Economic environment

The term economic environment referes to all the external economic factors that influence buying habits of consumers and businesses, and therefore affect the performance of a company. These factors are often beyond a company's control, and may be either large-scale (macro) or small-scale (micro).

The Five Forces Model of competition

Developed by Professor Michael Porter of Harvard Business School in the 1980, the Five Forces Model sets out to identify those factors which are likely to affect an organisation's competitiveness. This then helps a firm choose an appropriate strategy to enhance its competitive opportunities and to protect itself from competitive threats. The five forces that Porter identifies are (Sloman, 2005):

• The bargaining power of suppliers,
• The bargaining power of buyers,
• The threat of potential new entrants,
• The threat of substitute products,
• The extent of competitive rivalry.

The bargaining power of suppliers

Most business organisations depend upon suppliers to some extent, whether to provide the raw materials of simply stationery. Indeed, many businesses have extensive supply or value chain networks. Such suppliers can have a significant and powerful effect on a business when (Sloman, 2005):

• There are relatively few suppliers in the market, reducing the ability of the business to switch from one supply source to another,
• There are no alternative suppliers that can be used,
• The cost of the suppliers forms a large part of the firm's total costs,
• A supplier's customers are small and fragmented and as such have little power over the supplying business.

The importance of analysis of supply and demand

The Market is the area where buyers and sellers negotiate the exchange value of commodities. Originally, exchanges between individuals were carried out through a system of barter, that is, some goods were exchanged for other goods. This problem in the exchanges (the double coincidence of needs) was solved when a commodity was defined as a unit of value measurement, in the beginning these were the commodities which enjoyed high esteem among the population (e.g. salt; of livestock, etc.) unit reaching the current system, where money is the commodity that is used as a unit of measurement when obtaining one thing for another (Rubio, 2019).

Market Demand

The demand if the market is defined by the decisions of the consumers of commodities in a given market. Therefore, when establishing which are the variables that determine the demand, it is necessary to define what are the variables that make the families or consumers decide to buy more or less of a particular good. We can distinguish among them the price of the commodity, the consumer's income and also the price of other goods (Rubio, 2019).

Market Supply

The supply of a good on the market will be determined by the decisions made by the producers of a given good and just as it happens with a demanded quantity of a particular food, the quantity supplied by the producers does not depend only on a price of a good itself on a series of variables that will determine that the quantity offered on the market is greater or smaller (Rubio, 2019).

Economic environment — recommended articles

Market structure — Industry environment — Factors affecting business — Threat of new entrants — Price — Sales potential — Global demand — Standard price — Price Maker

References

• Adamik A. (2011), Influence of Socio-Economic Environment on the Development of Small and Medium-Sized Enterprises, Wydawnictwo Politechniki Łódzkiej, Łódź,
• Gerber K. (2007), FCS economic environment L2, Pearson South Africa, Cape Town,
• Rubio M. (2019), The Analysis of Economic Environment, ESIC Editorial, Madrid,
• Sloman J. (2005), The Economic Environment of Business, Pearson Education, Harlow,
• Üskül A. (2018), Socio-economic Environment and Human Psychology, Oxford University Press, New York.

Author: Katarzyna Adamczyk