Question

What is the business environment and explain the external factors which affects the business?

Answer 1

External Factors Affecting Business Environment

Economic Forces

The economic environment can have a major impact on businesses by affecting patterns of demand and supply. Companies need to keep a track of relevant economic indicators and monitor them over time.

Income

Income indicates a customer’s ability to spend on the products sold by the marketer. The rise in the number of dual income families in several parts of the world, including urban world, has led to the rise in the incomes for such families. This has resulted in higher demand for lifestyle and luxury products.

However, marketers should be wary of making generalizations, as customer’s propensity to spend depends on cultural factors as well. Such products, such as dishwashers, that are considered in necessities in Western markets, do not even fall into the consideration set of consumers.

Inflation

Inflation refers to an increase in prices without a corresponding increase in wages, resulting in lower purchasing power of consumers. When cost of production of products and services is low, they will be sold at lower prices. Inflation rate is higher when costs of producing products or services go up, or when there is too much money chasing too few supplies, prompting suppliers to raise prices and earn higher profits.

High inflation rate decreases real wages, i.e. the customer can buy less goods with his income because the goods have become costlier. Inflation will reduce the demand for several products because the customer will ration his income on goods. In inflationary times, customers stock items to save themselves from further increase in prices and abandon their favorite brands to buy more economical brands.

When costs of production go up, companies should try to withhold increasing prices for as long as possible. In the long run, companies will have to look for better methods of production and cheaper inputs so that cost of production can be brought down.

Answer 2

Explanation:

What is the business environment and explain the external factors which affects the busines