Factors that form economic environment

by • 09/06/2011 • B.COM PART 1 Introduction to BusinessComments (0)841

Q2-What are the factors that form economic environment?



Economic environment condition is composed of the following factors:

  • Demand and supply
  • Capital/ Finance
  • Inflation
  • Government policies and restrictions
  • Tax strategy
  • Labor


According to Peter Drucker, the purpose of the business is to create customers. Customers create demand for the product. Demand and supply play an important role in the business world. High demands for the products can be created I the goods are manufactured keeping in view the taste, like, and preference of customers.


Capital is the life blood of the business. No business can be run without it. Businesses need money at every step whether they are manufacturing, buying, selling, or service concerns. A business has three ways or choices of getting funds/ finance.

  • Capital:

It is the owner’s equity. The person who invest capital gets return on it in the form of profit or dividend.

  • Loan:

Loan is the amount borrowed by the business. The person or institution that lends money is known as creditor or bondholders and the receiver is known as debtor or borrower. The return on lent money is known as interest.

  • Retained Earning:

This is another source of getting finance by a businessman. It is the accumulated and inappropriate profits over the previous years.


Inflation refers to those economic conditions in which the purchasing power of money declines. Inflation is created when money supply increases without corresponding increase in the production.


Government’s fiscal and economic policies reflect the mode of taxes and expenditure of the country. The policy directly affects money supply, price levels, demand and supply, income, savings, production, expenditure and investment.


Taxes are one of the most important sources of income for the government. A citizen or a businessman faces government taxes at every step. These may be direct or indirect taxes. Sometimes one item is taxed many times at every process which is known as turnover tax.


Labor plays a vital role in the economy of a country. Labor is one of the four factors of production as determined by Adam Smith, the father of economics. The return on labor is known as wages.

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