Organizational environment is defined as all elements that exist outside the boundary of the organization and have the potential to affect all or part of the organization.
We can single out such economic factors:
Demand and Supply . The demand and supply are two principal factors that affect the working of any business model. The demand is the will and ability of consumers to purchase a particular commodity, while supply is the ability of the business to provide for the demand of consumers. Suppose, a mobile phone infused with latest technology is introduced in the market, it will have a higher price because of its demand in the market. Its prices will continue to increase if the supply does not meet the demand.
Marginal and Total Utility. Utility is the amount of satisfaction, that is derived by consumers from the consumption of goods. It so happens that after continuous and successive consumption of units of the same goods, the satisfaction that is experienced by a consumer starts decreasing. This often results in short-term or long-term fall in sales. Some organizations prepare for the launch of another brand, before the fall in utility and sales is experienced. The launch of new brand ensures that the revenue trend of the business does not fall. Diminishing utility is among the external factors affecting business.
Money and Banking. Banking facilitates monetary and fiscal policies that affect business and also the customers of the business. Money in circulation dictates the purchasing power or rather the demand of the consumers. On the other hand, the banking facility dictates the borrowing capacity of individuals as well as the business. The banking policies play a decisive role in affecting the prices of goods and interest rates along with investment and asset prices. The monetary polices of countries also influence the economic activities and inflation. This whole dynamic process is also known as monetary policy transmission mechanism
Economic Growth and Development. Economic growth dictates the amount of finances that the society at large is earning and development indicates the volume of money that is being invested into channels of long-term upgradation. Among all the economic factors, development is the most important one, as a business has to cater to the demands of an economically dynamic society. For example, the luxury brands perform well during an economic upturn, much more than the companies which produce essential offerings.
Income and Employment. Other important aspects of the economy that affects a business operation, are the employment density and rate of income. The per capita income and density of employment determines the rate of demand, density of demand, and also the purchasing power of the people. For example, during an economic upturn, there are employment opportunities which generate income that enables people to possess a stronger purchasing power. On the contrary, as the employment density and income rate go down during recession period, the purchasing power of the people also diminishes.
General Price Level. Another very important aspect of the economy that plays a part in the growth of business is the general price levels of commodities. Costs of raw materials, paying power of people, cost of production, and cost of transportation are some of the most important components that determine the general price levels and in turn, lower the profit margin of a business.
For example, an increase in the price will reduce the total revenue generated as there might be a dip in the demand. Let us assume that we have bought 16 pizzas for the price of $4. However, after an increase in the price of pizzas, we may
get to buy only 8 pizzas even after shelling out $6.
Trade Cycles . A trade cycle plays a part in fluctuating the costs of goods and commodities in an economy. Prosperity, recession, depression, and recovery are the phases of a business cycle that affect the demand and supply of all goods. Also, trade cycles often affect the general price levels of essential and non-essential commodities