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The government, in every country, regulates the business according to its defined
priorities. Legal system of a country is framed by the government. The laws which
are passed by the government for business operation is called legal environment. In
every country, the government regulates business activities. These regulations of
government are considered as legal environment. In practice legal and regulatory
goes hand in hand. The limits for business operations are decided by regulatory
environment & this is also called legal environment.

Legal environment in a country has a dominating position on all decisions of

organization. As all business policies are highly influenced by government, the
organization should have thorough knowledge of these policies because non-
implementation of legal policies results in heavy fines, penalties & punishment &
therefore every organization must follow all these regulations.



The problem of an economy like that of India lies in the fact that decisions are
controlled by government and other regulatory authorities, business firms don’t
have much freedom to take their own decisions. It is a challenge for every business
enterprise to run its activities meeting such wide formalities and stipulations
required by the authorities.

The business sector has to maintain a sound and steady interaction with other
sectors of the economy viz. the household sector, capital market, the government
and the external sector. It is undeniable that individual business enterprise has
very limited option to have a proactive role in determining its environment. But
they may form trade associations like CII, FICCI, and ASSOCHAM to exert their
influence on changing government policies or bringing the policies in their favour.

At the time of budget preparations the government interacts with the trade
associations and offer tax relief in the deserving cases. Government also gives
concessions, incentive for certain industries which require development and
protection. Thus trade associations can contribute a lot in changing environment.


Meaning of Social System:

It is Talcott Parsons who has given the concept of ‘system’ current in modern
sociology. Social system refers to’ an orderly arrangement, an inter relationships of
parts. In the arrangement, every part has a fixed place and definite role to play. The
parts are bound by interaction

Society is a system of usages, authority and mutuality based on “We” felling and
likeness. Differences within the society are not excluded. These are, however,
subordinated to likeness. Inter-dependence and cooperation are its basis. It is
bound by reciprocal awareness. It is essentially a pattern for imparting the social

It consists in mutual inter action and interrelation of individuals and of the

structure formed by their relations. It is not time bound. It is different from an
aggregate of people and community. According to Lapiere, “The term society refers
not to group of people, but to the complex pattern of the norms of inter action that
arises among and between them.”


Features of Mixed Economy:

A mixed economy possesses the following features:

1. Public Sector:

2. Private Sector:

3. Joint Sector:

4. Cooperative Sector:

5. Freedom and Control:

6. Economic Planning:

7. Social Welfare:


Governments across the world earn "public revenue" from the following main

 Tax revenue

 Non-tax revenue

 Capital receipts

Culture is the characteristics and knowledge of a particular group of people,
defined by everything from language, religion, cuisine, social habits, music and
The Center for Advance Research on Language Acquisition goes a step further,
defining culture as shared patterns of behaviors and interactions, cognitive
constructs and understanding that are learned by socialization. Thus, it can be
seen as the growth of a group identity fostered by social patterns unique to the


The monetary value of all the finished goods and services produced within a
country's borders in a specific time period, though GDP is usually calculated on an
annual basis. It includes all of private and public consumption, government
outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX


"C" is equal to all private consumption, or consumer spending, in a nation's

economy"G" is the sum of government spending"I" is the sum of all the country's
businesses spending on capital"NX" is the nation's total net exports, calculated as
total exports minus total imports. (NX = Exports - Imports)


Financial environment includes bond markets, forex markets, stock markets,
commodity markets, OTC markets, Real estate markets and cash or spot markets.
All these markets play an important role in raising finances for the companies and
at the same time give profits to the investors. Basically a financial environment
comprises of the public sector enterprises, legal authorities, fiscal authorities which
are directly or indirectly impact the financial system, monetary institutions,
financial institutions, and official organizations. All these organizations have a
direct impact on the financial system of the companies including private and
public. Therefore, in order to give the money to the people who need it and to give
the profit to the people who want to invest it, financial markets play an important


The main components of capital market are: 1. Primary Market 2. Secondary
Market !

1. Primary Market (New Issue Market):

Primary market is also known as new issue market. As in this market securities are
sold for the first time, i.e., new securities are issued from the company. Primary
capital market directly contributes in capital formation because in primary market
company goes directly to investors and utilises these funds for investment in
buildings, plants, machinery etc.

2. Secondary Market (Stock Exchange):

The secondary market is the market for the sale and purchase of previously issued
or second hand securities.

In secondary market securities are not directly issued by the company to investors.
The securities are sold by existing investors to other investors. Sometimes the
investor is in need of cash and another investor wants to buy the shares of the
company as he could not get directly from company. Then both the investors can
meet in secondary market and exchange securities for cash through intermediary
called broker.



Impact of economic environment on business:

Business, now-a-days is vitally affected by the economic, social, legal,

technological and political factors. These factors collectively form business
environment. Business environment, as such, is the total of all external
forces, which affect the organization and operations of business. The
environment of an organization has got internal, operational and general
lives managers must be aware of these three environmental levels and their
relationship and importance.

Now we discuss those factors in details as below:

Economic dimensions of environment
Economic environment refers to the aggregate of the nature of economic
system of the country, the structural anatomy of the economy to economic
policies of the government the organization of the capital market, the nature
of factor endowment, business cycles, the socio-economic infrastructure etc.
The successful businessman visualizes the external factors affecting the
business, anticipating the prospective market situations and makes suitable
to get the maximum with minimize cost

Economic factors that affect the business environments are as under:

 Government economic policies
 rate of interest set by the centeral bank of any country
 Per capita Income which has a huge impact on business environment
by changing their consumption behavior
 Privatization policy by the government
 instablity in the economy due to bad political conditions in the county
affects the business environment
 Dumping
 Customs duty structure
 Airline air freight charges
 Foreign investment in the country


1. Economic Environment
The economic environment consists of factors that affect consumer
purchasing power and spending patterns. Economic factors include
business cycles, inflation, unemployment, interest rates, and income.
Changes in major economic variables have a significant impact on the

2. Technological Environment
The technological environment refers to new technologies, which create new
product and market opportunities. Technological developments are the most
manageable uncontrollable force faced by marketers. Organizations need to
be aware of new technologies in order to turn these advances into
opportunities and a competitive edge

3. Political and Legal Environment

Organizations must operate within a framework of governmental regulation
and legislation. Government relationships with organizations encompass
subsidies, tariffs, import quotas, and deregulation of industries.
The political environment includes governmental and special interest groups
that influence and limit various organizations and individuals in a given

4. Demographic Environment
Demographics tell marketers who current and potential customers are;
where they are; and how many are likely to buy what the marketer is selling.
Demography is the study of human populations in terms of size, density,
location, age, sex, race, occupation, and other statistics. Changes in the
demographic environment can result in significant opportunities and threats
presenting themselves to the organization. Major trends for marketers in the
demographic environment include worldwide explosive population growth; a
changing age, ethnic and educational mix; new types of households; and
geographical shifts in population.

5. Social / Cultural Environment

Social/cultural forces are the most difficult uncontrollable variables to
predict. It is important for marketers to understand and appreciate the
cultural values of the environment in which they operate

6. Ecosystem Environment
The ecosystem refers to natural systems and its resources that are needed
as inputs by marketers or that are affected by marketing activities. Green
marketing or environmental concern about the physical environment has
intensified in recent years. To avoid shortages in raw materials,
organizations can use renewable resources (such as forests) and alternatives
(such as solar and wind energy) for nonrenewable resources (such as oil and
coal). Organizations can limit their energy usage by increasing efficiency.
Goodwill can be built by voluntarily engaging in pollution prevention
activities and natural resource.


The advantage of this type of market is that it allows competition between

producers with regulations in place to protect society as a whole. With the
government being present in the economy it brings a sense of security to sellers
and buyers. This security helps maintain a stable economy.

Overall, businesses, as well as consumers, in mixed economies have freedoms that

are important to both. And while government is actively involved and provides
support, its control is limited, which is good for structure.

The Details: The Advantages of a Mixed Economy

 In a mixed economy, private businesses can decide how to run their

businesses (e.g. what to produce, at what price, who to employ, etc.).

 Consumers also have a choice in what they want to buy.

 In this system, there is also less income inequality.

 Monopolies, market structures that are the only producer of a certain

product, are allowed under government watch so they do not make it
impossible forentrepreneurs in the same industry to succeed.

More specifically:

The elements of a mixed economy have been demonstrated to include a variety of


 to possess means of production (farms, factories, stores, etc.)

 to participate in managerial decisions (cooperative and participatory

 to travel (needed to transport all the items in commerce, to make deals in
person, for workers and owners to go to where needed)

 to buy (items for personal use, for resale; buy whole enterprises to make the
organization that creates wealth a form of wealth itself)

 to sell (same as buy)

 to hire (to create organizations that create wealth)

 to fire (to maintain organizations that create wealth)

 to organize (private enterprise for profit, labor unions, workers' and

professional associations, non-profit groups, religions, etc.)

 to communicate (free speech, newspapers, books, advertisements, make

deals, create business partners, create markets)

 to protest peacefully (marches, petitions, sue the government, make laws

friendly to profit making and workers alike, remove pointless inefficiencies to
maximize wealth creation).

They provide tax-funded, subsidized, or state-owned factors of production,

infrastructure, and services:

 libraries and other information services

 roads and other transportation services

 schools and other education services

 hospitals and other health services

 banks and other financial services

 telephone, mail, and other communication services

 electricity and other energy services (e.g. oil, gas)

 water systems for drinking, agriculture, and waste disposal

 subsidies to agriculture and other businesses

 government-granted monopoly to otherwise private businesses

 legal assistance

 government-funded or state-run research and development agencies

Such governments also provide some autonomy over personal finances, but include
involuntary spending and investments, such as transfer payments and other cash
benefits, including:

 welfare for the poor

 social security for the aged and infirm

 government subsidies to business

 mandatory insurance (e.g. automobile)

They also impose regulation laws and restrictions that help society as a whole,
such as:

 environmental regulation (e.g. toxins in land, water, air)

 labor regulation, including minimum wage laws

 consumer regulation (e.g. product safety)

 antitrust laws

 intellectual property laws

 incorporation laws

 protectionism

 import and export controls, such as tariffs and quotas

 taxes and fees written or enforced with manipulation of the economy in mind


Major functions of the RBI are as follows:

1. Issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes except one
rupee notes which are issued by the Ministry of Finance. Currency notes issued by
the Reserve Bank are declared unlimited legal tender throughout the country.

This concentration of notes issue function with the Reserve Bank has a number of
advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective
state supervision; (iii) it is easier to control and regulate credit in accordance with
the requirements in the economy; and (iv) it keeps faith of the public in the paper

2. Banker to Government:

As banker to the government the Reserve Bank manages the banking needs of the
government. It has to-maintain and operate the government’s deposit accounts. It
collects receipts of funds and makes payments on behalf of the government. It
represents the Government of India as the member of the IMF and the World Bank.
3. Custodian of Cash Reserves of Commercial Banks:

The commercial banks hold deposits in the Reserve Bank and the latter has the
custody of the cash reserves of the commercial banks.

4. Custodian of Country’s Foreign Currency Reserves:

The Reserve Bank has the custody of the country’s reserves of international
currency, and this enables the Reserve Bank to deal with crisis connected with
adverse balance of payments position.

5. Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of emergency to tide
over financial difficulties, and the Reserve bank comes to their rescue though it
might charge a higher rate of interest.

6. Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve
Bank, it is easier to deal with each other and settle the claim of each on the other
through book keeping entries in the books of the Reserve Bank. The clearing of
accounts has now become an essential function of the Reserve Bank.

7. Controller of Credit:

Since credit money forms the most important part of supply of money, and since
the supply of money has important implications for economic stability, the
importance of control of credit becomes obvious. Credit is controlled by the Reserve
Bank in accordance with the economic priorities of the government.


Objectives of Economic Planning

1. Increase in the Rate of Economic Development

One of the most important objectives of Economic Planning is to increase the rate
of economic development. Capital formation should be carried out. Infrastructure
facilities should be extended and social overhead such as education, technical
training and health facilities should be increased. Planning in Pakistan should be
done keeping in mind that country is populous and there are too many people
looking for jobs, hence labor intensive projects should be given priority, which will
absorb labor force and employment opportunities will increase. Increase in
employment will increase national income and per capital income. Standard of
living of people will raise and rate of domestic savings will increase.
2. Diversification of Economy
All sectors of economy should be given proper importance. No sector of economy
should be neglected. Pakistan is an agrarian country, the development of industry
of Pakistan depends upon agriculture, therefore more emphasis should be given to
agriculture. Since population is too much and it is further increasing at a fast rate,
therefore production of food grains should be increased.

3. Price Stability
Increase in price level hits the poor and fixed income people very much, whereas
decrease in price reduces profit margins of the businessmen, which causes
reduction in investment. One economic planning is to maintain the price stability.
Through planning equal distribution of national wealth be made. The society
should not be divided between “Haves and Have-nots”

4. Higher Standard of Living

Economic Planning should ensure that good education; technical training and
better medical facilities are available to all the people of the country. Every one
should be provided a reasonable accommodation. Thus policy should standard of
living of the masses.

5. Improving Balance of Payments

All out efforts should be done under planning that balance of payments continues
to improve. Export oriented and import substitutions industries should be given
importance. Luxurious goods should be banned and small and agro-based
industries should be given concessions and facilities. Imports should be reduced
and export increased, in order to improve foreign exchange earnings. Dependence
on foreign aid and grants should be curtailed.


Advantages of stock exchange

1. Long Term Finance: Banks may not be willing to provide long term finance,
so, the companies needing such financing turn to the public, inviting people
to lend them money or take a share in the business in exchange for future
profits. This they do by issuing stocks and shares in the business though
stock exchanges. By doing so, they can mobilize the savings of individuals
and institutions. Thus, the Stock Exchange exists to provide a channel
through which these savings can reach those who need finance.

2. Unlimited Opportunity of investment: Everyone wants to save or invest in

one form or another. The Stock Exchange provides a way in which money
can be put to work. When the saver in shares needs his money back, he
does not have to go to the company with whom he originally placed it.
Instead, he sells his shares to some other sever who is seeking to invest his
money through the Stock Exchange. Stock exchanges have, thus, found
different solutions to the problem of providing contiguous and free market
insecurities, with varying degrees of success.

3. Economic Stability: The economic stability of a country is essential for the

growth of healthy industrial atmosphere and participation’s of people in
productive economic investments. Capital is the lifeblood for industries. The
Government is providing the major equity for further expansion or to survive
in a different economic condition. The stock Exchange provides assistance to
the enterprises by creating avenues for selling shares and stocks to the
public to generate fund. Thus, the Stock exchange is a unique yard-stick to
assess the industrial activity and investment opportunities of a country.

4. Investment opportunities to small savers: The Stock Exchange is a

system of arrangement which, in combination with other institutions,
patterns the capital market of an economy. In a free economy the stock
exchange is the pivot of the money market. It thus provides investment
opportunities to small savers.

5. Raising of new capital: Companies, however, do not get their shares listed
on the stock exchange automatically and, though the actual listing fees
payable to the stock exchange are not big, the cost to the company of
meeting the exchanges may be considerable. A company willingly accepts
these responsibilities because access to the Stock exchange brings benefits
in the form of better marketability for their shares and, thereby, assists in
the raising of new capital.

6. Easy to participate: The Stock Exchange has no statutory authority, or

monopoly, over anybody and no legal powers other than those which
individual companies freely contract to give. Members of the Stock Exchange
agree to abide by its rules as a condition of membership and companies do
so by signing the listing agreement or general undertaking.



The most important functions of commercial banks are discussed below:

1. Accepting deposits:

The most significant and traditional function of commercial bank is accepting

deposits from the public. The deposits may be of three types: Saving deposits,
Current deposits and fixed deposits. In case of current account, people can
withdraw deposits in part or in full at any time he likes without notice.
Usually no interest is paid on them, because the bank cannot utilise these short-
term deposits. Savings deposits are payable on demand and money can be
withdrawn by cheques. But there are certain restrictions imposed on the depositors
of this account. Deposits in this account earn interest at nominal rates. Fixed
deposits are made for a fixed period of time. A higher rate of interests is paid on the
fixed deposits.

2. Providing loans:

The second important function of the commercial bank is to provide loans against
suitable mortgages to the public to fulfill their needs of money. Loans can be
granted in the form of cash credit, demand loans, short- term loan, overdraft,
discounting of bills etc. Under cash credit system, borrower is sanctioned a credit
limit up to which he can borrow from the bank. The interest payable by the
borrower is calculated on the amount of credit limit actually drawn. Demand loans
granted by a bank are those loans which can be recalled on demand by the bank
any time.

Here, the interest is payable on the entire sum of demand loans granted. Short-
term loans (like car loans, housing loans etc.) are given as personal loans against
some security. The interest is payable on the entire sum of loan granted. In case of
overdraft facility, an account holder is allowed to withdraw a sum of money in
excess of the amount deposited with the bank.

Here, the borrower who has received this facility, has to pay interest on the amount
overdrawn. Another important form of bank lending is through discounting or
purchasing the bills of exchange. A bill of exchange is drawn by a creditor on the
debtor specifying the amount of debt and also the date when it becomes payable.
Such bills of exchange are normally issued for a period of 90 months.

3. Credit Creation:

This is an unique function performed by the commercial banks. A bank has

sometimes been called a factory for the manufacture of credit. In the process of
acceptance of deposits and granting of loans, commercial banks are able to create

4. Transfer of funds:

Commercial banks are able to transfer funds of a customer to other customer’s

account through the cheques, draft, mail transfers, telegraphic transfers etc.

5. Agency functions:

In modern time, commercial banks also act as an agent of the customer. However,
banks charge fee or commission for these functions.

Agency functions include:

(a) Collection of cheques, bills and drafts,

(b) Collection of interest, dividend etc.

(c) Payment of interest, installments of loans, insurance premium etc.

(d) Purchase and sale of securities

(e) Transfer of funds through demand drafts, mail transfer etc.

6. Other functions:

Apart from the above important and most popular functions, commercial
banks also perform the following other functions:

(a) Payment of credit letters and travellers cheques, gift cheques, bank draft etc.

(b) Dealing in foreign exchange.

(c) Locker services.

(d) Provision of tax assistance and investment advice etc.

From the above analysis, it is clear that in a modern economy the commercial
banks play an important role in various economic activities of the country.



Many social factors influence markets that retail businesses serve. Economic and
political changes, for instance, can overlap and fundamentally change how a
society thinks. While retail business owners can’t hope to predict every possible
change, paying attention to the major social factors that drive change can help
prepare them to adapt.


Technological changes have an enormous impact on how retail businesses operate,

in good ways and in bad. Take the advent of smartphones, for example. Retail
stores now can use location-based advertising to reach nearby consumers with
targeted sales messages, but they also must deal with shoppers comparing prices
across the world to find the best deal. The effect technology has on a society can
boost a retail store’s performance while also undermining traditional ways of doing
business, forcing retailers to adapt or give way to more progressive competitors.

Social Responsibility

Consumers increasingly consider the social impact of the money they spend. Some
will pay more to support retailers who assert sustainable practices, for instance, by
buying products made with recycled material. Others avoid companies notorious
for irresponsible or unethical practices, such as outsourcing manufacturing to
exploitative sweatshops in under-developed countries. More than ever, retail store
owners must consider the ethical and social ramifications of their actions, as well
as the actions of their suppliers. A manufacturer’s negative publicity, for example,
could hurt sales in every retail store it supplies.

Consumer Preferences

Consumer preferences shift, often unpredictably. A particular clothing store’s

products may be in one day and out the next. Retail businesses do their best to
stay ahead of consumer buying trends, but all the research and marketing in the
world can’t replace simply being in the right place at the right time. For example, a
handbag retailer might jump to the front of the pack because a celebrity was
photographed on the street with one of its products. Similarly, the fashion world
might decide, seemingly on a whim, that a successful retailer’s product line is now
stodgy and outdated.

Generational Differences

Broad social changes also impact a retail business. An economic recession, for
instance, can cause a shift in consumer spending across all categories. Demand for
luxury items might plummet, while discount retail stores experience a significant
surge in demand. Such shifts might last only as long as the initial causes, or they
might permanently alter the way an entire generation thinks. For example,
Depression-era hardships created a generation that was less likely to use credit
than the relatively reckless Baby Boomers who followed. Even without significant
economic developments, the changing proportions of a population’s age groups can
alter overall spending rates and habits, forcing retailers to adjust their business
models to compensate.