In the lives of humans the environment in which we live in defines us; however in business the environment which a business operates influences its decisions. Microeconomics is one of the two branches of economics that focuses on the micro or the smaller details of basic economic theories of demand and supply and how individual businesses make their decisions. Therefore the operations’ and short term decisions of a business fall in the microeconomic branch. Macroeconomics on the other hand has its focus on the major factors or the larger environment in which a business operates, most of which are out of its control or influence. In a nutshell the analysis of the economic environment focuses on all factors influencing decisions that the business takes in the short or long term which end up influencing the business’s future performance.




On an individual level microeconomics involves the study of allocation of scarce resources among competing wants. In business however, microeconomics involves the study of the investment decisions made by a business which are usually influenced by the environment. The microeconomic environment is the determinant of the level of success of a business since it plays a crucial part in the decision making process. It is made up of suppliers, consumers, competing businesses and intermediaries (Smith 2008, p. 171). Each of these factors affects the business independently and may have a positive or a negative impact on the business depending on the nature of business. These factors do have a varying level of impact on the businesses depending on the level of dependence the business may have on the specific factor. For instance a producer may be highly affected by a change in consumer behavior while the same change may have little impact on the retailer due to the variety of products on sale.

The consumers are central to any business operations since they are the reason for the existence of the business. Recent trends have shown that more emphasis have been put on the consumers as more investment and efforts are being directed to marketing and more attention on the quality of the products. This factor plays a very important role in businesses since the trends and preference of consumers determine the type of product and service that businesses offer. The marketing and sales department focuses on this factor and the main determinants of what to produce, at what price and which amount to produce or sell. Intermediaries on the other hand are businesses that help a company to promote its products or facilitate the marketing and distribution (Smith 2008, p. 173). They play a crucial part in providing the market feedback which is crucial in making future decisions especially on the amount to produce. They play a crucial part in developing of strategic plans and enhancing the popularity of a new business or a new product.

The suppliers also play a crucial part for the smooth running of a business. Since the products are dependent on the input, the quality of supplies is a very important part of a business. The procurement function of a business is in charge of ensuring that the supplies are of the right quality, quantity and are delivered at the right time. These three factors are very important in determining the type of impact suppliers have on an organization. The final factor is the competitors who are very influential on a company’s decision regarding its products portfolio. The main reason behind this is because some of the competitors are trend setters and as a result they influence the type of products a company will produce (Baumol & Blinder 2009). The competitors or the level of competition is also important because of its influence on the prices. In a competitive market, the prices are set by the market forces of demand and supply and therefore the business has to adjust accordingly.


In economics we deal with a number of assumptions with one of the main assumptions being that all businesses seek to maximize profits. Having this in mind, it is therefore obvious that business objectives and behavior is always aimed at maximizing profits. However this is guided by the business’s mission and vision statement and its code of conduct. The objectives which are usually optimal in nature are a product of the analysis of marginal costs and marginal revenue figures (Baumol & Blinder 2009). Other than profit maximization the behavior and objectives of a business are also influenced by its social responsibilities such as environmental care, sale of health products among other responsible actions. It important to note that the behavior of a business is subject to the industry’s set of rules and laws which it ought to abide to failure to which it will be termed to have acted unethically and therefore will attract a penalty which maybe in monetary form or a ban.

Business objectives are defined as ‘statements of specific outcomes that are to be achieved’ (Riley 2012). Other than profitability they are usually influenced by various factors key among them being stakeholder needs and expectations. Since a business is made up of various stakeholders ranging from customers, shareholders, suppliers and the government, the business objective has to balance and satisfy each of the stakeholders. Another factor is the technological opportunities which various scholars have argued that it is influenced by demand while others argue that its appropriateness influences demand either way it influences the objectives (Zakic´ et al 2008). The intensity of competition is also an important factor in decision making as it influences the type of objectives to be set as a highly competitive market leads to innovation and survival oriented objectives while a less competitive market usually have growth and profit maximization oriented objectives. It is important to note that objectives aimed at profitability, productivity, customer service and growth are more popular (Root 2014).


There are two main markets structures which have distinct characteristics and thrive in different environments. The two structures are an imperfect competition structure and the perfect competition market structure. The most common structure is the perfect competition market which is characterized by a large number of buyers and sellers however it does not exist in entirety. The market structure also exhibits characteristics such as few barriers to entry or exit to the market, existence of many substitutes, existence of perfect information in the market and the prices are entirely set by the market (Heakal 2014). An organization that exists in such a market therefore has no influence on the market and in most cases has to invest a lot in marketing and innovation. This is because for a business to be successful it must have a unique feature, an established target market and have a competitive advantage.

The imperfect competition market is made of two types; a monopoly and an oligopoly. A monopolistic market on the other hand is almost the opposite of a perfect competitive market. This market structure has only one producer or seller in the market which has exclusive rights to the industry. The monopoly is the price setter, there exist barriers to entry and exit due to high startup capital needed or the ownership of an exclusive right to strategic input and the information about the market is imperfect (Musgrave & Kacapyr 2006). An organization which is a monopoly is never influenced by the market forces and it’s the market trend setter. The oligopoly market on the other hand is made up of a few only a few firms, has high barriers to entry, produce almost identical products and the firms control the prices. The market is characterized by aggressive advertisement and frequent price wars for non collusive firms (Musgrave & Kacapyr 2006). An organization in this market structure must have a vibrant marketing team and invest a lot in product differentiation and creation of a wide range of products.




The world today has evolved from the old partitioned continents to become a one global village whereby each market counts. Instability in the oil rich West African coastline will have a global impact, economic shocks in the US economy will send shockwaves throughout the world while harsh climate in China will lead to fluctuations in prices in the entire world, that’s how interconnected the world has become. Therefore the international economic environment is part and parcel of the development. The international environment is made up by a number of features key among them being, globalization, migration, patterns of trade, regionalism and international financial systems.

Globalization is the process through which social, political, and technological links are established between countries (Hamilton & Webster 2012). This is the process through which the partitions between countries which act as barriers are removed making the world one village in which exchange of goods, services and money prevails. As the links grow businesses become more and more integrated in the same thus creating as special trading environment known as the global economy. This is the main reason why a collapse of any market involved in the global economy leads to price fluctuations or instability of the entire world economy. The environment is also characterized by a number of trade patterns some of which have been in existence for quite some time while others have been introduced recently. One such pattern is the high levels of trade between industrialized nations. For instance a report by FAO indicated that USA, Western Europe and Japan had over 66% of world trade a trend that ensures continued domination.

Regionalism which is the union of countries from the same region is another important feature of the international environment. These unions are usually formed to bolster trade within the partners as well as their bargaining power. This is because the unions command a bigger share of market and therefore are in a position to impact the market. Regionalism has both benefits and disadvantages to trade because some of the dominant unions such as EU use their muscle to exploit other trading partners.  The existence of an international financial system is another key feature of the international economic environment. The International Monetary Fund (IMF) and the World Bank are the key institutions which ensure there is stability in the international economy. The two institutions have been specifically very helpful in the stabilization and development of third world countries through subsidized long term loans and grants.



Participation in global business means that a business has to be ready to adopt various changes and come up with strategic plans for each market for it to be successful. This is because being part of international business means that the business will be subject to varying political, technological, social, legal and economical forces. The political forces have been known to have massive impacts on the business since they are not negotiable or influenced by the market sources (Conklin 2011). These forces maybe in form of campaigns and tariffs against international goods which reduces the tax margins or leads to low sales due to high prices or labor reforms and laws such as labor benefits systems which lead to high operating costs. Legal forces play an important part in the success of international business since the business has to satisfy all the legal requirements of the specific country before being allowed to carry out business in the country. These legal requirements may prevent a business from doing business in the country in countries such as Mexico where investment in energy sector is illegal for foreigners.

Corporate Social responsibilities and ethical codes are very crucial in international trade as they encompass quite a large number of issues which in most cases are common across countries. However the difference in cultures has been the major social force influencing businesses and the issue goes beyond CSR and the ethic codes (Conklin 2011). This has led to organizations being forced to review their structures and utilize the Hofstede and Bond typology to come up with all inclusive structures (Conklin 2011). The economic forces have also been influential in carrying out international businesses. Factors such as the level of inflation, level of unemployment among other factors have been influential in making decisions on whether to invest in a specific country or not (Campbell & Craig 2005). Finally the technological forces are very influential especially in regard to the social capital. This is because each nation within each region has a unique innovation system which is a key component of the environment of business (Conklin 2011). Therefore these innovation systems are very important to new businesses as they are influential in determining the businesses’ profitability.






The environment forms a crucial part of business especially when operating in a foreign country. It does not only influence the decisions but it determines how you do business. The management always have a daunting duty of identifying the type of environment, determining its influence and coming up with policies to adjust or counter the environmental influences. It is however important to note that success is not guaranteed and forces such as political and legal forces are unavoidable and cannot be countered and therefore a thorough analysis and research is a crucial part of international investors duties.



Baumol, WJ & Blinder, AS 2006, Microeconomics: principles and policy, 10th edn, Mason, OH: Thomson/South-Western.

The Economic Environment, Chapter 2: The Economic Environment, viewed 20 June 2014,  <>.

Conklin, D 2011 ‘The global environment of business: New paradigms for international management’  Ivey Business Journal, vol. 12, no.2, viewed 20 June 2014, <>.

Hamilton, L & Webster P 2012, The international business environment, 2nd edn, Oxford: Oxford University Press.

Musgrave, F & Kacapyr, E 2006, Barron’s how to prepare for the AP microeconomics/macroeconomics advanced placement examinations 2nd edn Hauppauge, N.Y.: Barron’s.

Riley, J 2012, ‘Objectives in Business Strategy’ Business objectives, viewed 20 June 2014, <>.

Zakić, N Jovanović, A & Stamatović, M 2008, ‘External and Internal Factors Affecting the Product and Business Process Innovation’ Facta Universitatis, vol. 5, no. 1, pp. 17 – 29.

Do you need an Original High Quality Academic Custom Essay?