What is the economic environment? Definition and examples
The Economic Environment refers to all the economic factors that affect commercial and consumer behavior. The economic environment consists of all the external factors in the immediate marketplace and the broader economy. These factors can influence a business, i.e., how it operates and how successful it might become.
The economic environment consists of different things for different people. For example, for a farmer, the weather and price of fertilizers are important factors.
For a TV channel on the other hand, the growth in Internet advertising matters a great deal, but not the weather. Internet advertising matters to a TV station because the Internet competes for advertising business. For a farmer, however, advertising media is not important.
Technological advancements and shifts in consumer preferences can dramatically reshape the economic environment, often creating new opportunities for some sectors while posing challenges for others.
The Business Development Bank of Canada has the following definition of the term:
“The term 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.”
“These factors are often beyond a company’s control, and may be either large-scale (macro) or small-scale (micro).”
Economic environment – factors
The economic environment consists of microeconomic and macroeconomic factors.
Microeconomic factors
The microeconomic environment refers to things that happen at the individual company or consumer level.
Microeconomic factors do not affect the whole economy. Below are some microeconomic factors that may influence a business:
- Competitors.
- Demand.
- Market size.
- Suppliers.
- Supply.
- How you supply your goods, i.e., the distribution chain. For example, through retail stores, distributors, the Internet, etc.
Macroeconomic factors
The macroeconomic environment, on the other hand, refers to things that affect the entire economy. Macroeconomics is concerned with general or large-scale economic factors, such as:
- Unemployment
- Inflation.
- Interest rates.
- GDP growth. GDP stands for Gross Domestic Product. In other words, is the economy in recession, is it booming, etc.?
- Taxes.
- Exchange rates, i.e., how much currencies are worth in relation to one another.
- How much discretionary income consumers have, i.e., income after paying tax, social security, etc.
- Levels of consumer confidence.
- Savings rates.
Business people cannot control their economic environment. However, they can evaluate conditions in the marketplace before deciding whether to proceed with a plan or project.
In this context, the term ‘marketplace‘ means the same as ‘market‘ in its abstract sense.
Economic environment vs. environmental economics
Do not confuse the term ‘economic environment’ with ‘environmental economics.’ Although they sound similar, their meanings are quite different.
Environmental economics, a sub-field of economics, is all about environmental issues. Since the second half of the last century, environmental economics has become an increasingly popular topic.
Environmental economics looks at the economic effects of local or national environmental policies across the globe. Particular issues include the costs and benefits of alternative environmental policies that deal with water quality, air pollution, and global warming.
Moreover, the discipline examines the allocation of environmental resources through economic principles to achieve sustainable development goals.
Additionally, environmental economics is concerned with finding equitable solutions for the distribution of environmental benefits and costs among different communities and generations.
Compound nouns with “economic”
“Economic Environment” is a compound noun, i.e., a term consisting of two or more words. There are many compound nouns containing the word “economic.” Let’s take a look at ten of them, their meanings, and how we can use them in a sentence:
The economic climate refers to the overall state of the economy, including factors such as employment rates, inflation, and consumer confidence.
Example: “During a favorable economic climate, businesses often experience higher sales and greater profitability.”
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.
Example: “The country’s strong economic growth was evident in its rising GDP and improving standard of living.”
Economic life is the expected period of time during which an asset is useful to the average owner.
Example: “The economic life of the machinery is estimated to be about ten years, after which it will need replacement.”
An economic bubble is a situation where the price of an asset inflates significantly higher than its intrinsic value.
Example: “The housing market experienced an economic bubble that burst in 2008, leading to a severe recession.”
Economic value is the measure of the benefit provided by a good or service to an economic agent.
Example: “The economic value of clean air and water goes beyond simple metrics, impacting health and quality of life.”
Economic risk refers to the potential for loss in financial investments or business operations due to economic conditions or changes.
Example: “Companies operating internationally often face economic risk due to fluctuating currency exchange rates.”
Economic surplus is the benefit gained by consumers and producers in the market; it is the difference between the total amount that consumers are willing to pay and the total amount they actually pay.
Example: “The introduction of new technology increased the economic surplus by lowering production costs and prices for consumers.”
An economic benefit is a gain received from an action or investment, encompassing both direct and indirect financial gains.
Example: “The new stadium brought significant economic benefits to the city, including job creation and increased tourism.”
Economic equilibrium is a state where economic forces such as supply and demand are balanced, and in the absence of external influences, the values of economic variables will not change.
Example: “When the market reached economic equilibrium, the price of goods stabilized, and the quantity supplied equaled the quantity demanded.”
The economic base of a region or a country is the set of industries that produce goods and services for export, which brings income into the area.
Example: “The city’s economic base shifted from manufacturing to technology, reflecting the new demands of the global economy.”
Two Videos
These two YouTube videos come from our sister channel, Marketing Business Network or MBN. They explain what the terms “Economic Environment” and “Economic Climate” mean using easy-to-understand language and examples:
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What is the Economic Environment?
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What is the Economic Climate?