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.
MICROECONOMIC BUSINESS ENVIRONMENT
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.
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