivity of consumer. Market system also influence the choice and selection of consumer, but consumer is the decision maker. Consumer predominance is based on following factors like level of earning, availability of choices for goods and services, limits placed on consumption but still consumer enjoys his dominance. (iv) Profit Motive: Profit is the driving force in any economic system. The emergence of the economic activity is concentrated on earning profits. That will validate the interest and risk taken up by the entrepreneurs or investors. The profit motive enhances the passion of business, efforts are more dedicated and production system is more efficient and technology is incorporated at various stages to ensure competitiveness in the market. Hunger and ambition to grow provides great platform for wide variety of product lines and spur in quality. To gain and enjoy more profit drives the economic development of the country. (v) Competition: Malpractices, unfair trade norms, unethical procedure can easily get submerged in Capitalist Industry structure. There is no government interference, no guideline to follow, no restriction to adhere to, no accountability for the society as it is opposite of what Capitalist structure is all about. It can also lead to emergence of monopoly and consolidation of power in hands of few. Still competition exist between large organizations. Competition is an important characteristic of the Capitalist, so government impose certain restriction to protect market from monopolies. For example, in US- The well-known capitalist economy of the World has file case against Microsoft to prevent market from its monopoly in software industry. (vi) Price Mechanism: The demand and supply in the market determines the price of goods and services. If demand is more than supply, then price will increase and vice a versa. Enterprises that adapt to this system of market they make up normal profit while who do not 32 CU IDOL SELF LEARNING MATERIAL (SLM) adjust are wiped off the market. Market forces also decides the specific industry to develop more as compare to others, as small players will enter in sector that gives more profit. (vii) Limited government interference: Government is assumed to collect taxes and not to interfere in the working of industries and markets. The Government should extend support to the enterprises. But now this view point is getting faded as there is increase in awareness that industrial growth should aid in society welfare. Now-a-days Government plays a role of savior that helps economic system in times of Depression, Recession, wars, etc. Countries like USA, UK, France, Netherland, Spain, Portugal, Australia etc. are known as capitalistic countries where government plays important contribution in economic development. 4.3.2 SOCIALIST ECONOMY: In the socialist or centrally planned economies, all the productive resources are owned and controlled by the government in the overall interest of the society. A central planning authority takes the decisions. The socialist economy has the following main features. (i) Collective Ownership of means of Production:All the factors of production are under the control of Government and it is meant to serve the objective of people welfare. The institution of private property is abolished and no individual is allowed to own any production unit and accumulate wealth and transfer it to their heirs. People have all the right to maintain consumer durable goods for their personal consumption. (ii) Social Welfare Objective:The main purpose of Government practicing such control over industry is to achieve social welfare and ensure equitable distribution of the profit earned by the economic activities. Demand and supply equation is not of much use in such approach. (iii) Central Planning: Resource allocation is based on the national priorities and proximity of resources. A central Planning authority is appointed to administer and implement the Economic planning. Government takes all economic decisions regarding production, consumption and investment keeping in mind the present and future needs. The planning authorities fix targets for various sectors and ensure efficient utilization of resources. (iv) Reduction in Inequalities:One of the important objectives of Socialist economy is to minimize the inequalities by eliminating the control of economic activities by group of 33 CU IDOL SELF LEARNING MATERIAL (SLM) wealthy people. It is important to note that perfect equality in income and wealth is neither desirable nor practicable. (v) No class conflict:As the Power and control of economic activities lies with the Government, there is no race or class-conflict arises because everyone has to follow the guidelines of the Government. All are co-workers. Socialism in today’s world Countries such as Russia, China and many eastern European countries are said to be socialist countries. As the global trade is the demand of an hour, many socialist countries are changing now and encouraging liberalization in their countries for their economic development. 4.3.3 Mixed Economy:Mixed Economy offers the advantages of both capitalism and socialism. The Government provides guidelines for economic activity and market forces are allowed to operate in the framework decided. The public and private sectors co-exist in mixed economies. The main characteristics of a mixed economy are as follows: (i) Co-existence of public and private sectors:The industrial sectors are divided among public and private categories. Entrepreneurs, business families and large group of investors undertakes the production units of private sector and profit is their main objective. The public sector consists of production units owned by the government and works on the basis of social welfare. The areas of economic activities of each sector are generally demarcated. Government uses its various policies e.g., licensing policy, taxation policy, price policy, monetary policy and fiscal policy to control and regulate the private sector. (ii) Individual Freedom:Entrepreneurs or aspiring professional have all the right to select their type of business and earn good profit but at the same time they need to strategize the operation as per the Government guidelines. Government has enacted various Acts and laws to prevent the exploitation of labors, consumers, natural resource and market. For instance, government may put restrictions on the production and consumption of harmful goods. But within rules, regulations and restrictions imposed by the government, for the welfare of the society the private sector enjoys complete freedom. (iii) Economic Planning:Economic planning provides direction to the efforts of public as well as private sector. The production strategies, incentives, investment, availability of credit 34 CU IDOL SELF LEARNING MATERIAL (SLM) and so on factors provides support system to both public and private sector. Economic and National priorities especially that is overall concern with the welfare of society is the main motivation which highlights different priority is Planning. (iv) Price Mechanism:Price decides the profit margin as profit margin will ensure the survival of public and private sector. Prices are decided by considering the profit margins on one side and social objectives on the other. Prices play a significant role in the allocation of resources. But for some important commodities prices are maintained by the Government by offering subsidies. Thus, in a mixed economy people at large enjoy individual freedom and government support to protect the interests of weaker sections of the society. Indian economy is considered a mixed economy as it has well defined areas for functioning of public and private sectors and economic planning. Even countries such as USA, UK, etc. which were known as capitalistic countries are also called mixed economies now because of active role of their government in economic development. 2.5 SUMMARY An economic system is the socio-economic and political framework within which an economy functions. A free-enterprise economy also known also as capitalism, market-driven economy, Laissez-Faire and free-market economy, postulates that free and unfettered trade help economies grow to their fullest potential. Private property is the most important feature of capitalism. Other characteristics include consumer sovereignty, freedom of enterprise, free play of enlightened selfinterest of individuals and profit motive being the mainspring of economic activity and the engine of progress. A socialistic economy is one where conscious and deliberate choice of economic priorities is made by some public authorities. Some features of a planned economy are: a central planning authority, pre-determined and well-defined objectives, fixation of targets, administration of controls and growing role of the public sector. Socialism is founded on the principle that resources belong to the entire society and they should be owned by all members of the society represented by the State. In such an economy, all the means of production including landed property are vested in the hands of the State. Economic development is carried out through centralized planning. It is a public sector oriented economic system. 35 CU IDOL SELF LEARNING MATERIAL (SLM) A mixed economy incorporates the merits of both socialism and capitalism while eliminating the pitfalls found in both of them. In such an economy, both public and private sectors coexist Balance between the private and the public sectors has been achieved by adopting certain policies that permitted both the sectors to play their role in a well-planned manner; formulation of the Industrial Policy Resolution of 1948 and 1956, and also the Industries (Development and Regulations) Act. 2.6 KEYWORDS Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein Economic system: is the socio-economic and political framework within which an economy functions. Laissez-faire system: The driving principle behind laissez-faire, a French term that translates to "leave alone" (literally, "let you do"), is that the less the government is involved in the economy, the better off business will be, and by extension, society as a whole. A socialistic economy is one where conscious and deliberate choice of economic priorities is made by some public authorities. Co-exist - exist at the same time or in the same place. 2.7 LEARNING ACTIVITY 1. Why Class Conflict is included as a feature of Capitalist Economy? ___________________________________________________________________________ _______________________________________________________________ 2. Equality of opportunity is an important feature of Socialist Economy. Discuss your views. ___________________________________________________________________________ ____________________________________________________________________ 2.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. State the salient features of an economy. 36 CU IDOL SELF LEARNING MATERIAL (SLM) 2. 3. 4. 5. Explain the concept of Economic system. Enlist the demerits associated with Capitalist Economy. Define Socialist Economy. Why Government Control and Regulation of the Private Sector is necessary in Mixed Economy? Long Questions 1. State and explain the advantages of Capitalist Economy 2. Explain on the basis of level of development how economies are classified? 3. Why Public Sector is emphasized in Socialist Economy? 4. Explain the Economic Environment. 5. Brief about the features of Indian Mixed Economy. B. Multiple Choice Questions 1. The ______________plays an important role of coordinating agent in Capitalist Economy. a. price system b. legal system c. judicial system d. Joint FDI 2. The prices of products and services are also determined by the interaction of consumers through market forces. This feature is known as ______________ a. Private Property b. Consumer Sovereignty c. Enlightened Self -interest d. Profit Motive 3. Identify the feature of Socialist Economy a. Private Property b. Co-existence of public and private sectors c. Public ownership of property d. Absence of government interference 4. What believes in a secular State? a. Capitalist Economy b. Mixed Economy c. Market Economy d. Socialism 5. In Mixed economy both public and private sectors ___________ 37 CU IDOL SELF LEARNING MATERIAL (SLM) a. b. c. d. coexist does not exist together are parallel in nature are joint Answers 1 -a; 2 -b; 3 - c; 4 -d; 5 – a; 2.9 SUGGESTED READINGS Text Books: Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House], C. Fernando, Business Environment Kindle Edition, Pearson K. Aswathappa, Essentials of Business Environment, Himalaya Publishing House SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall. Paul, J. Business Environment: Text and Cases, 4thEdition, Tata McGraw Hill, India. Reference Books: Engineering Economic-Dr. Rajan Mishra by University Science Press The Gazette of India, Ministry of Law and Justice, New Delhi. No.311, June’16, 2006. Morrison J, The International Business Environment, Palgrave MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi Business Environment Raj Aggarwal Excel Books, Delhi Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi Dahl Modern political analysis. Englewood Cliffs, N.J: Prentice-Hall. Open Text Source: Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India. p. 2049. ISBN 9788180385926. Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB). 38 CU IDOL SELF LEARNING MATERIAL (SLM) Bakshi; P M (2010). Constitution of India, 10/e. Universal Law Publishing Company Limited. pp. 48–.ISBN 978-81-7534-840-0. International Journal of Scientific and Research Publications, Volume 2, Issue 12, December 2012 www.yourarticlelibrary.com https://courses.lumenlearning.com/ 39 CU IDOL SELF LEARNING MATERIAL (SLM)
