Dimensions of Business Environment: Economic, Legal, Political, Example

The compilation of these Business Environment Notes makes students exam preparation simpler and organised.

Dimensions of Business Environment

You must have observed that businessmen get very excited when the stock market is doing well, even though they are not invested personally? Why is this so? This is because there are innumerable factors that affect the business environment, and Sensex is one of the main factors. Let us learn the basic dimensions of a business environment.

Dimensions of Business Environment

As we learned that there are various forces that affect the business environment like suppliers, customers, investors, competitors, etc. Now let’s understand the general forces that affect and shape the business environment. There are five general dimensions of the business environment. We will study each one of them in some detail.

Business Environment

Economic Environment

The Rate of Inflation:
The simplest way to understand inflation is to see it as rising prices. If the economy is in a state of the boom. Where business is flourishing and everyone is earning a good amount of money which results in the increase in purchasing power of the consumer. This means that the producer is able to sell his commodity at a high price in the market. Whereas, in a state of depression in the economy, the purchasing and investing power of the customer falls down. As the firm can’t influence the general factors of the business environment, it has to change itself in order to survive the change. And the producer has to re-establish the prices of his commodity for people to afford it.

Demand and Supply:
When a business identifies a profitable opportunity they are observing the existence of potential demand for the product. And businesses which can foresee potential profits have an incentive to increase production. Demand and the supply of a commodity in the market influence the business environment enormously. This factor is based on the demand of a commodity in the market and the producer’s ability to produce it on time.

Economic Policies:
Government seeks out to control the business environment in order to meet a range of objectives. These include stability and predictability, health, and safety. Local, state, and national policies affect the planning and operations of business deeply. Economic policies are drafted to direct the economic activities. They include import-export, employment, tax structure, industry, public expenditure, public debt, foreign investment, etc.

Social Environment

Culture and Traditions:
In India, culture and traditions influence the majority of business. Traditions mean the social practices that have passed down from one generation to another. For example, Diwali, Christmas, and Eid. These festivals prove to be a profitable period for electronics, sweets, greeting cards, and restaurant businesses. The business should plan its strategies according to the traditions and social practices of a country.

Social Trends:
Social trends in society are proportional to the demand for the product. An example of a social trend in health and fitness. The products such as diet foods, diet drinks, and fitness centers have given a new face to the industry of health and fitness.

Values can be called the standard society keeps about itself. Such as freedom, social justice, and equal opportunities.

Legal Environment

The legal environment includes the laws passed by the government as well as the decisions rendered by the various commissions and agencies at every level of the government. It’s important that every business must function according to the law of the area in which it wishes to operate.

Not obeying the rules can result in legal trouble for the business. In India, business firms are required to have complete knowledge of acts like Companies Act 1956, Consumer Protection Act 1986, Industrial Disputes Act 1947, and Competition Act 2002, and so on. For example, it is mandatory for tobacco companies to print ‘smoking is harmful’ on its products.

Technological Environment

The primary forces that are responsible for the improvement in the scientific field and new innovations being introduced in the market for improving the quality of goods and services and techniques for operating business more efficiently are known as technological factors in the business environment.

Just like two sides of the same coin, technological changes are threats to some organisations and opportunities for others. The introduction of Television was a major blow to the industry of Radio and Cinema industry. Mobile phones have snatched the market from Telephones.

These days, online food delivery businesses are emerging in the market which is using smartphone technology that is ‘Apps’ to order food online. This is a major change in the food industry business and has affected the restaurant industry tremendously.

New innovations are occurring in medicine, telecommunications, and biotechnology. Recent advancement in the market of Autonomous cars i.e Driverless cars is proving to be a major threat to the business of the self-driving car industry.

Political Environment

This factor consists of external factors such as political stability and peace in the country. The foresight of the ruling party and its perspective towards business. Needless to say, the political environment is easily the most important dimension of the business environment.

As it decides what is the ideology of the party which is dominant in the country. For example, after globalisation India let foreign companies enter the Indian market for giving a boost to different industries such as the food processing industry, the technological industry.

Businesses function with the nature and the framework of the political party. The components of a political environment consist of the constitution of the country, political stability, political ideology, political outlook on business sectors, the extent of government intervention, and degree of politicisation of business and economic issues.


Which of these is a factor of the economic environment?
a. Mobile Apps
b. Rate of Interest
c. Consumer Protection Act
d. Social Justice
e. Innovation
The correct option is “b” which is the Rate of Interest. Changes in the interest rates greatly affect the demand for goods and services. For example, low long-term rates on home loans are beneficial for both banks and consumers both.