Essay on Describe and Analyse the External Environment of Business.

1523 Words Jan 3rd, 2006 7 Pages
The external environment is the "external context within which an organisation exists and operates."1 One of the ways in which the external environment can be analysed is by assessing the impact of politics, the economy, social factors and technological factors (P.E.S.T. analysis). The organisations are affected either generally or immediately by the external environment. The immediate factors, also referred to as the operational environment, include aspects such as suppliers, financial institutions, customers and labour markets. The general features, or the contextual environment, comprise of the economic, political, legal and technological influences, for example. The political environment has an affect on businesses because …show more content…
The government has to control inflation because unemployment can be caused, because firms have to reduce costs and reducing staff is an easy way to do this and effective for luxury good companies because demand will be less so therefore they will not have to produce as much, hence not as many staff will be required. Unemployment therefore needs reducing because as ‘Phillips Curve' suggests inflation is higher when unemployment is high.
International trade is affected because foreign countries will receive a less favourable exchange rate and they may therefore reduce trade with UK companies, which again affects their profits.
The government can use contractionary policy to reduce inflation and this reduces demand. They can increase taxation, reduce government spending or do both. By doing both they are relating to Fiscal policy and by taking in more money than they spending, for example on unemployment benefits, they reduce consumer power and therefore aggregate demand will fall. This therefore slows down the economy and makes it more stable.
A recession would have the opposite effect to inflation of there being a larger supply than demand, which results in lower priced goods. For example the pound would be worth more and consumers would have a larger disposable income to spend on luxury goods and services. This would be tackled in the opposite way to inflation by the government
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