1

micro ond Mocro conomics

Modem economlcs has Lwo maln branchesMlcro economlcs and Macro econom|cs 8oth the
branches sLudy economlc lssues and provlde a loglcal soluLlon Lo economlc problems aL dlfferenL
levels Powever Lhe Lerm Mlcro Lconomlcs and Macro Lconomlcs were flrsL of all colned and used
by 8agnar lrlsch of Cslo Un|vers|ty |n 1933 Mlcro economlcs sLudles economlc problems aL
lndlvldual level whlle Macro economlcs sLudles Lhem aL Lhe aggregaLe/naLlonal and as a whole
A JA1 IS MICkC LCCNCMICS?
Mlcro economlcs ls Lhe sLudy of lndlvldual unlLs llke lndlvldual household prlclng of a flrm wages
of a worker proflL of an enLrepreneur and so on ln slmple words lL ls Lhe parL of economlcs
whlch deals wlLh Lhe lndlvldual parLs of a sysLem
1he Lerm MlC8C economlcs has been derlved from Creek word meanlng small lL sLudles Lhe
economlc acLlons and behavlour of lndlvldual unlLs and small groups of lndlvldual unlLs ln mlcro
economlcs we sLudy how Lhe varlous unlLs of economlc organlsm do Lhelr economlc acLlvlLles and
reach Lhelr equlllbrlum sLaLe ln oLher words ln mlcro economlcs we make a mlcroscoplc sLudy of
Lhe economy ln Lhls way mlcro economlcs seeks Lo deLermlne Lhe mechanlsm by whlch dlfferenL
economlc unlLs aLLaln Lhe poslLlon of equlllbrlum proceedlng from lndlvldual unlLs Lo narrowly
deflned groups
ef|n|t|ons
ulfferenL economlsLs have deflned mlcro economlcs as under
'Mlcro' economlcs ls Lhe sLudy of parLlcular flrms parLlcular households lndlvldual prlces wages
lncomes lndlvldual lndusLrles and parLlcular commodlLles" k 8oolJloq
#Mlcroeconomlcs Lheory explalns Lhe composlLlon or allocaLlon of LoLal producLlon why more of
some Lhlngs are produced Lhan of oLhers" wotsoo
#Mlcro economlcs ls concerned wlLh economlc acLlvlLles of economlc unlLs as consumers
resource owners and buslness flrms" leflwllJl
#Mlcro economlcs deals wlLh small parLs of Lhe economy" 5boplto
lor Lxample SLudy of Slngle llrm or lndlvldual Pouse hold

Importance or Usefu|ness of M|cro Lconom|cs
ln modern Llmes mlcro economlcs ls very much slgnlflcanL lLs usefulness can be dlscussed as
under
1 Cperat|on of an Lconomy 1he greaLesL use of Lhe mlcro economlcs ls Lhe undersLandlng of Lhe
operaLlon of Lhe economy lL explalns how a free enLerprlse economy works and funcLlons lndlan
economy ls sald Lo be a mlxed economy lL ls a mlxLure of publlc and prlvaLe enLerprlses 8uL Lhe
prlvaLe secLor ls sLlll abouL four or flve Llmes as large as Lhe publlc secLor lL explalns how a markeL
economy wlLh mllllons of consumers and producers decldes Lhe allocaLlon of scarce producLlve
resources among mllllons of goods
Lff|c|ent Use of Scarce kesources lL ls helpful ln Lhe efflclenL employmenL of scarce resources
among compeLlng ends 1hls ls Lhe prlnclpal problem faced by every economy and mlcro
economlcs helps ln Lhls regard for achlevlng growLh wlLh sLablllLy
3 Lconom|c Je|fare Mlcro economlcs also sLudles economlc welfare 1he whole sLrucLure of
welfare economlcs ls bullL enLlrely on mlcro economlc Lheory of perfecL compeLlLlon as
maxlmlsaLlon of soclal welfare ls posslble only under perfecL compeLlLlon under monopoly
ollglopoly or monopollsLlc compeLlLlon Lhere ls generally mlsallocaLlon of resources leadlng Lo
conslderable wasLage of resources whlch lnvolves Loss of economlc efflclencles or welfare
4 Manager|a| Lconom|cs AnoLher use of Mlcro economlcs ls Lhe appllcaLlon of lLs meLhods of
analysls Lo buslness problems rlce Lheory ln Lhe servlce of buslness execuLlves ls known as


managerlal economlcs lLs knowledge enables buslnessmen Lo Lake lmproved declslons ln demand
analysls cosL analysls and ln meLhods of calculaLlng prlces Llnear programmlng a new analyLlcal
Lool ln prlce Lheory ls applled Lo buslness problems
red|ct|ons redlcLlons are made on Lhe basls of Lheorles of mlcro economlcs redlcLlons are
always based on Lhe cerLaln condlLlons
6 Lconom|c o||cy Lconomlc ollcy means all Lhe acLlons of Lhe CovernmenL LhaL are lnLended Lo
lnfluence Lhe economy 1he CovernmenL can evaluaLe Lhe lmpacL of lLs Lax or expendlLure pollcles
on welfare
7 e|pfu| |n Internat|ona| 1rade ln Lhe fleld of lnLernaLlonal Lrade lL ls used Lo explaln Lhe galns
from lnLernaLlonal Lrade balance of paymenL equlllbrlum and Lhe deLermlnaLlon of forelgn
exchange raLe
8 ko|e |n App||ed Lconom|cs Mlcro economlc analysls ls very useful ln varlous applled branches of
Lconomlcs llke publlc flnance ln publlc flnanc nd lnLernaLlonal Lrade mlcro economlc lnsLrumenLs
are used Lo reach Lhe deslred desLlnaLlons
L|m|tat|ons of M|cro Lconom|cs
lollowlng are Lhe maln llmlLaLlons of mlcro economlcs
1 Unrea||st|c Assumpt|ons Mlcro economlcs ls based on unreallsLlc assumpLlons lL ls hlghly
unreallsLlc as full employmenL ls noL Lhe rule buL an excepLlon ln Lhe real world
L|m|ted Scope 1here are cerLaln economlc problem whlch cannoL be analysed Lhrough mlcroe
conomlcs 1hus lmporLanL problems relaLlng Lo publlc Lype moneLary and flscal pollcles eLc are
beyond Lhe purvlew of mlcroeconomlcs
3 Jrong Assumpt|on of La|ssez Ia|re o||cy LnLlre mlcro economlcs assumed lalssezfalre pollcy
8uL afLer Lhe depresslon of 1930 lalssezfalre pollcy has become ouLmoded now a days economy
lmposes cerLaln resLrlcLlons ln Lhe lnLernaLlonal Lrade
4 Stat|c 1he sLudy of mlcro economlcs ls mosLly sLaLlc ln lL many economlc varlables are assumed
Lo be consLanL 1herefore Lhls parL of economlcs ls unreallsLlc Lo a greaL exLenL
Cn|y M|cro V|ew of the Lconomy Mlcro economlcs glves only a mlcro vlew of Lhe economy lL
does noL glve a correcL and proper plcLure of Lhe worklng economy ln facL lL ls Lhe sLudy of only
one parL of Lhe economy 1oday we need macro vlew of Lhe economy Lo solve varlous problems
of Lhe economy
8 MACkC LCCNCMICS
1lll Lhe CreaL uepresslon of 1930 economlsLs all over Lhe world were engaged ln formulaLlng
prlnclples relaLlng Lo Lhe allocaLlon of scarce resources Classlcal economlsLs llke 8lcardo Marshall
and lgou Lalked abouL aggregaLe behavlour of Lhe economy ln 1930 Lwo evenLs sLlmulaLed Lhe
sLudy of macro economlcs llrsL CreaL uepresslon demonsLraLed LhaL full employmenL was
unsLable ln uSA unemploymenL raLe whlch was 9 ln 199 [umped o 9 ln 1933
Moreover ln Lhe same perlod Cn decllned by abouL 30 lL lndlcaLed LhaL unemploymenL raLe
and aggregaLe CuLpuL were varlables 1herefore economlsLs felL Lhe need Lo sLudy Lhe facLors
LhaL deLermlne Lhe level of ouLpuL and employmenL

ln 1936 Lord keynes publlshed Lhe Ceneral 1heory of LmploymenL lnLeresL and Moe keynes
sLaLed LhaL unemploymenL could exlsL for long perlod Pe analysed Lhe causes for unemploymenL
and depresslon Many economlsLs accepLed keyneslan economlcs 1herefore Lhe publlcaLlon of
hls book and subsequenL adopLlon of hls vlews are ofLen referred Lo as keyneslan 8evoluLlon ln
modem Llmes economlsLs llke Plcks Pansen Cardner Ackley eLc have valuable conLrlbuLlon ln
Lhe fleld of Macro Lconomlcs
Jhat Is Macro Lconom|cs ?
3

1he term macro economlcs has been derlved from Greek word 'markros' whlch means large
Macro economlcs ls Lhe sLudy of economlc sysLem as a whole lL ls Lhe sLudy of overall condlLlons
of an economy ln oLher words lL deals wlLh LoLal producLlon LoLal consumpLlon LoLal solvlng and
LoLal llvesLmenL Agaln lL ls also called Lhe 'AggregaLe Lconomlcs' lL means LhaL deals wlLh greaL
averages |d aggregaLes of Lhe sysLem raLher Lhan wlLh parLlcular unlLs
#Macroeconomlcs deals noL wlLh lndlvldual quanLlLles as such buL wlLh aggregaLes of Lhese
qaanLlLles noL wlLh lndlvldual lncome buL wlLh naLlonal lncome noL wlLh lndlvldual prlces buL
wlLh prlce level noL wlLh lndlvldual ouLpuLs buL wlLh naLlonal ouLpuL" i k 8oolJloq
#Macro Lconomles concerns lLself wlLh such varlables as Lhe aggregaLe volume of Lhe ouLpuL of
any economy wlLhln Lhe exLenL Lo whlch lLs resources are employed wlLh Lhe slze of Lhe naLlonal
lncome wlLh Lhe general prlcelevel" Ackley CotJoet
#Macro economlcs deals wlLh Lhe funcLlonlng of Lhe economy as a whole" 5boplto
ln shorL macro economlcs deals wltb Lhe aggregaLes and averages of Lhe sysLem raLher Lhan wlLh
parLlcular unlLs ln lL
Importance or Usefu|ness of Macro Lconom|cs
Macro economlcs has emerged as Lhe mosL fasclnaLlng branch of economlcs
Manklw has sLaLed #1he sLudy of macro economlcs can lllumlnaLe much abouL Lhe world and Lhe
lessons learned lf properly applled can make Lhe world a beLLer place"
1he followlng facLors hlghllghL Lhe lmporLance of macro economlcs
1 Iunct|on|ng of an Lconomy Macro economlcs helps us Lo undersLand Lhe funcLlonlng of Lhe
economy lL glves blrd's eye vlew of Lhe phenomena of economlc unlverse lL provldes an ldea of
an economy's aggregaLe ouLpuL lncome consumpLlon savlngs and employmenL eLc
Ind|spensab|e for Accurate know|edge Macroeconomlcs ls lndlspensable for a proper and
accuraLe knowledge of Lhe behavlour paLLerns of Lhe aggregaLlve varlables
'Lhe foresL ls an aggregaLlon of Lrees yeL lL does noL exhlblL Lhe characLerlsLlcs and behavlour
paLLern of lndlvldual Lrees' ou/dinq

3 Lconom|c |ann|ng Macroeconomlcs ls exLremely helpful Lo Lhe governmenL ln formulaLlon of
approprlaLe economlc pollcles for Lackllng Lhe problems of lnaLlon balance of paymenLs overp
opulaLlon and underproducLlon
4 Study of Nat|ona| Income ln modern era almosL ln all counLrles lL ls only Lhrough Lhe sLudy of
naLlonal lncome LhaL Lhe economlc slLuaLlon of dlfferenL counLrles ls known 1herefore lL ls
essenLlal for every counLry Lo have full knowledge of naLlonal lncome Lo formulaLe lLs pollcles
concernlng plannlng welfare and war eLc
Study of Lconom|c eve|opment Macro economlcs has a speclal slgnlflcance for Lhe caplLal
poor counLrles ln undersLandlng Lhelr baslc problems lL also suggesLs ways and means Lo aLLaln
economl developmenL
6 Study of I|uctuat|ons 1he sLudy of macro economlcs helps Lo sLudy flucLuaLlons ln Lhe
economy lL suggesLs meLhods Lo regulaLe Lhese buslness flucLuaLlons
7 So|ut|on to Lconom|c rob|ems lL provldes a soluLlon Lo economlc problems of an economy
llke unemploymenL populaLlon poverLy rlslng and falllng prlces
8 Macro Lconom|cs 8ased on I|rm Lmp|r|ca| kesu|ts Macro Lconomlcs ls based on sound
pracLlcal experlences Many economlsLs have proved lLs reallsm rof kleln says #keyneslan
sysLem ls flrmly roLLed ln facLs"
L|m|tat|ons of Macro Lconom|cs
ln splLe of lLs greaL merlLs and usefulness of macro economlcs lL has cerLaln llmlLaLlons
Some of lLs ma[or llmlLaLlon ls dlscussed here


1 ependence on Ind|v|dua| Un|ts Macro economlcs deals wlLh aggregaLes and aggregaLes are
Lhe sum LoLal of lndlvlduals SomeLlmes resulLs of Lhese aggregaLes are dlfferenL ftom Lhe
lndlvldual behavlour 1hls ls called paradoxes or fallacles of composlLlon lor example savlng ls
vlrLue for an lndlvldual buL becomes a vlce for an economy
eterogeneous Un|ts Macro economlcs sLudles dlfferenL unlLs of goods as common ulfferenL
goods have Lhelr dlfferenL measures 1hls ls noL posslble Lo measure all Lhe goods wlLh Lhe same
measurlng rod As rof 8ouldlng says LhaL lL ls posslble Lo add or subLracL apples or oranges buL
noL posslble Lo add or subLracL apples and bulldlngs 1hus lL ls noL posslble Lo derlve aggregaLes of
lndlvldual goods
3 Unab|e to Inf|uence Soc|ety Lqua||y An aggregaLlve Lendency may noL lnfluence Lhe enLlre
secLors of Lhe economy ln Lhe same way lor example a general rlse ln prlce as lnflaLlon may noL
have slmllar effecLs on dlfferenL secLors of Lhe economy
4 Contrad|ctory Ln aggregaLes someLlme Lhe conLradlcLory lndlvldual aspecLs as neuLrallsed as
ln case of Lhe esLlmaLlon of lnflaLlon prlces ln agrlculLure fall of lndusLrlal producLs rlses whlch
have dlfferenL effecLs on lndlvldual facLors buL as an aggregaLe Lhere may be any effecL aL all
ko|e of Less Aggregat|ve Ana|ys|s AggregaLes lLself suffer from cerLaln serlous problems due Lo
sLaLlsLlcal Lechnlques 1he recenLly lnLroduced compuLaLlonal procedures and programmlng
Lechnlques have reduced Lhe role of aggregaLlve analysls
ulllL8LnCL 8L1JLLN MICkC LCCNCMICS ANMACkC LCCNCMICS

Mlcroeconomlcs Macroeconomlcs
l Mlcro economlcs deals one segmenL of Lhe LoLal
economy
1 Macro economlcs deals wlLh Lhe whole of
Lhe economy
lL deals wlLh Lhe economlc declslonmaklng of
lndlvldual economlc agenLs le producer Lhe
consumer eLc
Macro economlcs deals wlLh aggregaLes
and averages of Lhe enLlre economy
3 lL deals wlLh- Lhe process of prlce
deLermlnaLlon ln case of lndlvldual producLs and
facLors of producLlon
J lL deals wlLh Lhe general prlce level ln any
economy
Mlcro economlcs ls known as prlce Lheory as lL
explalns Lhe process of allocaLlon of economlc
resources wlLh alLernaLlve of producLlon on Lhe
basls of relaLlve prlces
Macro economlcs ls also known as Lhe
lncome Lheory as lL explalns Lhe changlng
levels of naLlonal lncome ln any economy aL
one parLlcular Llme
3 lL assumes homogeneous or slmllar producLs
5 lL assumes heLerogeneous or dlsslmllar
producLs
6 lL ls based on full employmenL ln Lhe economy
6 Macro economlcs assumes under
employmenL equallbrlum ln Lhe economy
7 lL helps ln formulaLlng approprlaLe pollcles
for resource allocaLlon aL Lhe flrm level
7 lL helps ln formulaLlng approprlaLe pollcles
for conLrolllng lnflaLlon
nvironmentnterno/
2 nd xterno/ ond Mocro nvironment
loctors
IN1kCUC1ICN
LnLerprlses model buslness work ln Lhe markeL sysLem Lo earn proflLs 8uslness belng an economlc
acLlvlLy Lake many buslness declslonmaklng Lhus economlc declslonmaklng process sLarLs lor
Lhls buslness enLerprlses depends upon Lhe economlc envlronmenL for acqulrlng Lhe facLors of
producLlon and for selllng of flnlshed goods and servlces 1he need of Lhe hour ls LhaL Lhe
3

managers should be fully aware Lhe changes and evenLs Laklng place ln Lhe wlder conLexL of
economlc envlronmenL 1herefore buslness economlc envlronmenL refers Lo all Lhose economlc
facLors LhaL have an effecL on Lhe funcLlonlng of buslness 1he manager's ablllLy Lo bulld proflLable
flrms depends malnly upon hls analysls of Lhe economlc envlronmenL 1hus managemenLs of such
houses musL respond Lo Lhe changes ln economlc envlronmenL by adopLlng sulLable courses of
acLlon

ef|n|t|ons
Accordlng Lo alre and Anderson #8uslness LnvlronmenL ls Lhe sum of Lhose lnpuLs Lo an
organlsaLlon whlch are under Lhe conLrol of oLher organlsaLlons or lnLeresL groups or are
lnfluenced by lnLeracLlon of'several groups such as Lhe economy"
Accordlng Lo uunham and lerce #Lvery organlsaLlon exlsLs ln an envlronmenL LhaL exLends
beyond lLs formal boundarles Lhls exLernal envlronmenL represenLs a seL of condlLlons
clrcumsLances and lnfluences LhaL surround and effecL Lhe funcLlonlng of Lhe organlsaLlon 1hls
envlronmenL ls made up of many dlfferenL lndlvlduals organlsaLlons and governmenL bodles"
kINS CI 8USINLSS LNVIkCNMLN1
1he envlronmenL of Lhe buslness ls always changlng and ls uncerLaln lL may be broadly classlfled
as exLernal and lnLernal envlronmenL
1 Interna| Lnv|ronment
lL represenLs Lhe world lnslde Lhe organlzaLlon lL lncludes of conLrollable facLors LhaL deflne Lhe
sLrengLhs and weaknesses of an organlzaLlon 1he buslness organlsaLlon generally has compleLe or
parLlal conLrol over Lhese facLors and has power Lo manlpulaLe Lhese facLors le Lo change
modlfy cancel sLop sLarL lnLroduce lncrease or decrease eLc accordlng Lo Lhe exlsLlng
clrcumsLances and demand of slLuaLlon 1he lnLernal envlronmenL conslsLs of many facLors whlch
are as follows
%a) Company Cu|ture CuLLure greaLly lnfluences Lhe worklng envlronmenL ln Lhe organlsaLlon
CulLure varles from buslness Lo buslness and from place Lo place and decldes how Lhe people
behave ln Lhe organlsaLlon lL refers Lo Lhe sLyle and Lhe learned ways LhaL shape people's
relaLlons wlLh Lhe organlsaLlon A healLhy culLure promoLes muLual coo peraLlon and
lnLerdependence lncreases employee morale provldes employee's saLlsfacLlon and reduces Lhe
confllcLs ln Lhe organlsaLlon
%b) Company Strategy SLraLegy ls Lhe overall plan of organlsaLlon whlch speclfles Lhe values
mlsslon ob[ecLwes and goals of an organlsaLlon lL ls Lhe gulde for busmess declslon
maklng whlch ls Lo be followed by everyone SLraLegy ls reflecLed by Lhe value sysa of Lhe
organlsaLlon values are Lhe decldlng facLors ln chooslng Lhe markeL decldlng Lhe producL
dlsLrlbuLlon sysLem salarles of employee's eLc
%c) Company Image lL Lakes many years for a company Lo bulld a good lmage wlLh years of hard
work and honesL cusLomer servlce ln order Lo bulld a good lmage a company musL perform lLs
soclal responslblllLy A good lmage leads Lo Lhe lncrease ln sales and proflLs of an organlsaLlon and
also adds new cusLomers
%d) Crgan|sat|ona| Structure lL refers Lo Lhe hlerarchlcal bulld up of an organlsaLlon and
relaLlonshlp beLween varlous poslLlons An organlsaLlon can have many Lype of sLrucLures llke
funcLlonal dlvlslonal geographlc eLc CrganlsaLlorlal sLrucLure wlll deLermlne Lhe level of
lnLeracLlons among members and lnLernal power relaLlonshlps
%e) key Staff Puman resources are asseLs of an organlsaLlon A company has compleLe conLrol
over recrulLmenL selecLlon and Lralnlng of personnel Cuallfled and experlenced sLaff ls Lhe
sLrengLh of an organlsaLlon whlch changes even Lhe exLernal LhreaLs lnLo opporLunlLles
6

%f) Lxper|ence of Crgan|sat|on 1he buslness flrms acqulre speclallzaLlon Lhrough experlence asL
experlences help ln handllng crlsls slLuaLlons and lncreases qulck declslonm aklng A flrm galns
experlence Lhrough accumulaLlon of knowledge and developmenL of skllls from dlrecL
parLlclpaLlon or observaLlon ln Lhe economlc evenLs and acLlvlLles for years
%g) Access to natura| resources lf an organlsaLlon has a huge amounL of resources under lLs
conLrol lL becomes an lnLernal sLrengLh for Lhe organlzaLlon as compared Lo lLs compeLlLors
1he resources LhaL an organlzaLlon seeks Lo acqulre are
(a) hyslcal or naLural resources (b) Puman resources (c 1echnologles (d) Slze of markeLlng neL
work (e) llnanclal resources eLc
%h) Locat|on A good geographlc locaLlon can provlde sLraLeglc advanLages and lead Lo reduced
cosL of producL and lncreased proflLablllLy eq nearness Lo raw maLerlal nearness Lo markeL
easy avallablllLy of facLors of producLlon eLc
%|) Cperat|ona| eff|c|ency lL refers Lo Lhe effecLlveness ln over all equlpmenL use lL shows Lhe
lnpuLouLpuL raLlo Plgh operaLlonal efflclency reduces Lhe overall cosL of producLlon and
lncreases proflLablllLy and provldes an advanLage over Lhe compeLlLors v
organlsaLlons usually have hlgh operaLlonal efflclencles
%) Cperat|ona| capac|ty CperaLlonal capaclLy ls Lhe LoLal producLlon capaclLy of a unlL under
norma) worklng condlLlons Plgh operaLlonal capaclLy provldes producLlon LlexlbllLy Lo Lhe
organlsaLlon Lo ad[usL accordlng Lo Lhe changed demand condlLlons Plgh- operaLlonal capaclLy
leads Lo economles of scale low cosL of producLlon hlgh sales and more proflLs ln Lhe long run
%k) I|nanc|a| resources MulLlnaLlonals are consldered as domlnanL underLaklngs because of Lhelr
huge flnanclal resources 1he capablllLy Lo ralse addlLlonal funds for worklng and flxed
caplLal lndlcaLes Lhe lnLernal flnanclal sLrengLh of Lhe organlsaLlon
%L) 1echno|og|ca| capab|||ty 1echnology lncreases Lhe compeLeLlve capaclLy of Lhe buslness
organlsaLlon ln Lhe lndusLry CorporaLlons whlch have excluslve super Lechnologles have world
leadershlp ln Lhelr producLs
(m) atents and trade secrets aLenLs are Lhe legal v proLecLlon of Lhe lnLellecLual properLy of
Lhe organlzaLlon lf Lhe company has an excluslve paLenL such as of a parLlcular drug or
medlclne producL or Lechnology Lhen lL provldes legal securlLy and commerclal guaranLee Lo a
flrm
%n) Lxc|us|ve contracts SomeLlmes a company can have excluslve conLracLs for long Lerm
supply of producL and servlces Lo governmenLs or oLher buslness organlsaLlons Such conLracLs
provlde guaranLee of sales excluslve markeLlng rlghLs and monopollsLlc condlLlons as compared Lo
Lhe compeLlLors
All Lhese facLors are contro||ab|e |n nature and the|r |mportance may vary from |ndustry to
lndusLry and buslness Lo buslness

II Lk1LkNAL LNVIkCNMLN1
LxLernal LnvlronmenL represenLs Lhe world ouLslde Lhe organlzaLlon lL refers Lo all Lhe relevanL
forces ouLslde Lhe flrm's boundarles All Lhese facLors provlde an opporLunlLy and pose a LhreaL Lo
Lhe organlsaLlon 1hese facLors are beyond Lhe conLrol of organlsaLlon and may vary from reglon
Lo reglon and from counLry Lo counLry 1he LxLernal LnvlronmenL ls furLher dlvlded lnLo
caLegorles
(1) Mlcro LnvlronmenL and (b) Macro LnvlronmenL
1 M|cro Lnv|ronment]1ask Lnv|ronment
7

Accordlng Lo hlllp koLler #1he Mlcro LnvlronmenL conslsLs of facLors ln Lhe company's lmmedlaLe
envlronmenL LhaL affecLs Lhe performance of Lhe company 1hese lnclude Lhe suppllers
cusLomers compeLlLors markeLlng lnLermedlarles and publlc"
1he Mlcro LnvlronmenL facLors carry lmpllcaLlons for a parLlcular buslness where as Lhe macro
facLors have general lmpllcaLlons for Lhe lndusLry or Lhe economy as a whole lL lncludes Lhose
exLernal facLors LhaL have a dlrecL lmpacL on Lhe organlsaLlonal sLraLegy
%A) Supp||ers
ersons who supply Lhe lnpuLs llke raw maLerlals and componenLs Lo Lhe buslness lL can be an
lndlvldual or an organlzaLlon Suppller may be a wholesaler or a reLaller 1hese days Lhe cholce of
suppllers ls a very crlLlcal lssue as a wrong cholce of suppller can make Lhe flnal producL unflL for
sale ln Lhe markeL or lower lLs compeLlLlveness A company should have rellable and mulLlple
sources of supply because a change ln Lhe aLLlLude of suppller may affecL Lhe company or lLs
producL roblem wlLh one suppller may also affecL Lhe company 1here a company musL have a
number of suppllers ln order Lo reduce rlsk and ensure conLlnuous producLlon wlLhouL any delays
Lmphasls should be placed on vLnuC8 uLvLLCMLn1 le closer suppller relaLlonshlps
Areas of Vendor eve|opment
An organlzaLlon needs Lo develop vendors and suppllers ln Lhe undernoLed areas
I Manpower
Mater|a|
3 Supp||ers of Servlces
4 Jarehous|ng and Storage
I|nance and Cred|t
%8) Customers
CusLomer means someone who pays for goods and servlces produced by Lhe buslness flrm ln
Loday's global and compeLlLlve buslness envlronmenL cusLomers have more cholce and more
conLrol over Lhe markeL A company may have dlfferenL caLegorles of CusLomers llke lndusLrlal
cusLomers wholesale reLall cusLomers governmenL bodles and forelgn cusLomers
1o be successful a buslnessman musL know whaL people wanL and wlll buy 1he cholce of
cusLomer segmenLs should be made by conslderlng
(l) 8elaLlve proflLablllLy (ll) uependablllLy (lll) SLablllLy of demand (lv) CrowLh prospecLs (v)
LxLenL of compeLlLlon
%c)Labour
ln blg organlsaLlons where hulldreds of workers ote employed Lhe labour force ls organlsed ln Lhe
form of Lrade unlons who negoLlaLe wlLh Lhe managemenL for hlgher wages bonus beLLer
worklng condlLlons eLc 1hey may pressurlse Lhe managemenL for Lhe fulfllmenL of Lhelr demands
and may resorL Lo pressure LacLlcs llke sLrlkes
%) 8us|ness Assoc|ates
8uslness assoclaLes are a sLrengLh for organlsaLlon whlch can be used for borrowlng caplLal durlng
emergency or for supplylng raw maLerlal or for Lhe sale of flnlshed producLs
%L) Compet|tors
A 8uslness needs Lo ad[usL lLs varlous acLlvlLles Lo maLch responses of lLs compeLlLors 1here are
varlous Lypes of compeLlLlons as sLaLed below
%a) es|re compet|t|on Lvery consumer has a llmlLed lncome and he cannoL fulfll all hls deslres
wlLh Lhls lncome 1he compeLlLlon among unsaLlsfled deslres wlLh llmlLed dlsposable lncome ls
called deslre compeLlLlon eg wlLh Lhe glven lncome a consumer has Lo declde wheLher he has Lo
spend on buylng a producL llke AC refrlgeraLor or lnvesL ln funds for fuLure reLurns llke lu
8

share debenLure eLc An organlsaLlon should Lry Lo ensure LhaL lLs producLs are preferred over
oLhers by Lhe consumers
(b) Gener|c compet|t|on 1he compeLlLlon among alLernaLlves wlLhln Lhe same caLegoly of deslre
eg lf a person wanLs Lo lnvesL hls money he has varlous alLernaLlves llke banks posL
offlces purchase of shares debenLures eLc
%c) roduct form compet|t|on 1he consumer has Lo choose beLween dlfferenL forms of Lhe
producL havlng varleLy of feaLures eg lf a consumer decldes Lo buy a 1n Lhe nexL quesLlon faced
ls blaLk and whlLe or coloured 1v 1 or 9 lnches dlglLal or nondlglLal eLc
%d) 8rand compet|t|on CompeLlLlon beLween dlfferenL brands of a same producL avallable ln Lhe
markeL eg lf a consumer decldes Lo buy a 1v he can choose beLween varlous brands llke Sony
LC hlllps eLc
CompeLlLor's analysls and monlLorlng ls cruclal lf an organlsaLlon has Lo malnLaln lLs compeLlLlve
poslLlon ln Lhe markeL
|| Intermed|ate Agenc|es
lnLermedlaLe Agencles are connecLlng llnks wlLh ulLlmaLe consumers 1hey are Lhe ouLslde
agencles llke wholesalers reLallers and markeLlng experLs 1he lnLermedlaLe Agencles are helpful
Lo Lhe buslness houses ln Lhe followlng ways
(a) 1hey provlde sLraLeglc lnformaLlon whlch ls useful for sLraLeglc plannlng and pollcy
formulaLlon
(b) 1hey provlde lmmedlaLe feedback regardlng Lhe response of Lhe consumers Lo Lhe producLs
lnLroduced for LesL markeLlng purposes
(c) 1hey provlde lnformaLlon regardlng unsaLlsfled deslres of Lhe consumers and are helpful ln Lhe
developmenL of new producLs and lnnovaLlon
(d) 1hey help ln lnLroduclng promoLlonal schemes for lncreaslng Lhe sales of producLs and
servlces
(C) 8egulaLory Agencles 8egulaLory Agencles are governmenL agencles formed wlLh Lhe purpose
of regulaLlng Lhe conducL and operaLlons of Lhe buslness unlL ln a speclflc area 1he powers of
regulaLory agencles are backed by Lhe concerned leglslaLlons speclally enacLed for Lhe purpse
1he regulaLory agencles have Lo ensure LhaL Lhe buslness flrms are noL vlolaLlng any of Lhe
esLabllshed norms ln case of vlolaLlon of any provlslon Lhe regulaLory agencles can lmpose
penalLles order closure of Lhe buslness eLc 1he maln regulaLory agencles wlLh whom Lhe
buslness houses have Lo deal are ueparLmenLs of lncome 1ax Lxclse and Sales 1ax olluLlon
ConLrol Company Law 8oard Labour CourLs Consumer CourLs rovldenL lund auLhorlLles eLc
(P) llnanclal lnsLlLuLlons
llnanclal lnsLlLuLlons usually have a large sLake ln Lhe buslness houses of Lhe counLry 1hese
flnanclal lnsLlLuLlons noL only provlde funds buL also provlde Lechnlcal asslsLance 1hey are very
cruclal for Lhe growLh and developmenL of a buslness flrm
(l)ubllc
ubllc refers Lo any group LhaL has an acLual or poLenLlal lnLeresL ln Lhe company A company
encounLers many such groups from Lhe lmmedlaLe envlronmenL llke consumer groups medla
persons envlronmenLal agencles sLudenL unlons rellglous groups eLc 1he publlc can pose
serlous LhreaL or he an lmporLanL supporL group for Lhe buslness unlL
Macro Lnv|ronment
lL conslsLs of forces LhaL shape opporLunlLles and pose LhreaLs Lo Lhe buslness lL lncludes
acLlvlLles whlch are more or less unconLrollable and need Lo be monlLored by a buslness
enLerprlse on an ongolng bas|s lL refers Lo Lhe general and overall envlronmenL wlLhln whlch an
enLlLy operaLes 1he slgnlflcanL macro envlronmenLal facLors are enllsLed below
9

1 Lconom|c Lnv|ronment lL refers Lo all Lhose economlc facLors whlch have an lmpacL on
funcLlonlng of buslness lL ls made up of macro level facLors relaLed Lo Lhe areas of producLlon
dlsLrlbuLlon lncome and wealLh A buslness geLs all lLs lnpuLs from Lhe economlc envlronmenL lL
operaLes ln economlc envlronmenL and sells lLs ouLpuL ln Lhe economlc envlronmenL 1he varlous
exLernal facLors LhaL affecL Lhe economlc envlronmenL of Lhe buslness are sLaLed below
%a) Lconom|c cond|t|ons prevalllng ln Lhe counLry llke naLlonal lncome per caplLa lncome
dlsLrlbuLlon of lncome and asseLs sLage of economlc developmenL eLc
%b) Lconom|c system lL may be caplLallsLlc soclallsLlc or a mlxed economy lndlan economlc
envlronmenL ls a mlxed Lype of economlc sysLem havlng coexlsLence of boLh publlc and prlvaLe
secLor
%c) Lconom|c po||c|es 1he governmenL decldes Lhe economlc envlronmenL of Lhe buslness
Lhrough budgeLs economlc plannlng lndusLrlal regulaLlons buslness laws lndusLrlal pollcy
lmporL and exporL regulaLlons Lrade and LransporL pollcles eLc
(d) varlous laws framed by Lhe CenLral SLaLe CovL and local bodles Lo regulaLe buslness are also a
parL of economlc envlronmenL llke Lhe lacLorles AcL 198 Companles AcL 1936 lorelgn Lxchange
8egulaLlon AcL 197 eLc
%e) Lconom|c growth 1he sLage of growLh of Lhe economy has dlrecL lmpacL on Lhe buslness
sLraLegles lncreased economlc growLh raLe and lncrease ln consumpLlon expendlLure offers more
opporLunlLles Lhan LhreaLs 8everse condlLlons wlll lead Lo compeLlLlve pressure and LhreaLs Lo
proflLablllLy
(f) lnLeresL raLes lnLeresL raLes effecL Lhe demand for Lhe producL ln Lhe economy parLlcularly so
when Lhe goods are Lo be purchased Lhrough borrowed flnance Low lnLeresL raLes provlde
opporLunlLles Lo Lhe lndusLrles Lo expand whereas rlslng lnLeresL raLes pose a LhreaL Lo Lhese
lnsLlLuLlons Low lnLeresL raLes can encourage companles Lo adopL amblLlous sLraLegles wlLh
borrowed funds
%g) Currency exchange rates uevaluaLlon of a currency may be a greaL opporLunlLy for Lhe exporL
secLor Whenever Lhe rupee has been devalued lndlan producLs have become cheaper ln Lhe
lnLernaLlonal markeL and exporLs have been boosLed

o||tIca| Lnv|ronment ollLlcal LnvlronmenL refers Lo Lhe lnfluence of Lhe gouwn8 bw and Lhe
regulaLory sysLem and Lhls effecLs Lhe way ln whlch an organlsaLlon operaLes 1he pollLlcal
envlronmenL of Lhe counLry may lnfluence Lhe mlsslon ob[ecLlves and long Lerm sLraLegles of Lhe
buslness 1he varlous componenLs of pollLlcal envlronmenL are llke a) 1he ldeology of pollLlcal
parLy ln power (1) ollLlcal cllmaLe (c) ollLlcal sLablllLy (d) 8udgeL deflclL and surplus (e) lmporL
Larlffs and quoLas t) LxporL resLrlcLlons (g) uefence and mlllLary poLlcy (h) lorelgn pollcy and (l)
lorelgn lnvesLmenL ollcy
1he governmenL of a counLry provldes Lhe baslc faclllLles requlred for survlval and growLh of
buslness 1he governmenL monlLors and conLrols Lhe buslness sysLem of Lhe counLry A sLaple
pollLlcal sysLem ls a prlmary facLor for economlc developmenL ln case of frequenL changes ln
governmenL economlc pollcles are frequenLly changed lL adversely affecLs Lhe buslness lacLors
leadlng Lo pollLlcal lnsLablllLy can be communal rloLs declaraLlon of emergency clvll war eLc
1herefore cordlal and frlendly relaLlons of a counLry wlLh oLher naLlons also affecL buslness lL
helps ln reduclng Lhe deflne budgeL whlch can be allocaLed Lo developmenLal acLlvlLles llke
lnfrasLrucLure developmenL whlch ln Lurn has favourable effecL on buslness Pere we musL
remember LhaL poslLlve Lhlnklng and healLhy aLLlLude of opposlLlon parLles also has a favourable
effecL on Lhe developmenLal acLlvlLles
10

3 Lega| Lnv|ronment lL means Lo all legal facLors LhaL govern Lhe acLlvlLles of Lhe buslness from
preformaLlon sLage Llll lLs closure LeglslaLlons and [udlclary have greaL lnfluence on Lhe buslness
secLor 8uslness has Lo undersLand Lhe legal envlronmenL falllng whlch legal dlspuLes can arlse
1he soluLlons of legal dlspuLes may be very cosLly Llme consumlng harasslng and can cause greaL
losses Lo a buslness enLerprlse
CovernmenL has framed leglslaLlons whlch regulaLe and conLrol Lhe buslness 1he maln
leglslaLlons regulaLlng Lhe buslness are as follows
(a) lndusLrlal ulspuLe AcL 197
(b) lacLorles AcL 198
(c) lndusLrlal uevelopmenL and 8egulaLlon AcL 1931
(d) Companles AcL 1936
(e) Consumer roLecLlon AcL 1986
(f) lorelgn Lxchange ManagemenL AcL 1999
(g) SecurlLles and Lxchange 8oard of lndla Culdellnes 000
(h) CompeLlLlon AcL 00
4 Soc|o Cu|tura| Lnv|ronment 1hey lnclude peoples aLLlLude Lo work and healLh role of a famlly
marrlage rellglon and educaLlon soclal responslblllLy of buslness eLc lrom Lhe buslness polnL of
vlew Lhls envlronmenL may lnclude Lhe facLors llke level of educaLlon class sLrucLure labour
moblllLy work relaLed vlews eLc 1he culLural dlfferences among people and naLlons effecL markeL
behavlour CulLure provldes boLh opporLunlLles and LhreaLs for buslness organlsaLlons operaLlng ln
dlfferenL counLrles under dlfferenL culLures CulLure can brlng opporLunlLles ln Lhe form of
changed fashlon LasLes preferences of Lhe people lL can lmpose LhreaLs ln Lhe form of publlc
aglLaLlons speclal aglLaLlons and some culLural dlsllkes
CulLure lnfluences Lhe prlorlLy of needs consumpLlon paLLerns consumpLlon hablLs and llfe sLyles
eq beef consumpLlon ls dlscouraged ln counLrles llke lndla Chlna eLc where as ln oLher
counLrles lL ls preferred Some maln culLural effecLs on buslness organlzaLlons can be as follows
(l) CulLure effecLs Lhe consumpLlon paLLern and behavlour of Lhe buyer
(ll) CulLure effecLs Lhe declslon regardlng sale of servlces
(lll) CulLure effecLs Lhe sale promoLlon measures Lo be adopLed by Lhe markeLer
(lv) CulLure effecLs Lhe aLLrlbuLes of producLs and servlces Lo be offered for sale ln Lhe markeL
(v) CulLure effecLs Lhe communlcaLlon process ln Lhe socleLy
(vl) CulLure effecLs Lhe Language educaLlon and rellglon
emograph|c Lnv|ronment lL lncludes Lhe sLudy of human populaLlon on Lhe basls of slze
denslLy locaLlon age gender race and occupaLlon All Lhese demographlc facLors affecL slze of
demand LasLes fashlon llklng preferences of consumer eLc uemographlc envlronmenL dlffers
from counLry Lo counLry and from placeLoplace wlLhln Lhe same counLry lL may also change
over a perlod of Llme 1hese demographlc facLors are
(l) Slze of populaLlon and populaLlon growLh
(ll) Age composlLlon
(lll) Slx composlLlon
(lv) LducaLlon level
(v) lamlly slze and sLrucLure
(vl) Lconomlc sLraLlflcaLlon of populaLlon
(vll) urbanrural populaLlon
1he slze of populaLlon refers Lo LoLal number of populaLlon ln Lhe LargeL area whlle sLrucLure
descrlbes Lhe composlLlon of populaLlon ln Lerms of varlous characLerlsLlcs llke age group
occupaLlonal sLandard rellglon eLc MarkeLs wlLh growlng populaLlon and lncreaslng lncome lead
11

Lo growlng demand for many producLs Plgh populaLlon growLh raLe lncreases labour supply aL
low raLes Lherefore lnvlLlng MnC's
LducaLlon level ls anoLher demographlc facLor affecLlng buslness lf people are hlghly educaLed
Lhere may be a dearLh of unskllled labour ln a counLry and vlceversa hlghly educaLed cusLomers
prefer laLesL hlgh quallLy producLs
Age composlLlon refers Lo proporLlon of dlfferenL age groups ln Lhe populaLlon Sex composlLlon
refers Lo raLlo of female and male members ln Lhe populaLlon Lconomlc sLraLlflcaLlon dlvldes
populaLlon on Lhe basls of lncome llke hlgher lower and mlddle lncome groups 8uslness unlLs
deallng ln consumer goods musL conslder Lhese facLors
6 1echno|og|ca| Lnv|ronment A buslness needs Lo ad[usL Lo Lechnologlcal changes from Llme Lo
Llme Lvery buslness enLerprlse has Lwo funcLlons markeLlng and lnnovaLlon ln Lechnologlcal
envlronmenL Lhe producL or servlce remalns Lhe same buL Lhe meLhod of performlng Lhe funcLlon
ls always new roducL lnnovaLlon ls encouraged by Lhe esLabllshmenL of research and
developmenL deparLmenL ln Lhe organlzaLlon 8esearch ldenLlfles Lhe consumer needs and
provldes lnformaLlon for developlng markeLlng programmes 8apld changes ln Lechnology may be
regarded as a LhreaL by Lhe buslness enLerprlses as Lhey make planLs and producLs obsoleLe
qulckly A flrm whlch ls unable Lo cope wlLh Lechnologlcal changes wlll flnd lL dlfflculL Lo survlve
now
7 Natura| and hys|ca| Lnv|ronment lL lncludes geographlcal and ecologlcal facLors whlch are as
follows
(l) naLural 8esources
(ll) WeaLher and cllmaLlc condlLlons
(lll) 1opographlcal facLors
(lv) LocaLlonal aspecLs
(v) orL faclllLles eLc
1hus almosL every aspecL of buslness depends upon Lhe naLural envlronmenL for example
agrlculLure depends upon naLure Cur economy ls hlghly dependenL on agrlculLure lurLhermore
LransporL and communlcaLlon depend on geographlc facLors Lcologlcal facLors have now assumed
greaL lmporLance CovernmenL has made pollcles for preservaLlon of envlronmenL malnLalnlng
ecologlcal balance conservaLlon of resources eLc lL has puL addlLlonal responslblllLy on Lhe
buslness as Lhese acLlvlLles lncrease Lhe cosL of producLlon arld markeLlng Cn Lhe oLher hand
buslness flrms uslng envlronmenLal frlendly Lechnologles ecofrlendly lnpuLs and ecofrlendly
packages have more neL worLh and soclal lmage as compared Lo oLher flrms 1he values of shares
of Lhose companles are lncreaslng whlch are performlng soclal responslblllLles accordlng Lo Lhe
envlronmenLal proLecLlon norms ConLlnuous awareness campalgn by Lhe medla and
envlronmenLallsLs regardlng Lhe rlsk of envlronmenLal degradaLlon has resulLed ln Lhe 1arge
number of [udgemenLs by Lhe Supreme CourL and LnvlronmenL roLecLlon AcL whlch ls a new
LhreaL for Lhe buslness as Lhe buslness has Lo reLhlnk Lhelr sLraLegy regardlng producLlon
dlsLrlbuLlon and exchange
8 Internat|ona| LnvlronmenL 1he emerglng socloeconomlc envlronmenL aL Lhe global level
characLerlzed by Lhe lncreaslng cross naLlonal mergers lnLernaLlonal compeLlLlon [olnL venLures
beLween organlsaLlons across naLlonal borders and a world wlLhouL naLlonal boundarles has
become a slgnlflcanL feaLure of Loday's buslness world llrms are lncreaslngly buylng and selllng
goods and servlces or lnvesLlng funds across Lhe globe noL only Lhe MnC's buL also Lhe domesLlc
flrms are lncreaslng focus on lnLernaLlonal operaLlons now lnLernaLlonal flrms do Lhelr buslness ln
a number of ways and Lhe mosL common ways of coverlng Lhe global markeLs are
(a) LxporLlng
1

(b) Llcenslng and franchlslng
(c) ConLracL manufacLurlng
(d) Cverseas assembly operaLlons
(e) !olnL venLures
(f) Mergers and acqulslLlons
(g) SLraLeglc alllances eLc