The economic environment refers to all the external economic factors that influence buying habits of consumers and businesses and therefore affect the performance of a company. It is one of the external factors that can influence strategy and decision-making in the business context. The economic environment consists of macroeconomic and microeconomic factors.
Microeconomic factors include:
- The companys suppliers and their bargaining power
- The companys customers and their bargaining power
- The companys competitors and their behavior
- The companys employees and their skills and labor costs
- The companys shareholders and their expectations
- The companys creditors and their terms of credit
Macroeconomic factors include:
- Gross domestic product (GDP)
- Exchange rates
- Inflation
- Interest rates
- Taxes
- Unemployment
The economic environment is important because it shows the level of confidence people have in the environment. Businesses flourish, people get more job opportunities, and customers spend more because of a favorable economic environment. Companies often cant control their economic environment, but they can evaluate economic conditions before choosing to enter a particular market or industry or pursue other strategies.
