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You are here: IGCSE Business External Environment Revision Notes Economic Environment factors

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Economic Environment factors

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Economic factors affecting  business

These are some of the economic environment factors which affect businesseconomic_environment

At what stage of the business cycle is the economy

If the economy is going through a recession it is obvious that businesses generally will not be doing well due to low aggregate demand in the economy. On the other hand, a boom period will lead to higher business profits and revenue for most of the businesses in the economy.

Inflation rate

High rate of inflation leads to lower purchasing power for consumers resulting in lower demand for goods and services. Moreover, a higher inflation rate will make business uncompetitive in the international market leading to lower sales for the business.

Prevailing interest rates

Higher Interest rates will lead to a fall in the aggregate demand in the economy thus leading to difficulty for business to find customers willing to buy its product. Lower interest rates will lead to a increase in demand in the economy.

Unemployment level

High level of unemployment in the country can also adversely affect a business. People will not have enough money to purchase a firm’s product.

Labor costs

High labor cost will result higher production costs. This will make a firm’s product more expensive as compared to other firms affecting its sales and profit margin.

Levels of disposable income and income distribution

High level of disposable income is good for business producing luxury goods. A large disparity in income distribution will promote businesses dealing in luxury goods as well as inferior goods.


High level of taxes will lead to low disposable income and contraction of demand in the economy. Business will find it difficult to attract consumers.


Tariffs are taxes and imposed on imported goods. If the tariffs are low the domestic market may be flooded with cheap imported goods and the local businesses will have tough time selling their products.

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