Microeconomics In Business Environment: Implications And Analysis

Micro and Macro Environments

Question:

Discuss about the Sustainability Determinants of Market Structure.

Economics, as a discipline itself, has immense implications in the multidimensional aspects of the growth and activities of a country. The commercial and industrial operations, amongst these aspects, are primarily dependant on the different economic variables, factors and their dynamics in the domain where they operate. These economic factors are broadly classified into microeconomic and macroeconomic ones (Baumol and Blinder 2015). The microeconomic aspects in the operational framework of a concerned business, are those aspects which are subjective to the concerned organization and its decision making process only. Keeping this into consideration, the concerned article tries to discuss and analyze the micro-economic components which are present in the business environment in general and which have implications on the business decisions as well as profitability and sustainability management of the same.

The overall environment, under which a business usually operates, can be divided into micro and macro environments. The former, as can be gauged from the term itself, refers to the specific and unique subjective task environment of a particular commercial institution, which have considerable implications on the regular working framework of the businesses. Unlike the implications of the macro environment of the businesses, the effects of any changes or dynamics in the micro environment are seen on the businesses in the short run itself (Babatunde and Adebisi 2012).

The elements of the micro environment of any business, consists of economic, social, political and several endogenous as well as exogenous factors present in the domain under which the business operates (Rocha 2012). Of these factors, the microeconomic factors, which have considerable implications on the operations of the businesses as well as on their profitability, expansion, prospects as well as long term sustainability are discussed as follows:

Factors of Production and their scarcity- The primary economic notion on which the businesses operate is that all the factors used for production of goods and services are scarce or limited in terms of availability. In economics, the factors of production are divided into four types:

1. a) Labor- This consists of the human labors and workers required for production of goods and services. The labors are paid in the form of wages.
2. b) Land- This resource includes the factors like land, water and all the natural resources which are required for any kind of production. The price of these types of resources are rent.
3. c) Capital- This type of resource includes financing resources as well as buildings, plants and machineries, the prices of the same being interest.
4. d) Entrepreneurship- This is required in order to make all the other three resources utilized optimally such that the production and revenue generation is maximum. The entrepreneurs are paid in form of the profit generated.

All these factors being scarce, it is one of the crucial activities of the businesses to utilize these resources optimally such that their cost of production is minimized and their revenue and profit generation is maximized.

Demand and supply dynamics- One of the primary microeconomic factors present in the micro environment of any business, is the aspects of dynamics in the demand supply scenario which the business experiences in its operations. Whereas the demand side shows the dynamics and attributes of the buyers, the supply side shows the behaviors of the suppliers (Herrera-Soler and White 2012).

The prospect of a business and its profitability largely depends on the demand conditions which the same faces in a market. Generally, with the increase in the demand of the products or services, the price increases, keeping the supply constant, which can be shown as follows:

The changes in demand of the products of a business management , in turn depends on the following factors:

• Income of the consumers- With an increase in the overall income of the consumers, the demand for the products is expected to increase and vice versa (provided the commodities are normal goods).
• Price- The increase or decreases in the prices at which the businesses sell their products have inverse implications, generally, on the demand conditions which the businesses face.
• Price of related goods- The demand faced by the businesses are also subjected to the prices of the substitute and complementary products of the commodities which they sell.
• Preferences- The tastes and preferences of the consumers also have implications on the demand conditions faced by the businesses (Rios, McConnell and Brue 2013).
• Price elasticity- The elasticity of demand for a product shows the degree of responsiveness of the demand for the same with respect to one unit change in the price of the same. The demand faced by the businesses, thus, also depends on the own price as well as cross price elasticity of demand of the products which they produce and sell (Thimmapuram and Kim 2013).

Microeconomic Factors in the Business Environment

The supply dynamics of any business also depends on the following:

• Price- High prices of their products encourage the businesses to supply more.
• Cost of production- With decrease in the cost of production and implementation of efficiency augmenting technologies, the supply of the businesses increase (Stanley and Doucouliagos 2012).
• Aims- The long term as well as short term aims of the businesses also plays vital roles in determining the supply dynamics of the organizations.

The increase in the supply leads to changes in the price and quantity demanded which can be showed as follows:

Together these dynamics in the demand and supply curves lead to the situation of equilibrium at the point where the demand and the supply curve intersects each other, which can be shown as follows:

Any anomaly in the demand and supply can lead to excess demand or supply in the market, which in turn can be detrimental for the producers and thus, has to be taken into consideration in any kind of business organizations.

From the above discussion, it can be seen that the microeconomic factors present in the business environment have considerable implications on the activities of the businesses, thereby indicating towards the fact that the economic factors play key roles in the business objectives and behaviors, which include different decision makings in their operational framework.

The primary objective of any commercial enterprise, especially those of private concerns, in terms of economics is that of profit maximization and cost minimization. While the former objective is achieved by increasing the revenues the latter is achieved by implementing efficient production processes, involving time and cost saving technologies and optimal number of labor and capital resources (Kagel and Roth 2016). In this context, the economic concepts of scarcity of resources and proper allocations of resources in the production process, hold considerable importance in the operational framework and the behavior of the commercial organizations.

The business behaviors of the companies are also subjected to the three key questions of economics- what to produce, how to produce and for whom to produce. The first question helps the businesses to decide their area of ventures in the global market, while the second one leads to the implementation of production processes optimal for the same. By answering the third question, the company tries to select and categorize their target clientele and geographical regions. Together these three basic questions of economics contribute considerably in determining the overall decision-making processes, objectives and operational behaviors of the commercial organizations across the globe (Fuss and McFadden 2014).

The production activities of companies are also related to the nature of the commodity which they provide to the customers. In this context, the concept of elasticity of demand is found to be highly relevant. The elasticity of demand refers to the degree of responsiveness of the demand for a commodity in case of a unit change in the price of the same. If with the change in price, the demand changes less than proportionately then the demand for the commodity is said to be inelastic. On the other hand, if the demand changes more than proportionately then it is said to be elastic in demand.

The firms need to take into consideration the elasticity of the products they provide and thus they need to base their business decision on the same.

On the other hand, there also remains several regulatory microeconomic strategies taken by the government of the countries in order to keep the prices at levels which are less hurting to the consumers or the suppliers according to the needs of the situation. These are known as price ceiling and price flooring. While price ceiling helps in setting the maximum price of the commodity price flooring refers to the minimum price of the same, which have to be abided by the businesses.

Factors of Production and their scarcity

In terms of economics, the global markets for goods and services are of several types, varying on the basis of the number of customers, density of suppliers, types of goods or services sold, barriers to entry and exit and the level of market power each producer and buyer enjoys. The primary types of markets are Monopoly, Oligopoly, Monopolistic Competition and Perfect Competition, each having their own unique set of characteristics (Dunne et al., 2013). These factors are crucial in determining the level of competition a business is going to experience while venturing in any market and also reflects the ways it can take to sustain in the market. The profitability, prospects and long term sustainability of the commercial organizations depend considerably the type of market the businesses venture into and the dynamics in the market with time.

In general, with the increase in the number of supply side providers in a market, the competitions of the businesses increase, thereby hampering their profitability and forcing them to implement more cost effective technologies. On the other hand, presence of higher market power and consumers, the businesses can implement price discrimination techniques in order to charge higher from those with less elastic demand and lower from those with more elastic demand (Gibbons and Roberts 2012).

Monopoly Market- In this type of market structure, there remains only one supplier and many buyers, which in turn leads to consolidation of market power in the hands of the supplier. The producer enjoys decision making power due to the lack of substitute commodities and there remains entry and exit barriers in the market. For instance, the arms and ammunition industry are usually monopolistic ones.

Oligopoly Market- Here, there remains many buyers and a few (not more than 20) sellers, which gives considerable market power to each of the seller. Each of the seller sells differentiated products and their production decisions depend on the decisions and actions of the others. The supermarket industries and banking industries are in general examples of oligopolistic markets.

Perfectly Competitive Market- There are many buyers and many sellers in the market and each of them are price takers, without any market power. There remains free entry and exit in this market and the goods sold are homogenous in nature. This is primarily hypothetical form of a market.

Monopolistically Competitive Market- This type of market has the characteristics of both monopoly as well as perfect competition. While there are many buyers and sellers, each of the sellers sell differentiated commodities.

The effects of the microeconomic environment and the changes in the same on the businesses can be shown with the help of the business operations of one of the leading multinational giants in the domain of mobile and electronics- Samsung. The company mainly ventures in an oligopolistic market, with few big suppliers and a consistently increasing number of buyers. With the increase in the demand for smart phones, globally, the company has resorted to implementation of more cost effective technologies, with the objective of catering to a greater number of clients (Peng 2013). The company also resorts to the production of mobiles of different price ranges, thereby catering to the different socio-economic strata of the world, which is one of the primary reasons behind the expansion of profitability of Samsung.

Demand and Supply Dynamics

From the above discussion, it can be concluded that the microeconomic environment of a business organization and the economic component if the environment, consisting of the demand supply trends, elasticity of demand, changes in the consumer behavior as well as the dynamics in the market structures, have considerable impacts on the decision making process and corporate behaviors of the businesses across the world.

The term “Macroeconomics”, as can be gauged from the term itself, refers to the general economic traits and the dynamics in the economic factors which have implications on a broad geographical region, usually a country as a whole. The macroeconomic scenario of a country usually consists of different sectors, primarily the household sector, the corporate or business sector and the governing body of the country and this discipline primarily deals with the movement of the economic factors and resources among these sectors and their behavior (Burda and Wyplosz 2013).

One of the primary components of macroeconomics is the national income of a country, which in turn has considerable implications on the growth and economic prosperity of the nations as a whole. The national income of a country shows the amount of income or expenditures or productivity of a nation, within a specified period of time. The most commonly used measure of national income of a country is the Gross Domestic Product, which shows the sum of the value of the goods and services (final) that are produced within the geographical domain of a country within a period, usually one economic year (Magazzino 2012).

The national income of a country consists of different components, which can be shown with the help of the following widely used equation, known as the national income accounting equation:

Y= C+I+G+NX, where, Y = National income or output, C = the total consumption expenditure, I= Investment Expenditure, G= the government or public sector expenditures and NX= The net exports of the country calculated by subtracting the imports of the country from the total exports of the same (Fixler and Johnson 2014). Each of these components play vital role in determining the national income and the behavior of the economy of a country as a whole.

These factors of the national income of a country have direct linkages with the ways in which the businesses operate in an economy, as the different sectors of a macro economy, the household, corporate and government sectors are interconnected with respect of the flow of income and economic and productive resources, as can be seen with the help of the concept of circular flow in economics:

As can be seen from the above figure, the operations and business decisions of any commercial institution are subjected to the macroeconomic trends present in the environment in which the businesses operate, due to the presence of multi-lateral linkages of the businesses with not only the consumption sector but also with the government and its activities in the economy (Deleplace and Nell 2016). The government of a country usually tries to run the economy of the same under a regulatory framework of different policies and strategies, which evidently affect the behavior of all the economic agents including the business organizations.

Implications of Microeconomic Factors

Another aspect of the macroeconomic environment of a country is known as the multiplier effect. When there is an injection of demand in the circular flow of income of a country, it leads to a multiplier effect in terms of an increase in income, which in turn leads to an increase in spending, thereby contributing to increase in demand and the cycle goes one. Thus, the multiplier effect shows the final increased income which arises from new injection of expenditures and takes several cycles to increase. The same, however, depends on the marginal propensity of expenditure of the households.

As discussed above, the behavior and trends prevailing in the economy of countries can be considerably attributed to the policy framework implemented and maintained by the governing authorities of that country. There are in general two types of policies which are undertaken by the governing authorities of a country to regulate its economic scenario, to achieve the long-term goals of increased welfare of the residents of the country and its economic prosperity (Rodrik 2012).

Fiscal Policy- The fiscal policies are those, which are undertaken in the form of adjusting the spending and the tax collection levels of the government of any country, in order to influence the behaviors of the economic agents of a country. Fiscal policies are of two types- expansionary and contractionary. The former ones are used during the periods of stagnation, recession, high unemployment in an economy, in order to stimulate the production activities of the economy. Done mainly by lowering taxes or increasing the government expenditures, these policies affect the economy by generating more productive activities in the same (Sims 2016). On the other hand, the contractionary ones are used at times of high demand, high inflation situations in economies and help in reducing the economic growth and exorbitant increase in demand and price by increasing taxes.

Monetary Policy- These policies are taken by the monetary authorities of an economy in order to control the supply of money, thereby targeting the inflation and interest rates. The monetary policies primarily try to maintain price stability and parity in money demand and supply in the economy, with direct implications on the monetary variables. Monetary policies are also of expansionary and contractionary types. The expansionary ones involve reduction of rate of interests and increase of liquidity of money and are used in the periods of economic stagnation, in order to lower unemployment and recessionary situations. On the other hand, the contractionary policies, involving interest hike and sell of securities, help in reducing inflationary situations in an economy (Hansen 2013).

Thus, it can be asserted that the conditions and activities in the economies of the countries depend considerably on the types of monetary and fiscal policy framework existing in the countries and while efficient implementations of these policies help in keeping the economies prospering and floating, usage of improper and short sighted policies often lead to emergence of unfavorable situations in the economies, having immense implications on the overall well being of the residents of the countries.

Business Behaviors and Economics

One of the primary examples of the implications of inappropriate policy structure, in the global scenario is that of the 2008 Financial Crisis which is counted as one of the worst global financial crisis in the international scenario, after the 1930s Great Depression. The primary reason behind the emergence of the international banking crisis was the subprime mortgage crisis of 2007, in the USA, which was in turn an effect of the bursting of the residential asset market bubble in the country (Fratzscher 2012).  The primary reason behind this crisis was the excessively lenient and expansionary monetary and fiscal policies taken by the government, prior to the crisis, in order to stimulate investments in the economy. This led to excessive risk-taking behavior among the banks and their lending activities, which ultimately ended up in creating an investment bubble, the bursting of which had immense negative implications not only on the economy of the USA but on the entire global economy (Chen et al., 2016).

The macro environment of a business consists of different exogenous as well as endogenous factors in the organization. While the internal factors include the strengths, weaknesses, threats and opportunities present within the operational framework of a business, the exogenous factors include the social, political, economic, legal, environmental and technological attributes of the environment in which a business organization operates.

The macroeconomic factors affecting the business decisions of firms are mainly as follows:

Interest rates- The investment decisions and loan taking activities of the companies depend on the interest rates prevailing in an economy. 

Inflation- The pricing decisions of businesses heavily depend on the inflation rates of the economy.

Exchange rates- The businesses imports and exports products and services based on the exchange rate dynamics (Borio 2014).

Taxes- The tax structure also plays key role in determining whether the companies would expand or not.

Recession- Stagnancy or recessionary situations in an economy also decides the purchasing power of the customers, thereby affecting the production decisions of the businesses.

Example: The recent macroeconomic trends persisting in the Irish economy have considerable impacts of the business organizations and their behaviors in the economy of Ireland. The policy of the government to achieve full employment is seen to creation of new employment scopes in the economy of the country in the recent periods, thereby leading to an increasing productivity of the country. However, this has also led to higher aggregate demand, which in turn has led to increase in the overall price levels, which can be seen in the higher inflation in the country.

Given that Samsung is a multinational tech giant, the current situations of economic crisis in the global scenario has affected the purchasing powers of the customers of the company. With the increase in the volatility and uncertainty in the macroeconomic environment of the organization, the company has been compelled to reorient its strategies accordingly (Ying 2016). The company has been increasingly expanding in the emerging markets of the developing economies in order to capture new markets and compensate the loss which they have been facing due to the saturation and volatility in the already existing developed economies.

Elasticity of Demand

The strategies taken by Samsung becomes even more feasible by looking at the internal and external conditions (positive and negative) of the company and the exogenous factors affecting the same, which can be seen by the SWOT and PESTLE analysis of Samsung:

Strengths ·       Long term presence ·       Largest manufacturer of phones and television globally ·       Variety of models ·       Innovations ·       Global presence and awareness ·        Provides intermediate products to many other manufactures	Weaknesses ·       Intense competition ·       Many companies providing products at much cheaper prices ·       Issues with several products like Note 7 ·       Affected by other tech giants like Apple ·        Customers losing confidence due  to quality and security issues of the products
Opportunities ·       Has scopes for innovations in order to solve the quality issues ·       Venturing scopes in the developing countries’ emerging markets ·        Region specific production scope, takin into account the diversity of the population, which may help in boosting the brand popularity and awareness	Threats ·       New competitors are primarily rising from the emerging markets of the Asian countries ·       Local brands like Mi, Oppo, Vivo and others are going global ·        The market and demand dynamics are becoming highly fluctuating due to increasing options

Political Factors- Samsung operating in a huge number of countries, mainly experience political environment conducive to its business. However, recent local political tensions in countries like South Korea, African and Latin American countries and others, have affected the global business scenario thereby affecting the prospects of the company too.

Economic Factors- The ongoing global financial crisis in the developed countries especially, has resulted in decrease in the purchasing power of the customers in these countries, thereby forcing the company to venture in the emerging markets in the developing countries, where the company is already facing considerable competition from the local brands which are going global.

Social Factors- Venturing in different countries with different socio-cultural trends and varied preferences and needs of the customers, the company has to incorporate a Glocal (Global+Local) strategy in order to retain their customers, which indicates towards the strategy of customization of their products according to the preferences of their clients.

Technological Factors- The company has been known for its innovative operational framework and product range. However, the company has also faced several backlashes due to the backfiring of their technologies like that in Note 7 in the Galaxy series. This, clubbed with the customer satisfaction from other brands and their global technological competitiveness, has resulted in more shift of the clientele of the company.

Legal- factors-  The allegations of the company imitating the designs of Apple has already landed up Samsung in a global legal debacle and the company had to pay heavy penalties for the same. Multiple lawsuits in many countries has also been formed against Samsung regarding its strategies and product issues, thereby teaching the same the importance of incorporation of the legal framework of the countries it serves, in its operational and productive framework.

Environmental Factors- With the awareness regarding environmental degradation spreading globally and with customers becoming more concerned about ethical and environment friendly production, the company has already started to incorporate recycling and environment friendly strategies in its production process and in creating less hazardous workplaces for its workers in order to avoid the backlash from the global population, which may hamper its prospects and sustainability severely.

The above discussion ascertains the fact that like the microeconomic factors, the macroeconomic factors, as well as other exogenous and endogenous factors, present in the business environment of an economy, have considerable implications on the decisions and strategies of the businesses and also on their long term as well as short term profitability, prospects and sustainability.

References

Babatunde, B.O. and Adebisi, A.O., 2012. Strategic Environmental Scanning and Organization Performance in a Competitive Business Environment. Economic Insights-Trends & Challenges, 64(1).

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Burda, M. and Wyplosz, C., 2013. Macroeconomics: a European text. Oxford university press.

Chen, Q., Filardo, A., He, D. and Zhu, F., 2016. Financial crisis, US unconventional monetary policy and international spillovers. Journal of International Money and Finance, 67, pp.62-81.

Deleplace, G. and Nell, E.J. eds., 2016. Money in Motion: the post-Keynesian and circulation approaches. Springer.

Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), pp.462-487.

Faculty.washington.edu. (2018). Demand, Supply, and Surpluses. Faculty.washington.edu. Retrieved 12 March 2018, from https://faculty.washington.edu/danby/bls324/surplus.html

Fixler, D. and Johnson, D.S., 2014. Accounting for the Distribution of Income in the US National Accounts. In Measuring Economic Sustainability and Progress (pp. 213-244). University of Chicago Press.

Fratzscher, M., 2012. Capital flows, push versus pull factors and the global financial crisis. Journal of International Economics, 88(2), pp.341-356.

Fuss, M. and McFadden, D. eds., 2014. Production Economics: A Dual Approach to Theory and Applications: Applications of the Theory of Production (Vol. 2). Elsevier.

Gibbons, R. and Roberts, J. eds., 2012. The handbook of organizational economics. Princeton University Press.

Hansen, A.H., 2013. Fiscal policy & business cycles. Routledge.

Herrera-Soler, H. and White, M. eds., 2012. Metaphor and mills: Figurative language in business and economics (Vol. 19). Walter de Gruyter.

Kagel, J.H. and Roth, A.E. eds., 2016. The Handbook of Experimental Economics, Volume 2: The Handbook of Experimental Economics. Princeton university press.

Magazzino, C., 2012. Wagner versus Keynes: Public spending and national income in Italy. Journal of Policy Modeling, 34(6), pp.890-905.

Peng, M.W., 2013. Global strategy. Cengage learning.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Rocha, E.A.G., 2012. The impact of the business environment on the size of the micro, small and medium enterprise sector; preliminary findings from a cross-country comparison. Procedia Economics and Finance, 4, pp.335-349.

Rodrik, D., 2012. Why we learn nothing from regressing economic growth on policies.

Sims, C.A., 2016, August. Fiscal policy, monetary policy and central bank independence. In Kansas Citi Fed Jackson Hole Conference.

Stanley, T.D. and Doucouliagos, H., 2012. Meta-regression analysis in economics and business (Vol. 5). Routledge.

Thimmapuram, P.R. and Kim, J., 2013. Consumers’ price elasticity of demand modeling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), pp.390-397.

Ying, F., 2016. Samsung’s international strategy. An Analysis.