Chapter 7 | Economic Environment

Question 1

What is an economic environment?

Answer 1

An economic environment refers to the economic conditions in which an organization operates.

Question 2

What is an economic condition

Answer 2

An economic condition or variable can include job growth, consumer confidence, interest rates, and much more.

Question 3

3 groups of economic environment

Answer 3

Individuals
businesses government

Question 4

Individual

Answer 4

Individuals decide how to spend their money and on what. Since money is a limited resource, an individual is forced to make spending choices—from the daily necessities of life such as food, clothing, and dental care, to more luxurious items such as travel and entertainment.

Question 5

What do we need to consider FOR OUR ECONOMY?

Answer 5

businesses also form part of the economic environment. In order for businesses to make a profit, managers have to balance the right combination of inputs that allow for efficiency, productivity, and overall firm growth. These inputs are often referred to as the five factors of production, which include natural resources, labour, capital, knowledge, and entrepreneurs.

Question 6

Five factors of production

Answer 6

natural resources (land, raw materials)

labour (workers)

capital (buildings, machinery, tools, equipment)

knowledge (knowledge workers with specialized education, skills and experience)

entrepreneurs (individuals who start up businesses)

Question 7

How is our economy doing as of december 2018

Question 8

What are the 3 economic environments

Answer 8

Individuals

Businesses (five factors of production)

Government

Question 9

Individuals (Economic Environment)

Answer 9

-Work (for business or self)
-Spend money (consumer spending)
-Pay taxes (so govt. can spend)

Question 10

Government

Answer 10

Creates laws (to guide/promote the economy)

Promotes tax credits

Ensures qualified
labour

Question 11

How do Economists Analyze the Economy?

Answer 11

Microeconomics
Macroeconomics

Question 12

Microeconomics

Answer 12

is the study of smaller components of the economy, such as individuals and businesses.

For example, microeconomists analyze consumer demand and existing supply.

Question 13

Macroeconomics

Answer 13

the study of larger economic issues involving the economy as a whole.

more complex, since it considers data for large groups of people and firms.

Examples of macroeconomic issues include unemployment, consumption, inflation, gross domestic product, and price levels.

Question 14

What is an economic system?

Answer 14

An economic system is the way that the five factors of production are managed. For instance, an economic system can have public or private ownership. In public ownership, decisions on production and the allocation of resources are made centrally by the government

Question 15

Private ownership

Answer 15

Private ownership is the opposite of economic system, where individuals can own their own property and make their own decisions. There are four types of economic systems: a market system, a communist system, a socialist system, and a mixed system.

Question 16

Types of economic systems

Answer 16

Market economy
Communism
Socialism
Mixed Economy

Question 17

Market economy

Answer 17

also referred to as a capitalist economy or a private enterprise system, is a free market system in which individuals can decide to be employees or owners of their own business.

Market economies offer entrepreneurs certain rights —for example,

-the right to own private property
-the right to compete
-the right to make their own choices,
-the right to make a profit.

-The right to make a profit is probably the most significant incentive for individuals to take the risks involved in establishing a business.

Question 18

Communism

Answer 18

-is the economic -system that once existed under the Soviet Union. Instead of individuals freely deciding which products to produce, the government owned essentially all of the country’s resources, and economic decisions were made centrally.

-The government decided which goods and services were produced and in what quantities.

-Communism tended to limit an individual’s choices, such as the ability to change jobs or to relocate.

Question 19

Socialism

Answer 19

is an economic system whereby the government has large ownership in or control over major industries essential to the country’s economy. Coal mines, transportation, steel mills, health care, banking, and utilities are a few examples.

Question 20

Mixed Economy

Answer 20

-Canada’s economy is considered a mixed economy since it uses more than one economic system.

-While most industries are the work of private enterprise, the Canadian government may be considered partly socialist in its control of certain industries such as Canada Post, utilities (for example, water), and some public lands. In Canada, for example, the provincial governments control and regulate the health care system. Similarly, the Ontario government owns and operates the Liquor Control Board of Ontario (LCBO), which controls the sale of certain types of alcohol.

-Today, most economies are considered mixed systems since governments usually play some role in managing the economy.

Question 21

Types of Competition

Answer 21

Perfect (or pure)

Monopoly

Oligopoly

Monopolistic

Question 22

Perfect Competition

Answer 22

It is characterized by four traits.

1.a large number of buyers and sellers act independently.

2. the product or service is undifferentiated. In other words, the good or service is similar to or the same as other products and services available in the market.
3. with undifferentiated goods, the market determines the price, not the company. The seller is therefore a price taker.
4. In perfect competition there are no barriers to entry.

Question 23

monopoly

Answer 23

represents the opposite extreme to perfect competition.

A monopoly occurs when only one company produces a particular product or service in a given market

there are no competitors.

price maker

Significant barriers to entry that prevent other firms from competing in the market must be present for a monopoly to exist.

Question 24

oligopoly

Answer 24

When only a few competitors dominate an industry,

. Commercial aircraft producers such as Boeing and Airbus are two examples of companies in an oligopoly. Oligopolies are also characterized by high barriers to entry such as capital costs. Oligopolies are price setters and are also characterized by fierce competition. Prices are usually close between companies. With so few
firms within an industry, a change in price by one company will likely cause the price to be matched by others in the industry. Automotive, oil, gas, tobacco, and cereal companies are some examples of oligopolies.

Question 25

monopolistic competition

Answer 25

Most other products and services in free market economies fall under a type of competition known as monopolistic competition. In monopolistic competition, a large number of companies compete with one another, offering products and services that are differentiated at least in a minor way. Differentiation strategies include branding, style or design, and advertising. Coffee, shampoo, furniture, and fast-food burger restaurants are a few examples.

Question 26

Goals of Canada’s Economic System

Answer 26

Economic growth
Economic stability
Employment

Question 27

The Business Cycle

Answer 27

Expansion
Peak
Contraction
Recovery

Besides adequate competition, there are other factors that are important to Canada’s economy. To achieve a thriving economy, Canada’s economic system has three primary goals: economic growth, economic stability, and employment.

Question 28

business cycle

Answer 28

refers to the rise and fall of economic activity over time. Although the economy will grow over the long term, economic growth is usually unstable. Business cycles or economic fluctuations vary in length and severity. Some periods of fluctuation are difficult and long; others are short and mild.

Question 29

expansionary phase (please look at graph example)

Answer 29

is a period when economic activity is rising. Goods are being produced and sold, the workforce is expanding (that is, jobs are being created), demand for goods is increasing, and the price of goods is rising. Typically, this is a positive period for business. Profits are rising, cash flow is steady, and there is an opportunity for some risk taking. The expansionary period can experience a sudden economic boom or slow and steady growth.

Question 30

peak

Answer 30

Once the economy has reached its highest point, it can be said to have peaked

marks the end of the expansionary phase and the beginning of the contraction phase.

Question 31

contraction phase

Answer 31

phase is characterized by declining economic activity and falling profits. During this phase, managers usually reduce costs, lay off workers, and halt any plans to invest in the company.

Question 32

recession

Answer 32

is realized when there are two or more consecutive quarter periods of negative or falling economic activity

Question 33

depression

Answer 33

is an extreme recession that is characterized by longer economic periods of declining economic activity, high unemployment, and high levels of personal and commercial bankruptcies.

Question 34

trough

Answer 34

is the opposite of a peak. A trough is a very low level of economic activity.

Question 35

recovery phase

Answer 35

begins after the trough. Here, economic activity slowly begins to rise and the demand for goods and services increases.

Question 36

Measuring Economic Growth

Answer 36

Gross domestic product (GDP)
Gross national product (GNP)
Real GDP
Nominal GDP

How do we measure economic growth over time? Measuring economic growth accurately is an important function of the government to ensure that the economy is on track. There are two main
measures of economic growth: GDP and GNP.

Question 37

gross domestic product (GDP)

Answer 37

) is the value of all final goods and services produced within a country’s borders. In Canada, this includes all goods and services produced by both Canadian and foreign companies physically located in Canada. For example, the value of cars produced by the US Ford Motor Company in Oakville, Ontario, would be included in Canada’s GDP.

Question 38

gross national product (GNP)

Answer 38

is the value of all final goods and services produced by a national economy inside and outside of the country’s borders. In other words, Canadian GNP measures income received in Canada whether earned in Canada or abroad.

Question 39

Real GDP

Answer 39

is GDP adjusted to reflect the effects of inflation. In other words, real GDP takes out the effect of rising prices.

Question 40

Nominal GDP

Answer 40

on the other hand, is not adjusted for inflation and is measured in current dollars.

Question 41

Productivity

Answer 41

measures the level of output versus the level of input in an organization.

Question 42

input

Answer 42

for example, can include materials, labour, or overhead, whereas an output is often a finished unit of product (or service) ready to be sold. An organization is said to have improved its productivity when it can produce more outputs with the same number of inputs.

Question 43

The Balance of Trade

Answer 43

-Trade surplus
-Trade deficit

The balance of trade is the value of all the goods and services a country exports minus the value of all the goods and services a country imports.

Question 44

-Trade surplus

Answer 44

occurs when a country exports more goods than it imports. This indicates a positive balance of trade and encourages economic growth.

Question 45

trade deficit

Answer 45

exists when a country imports more goods than it exports. A trade deficit is problematic because it results in a negative balance of trade, which means more money is leaving the country than is entering the country.

Question 46

Exchange rates

Answer 46

is the value of a foreign currency compared to a home currency or, in other words, the amount of domestic currency that must be given up to obtain an equivalent unit of the foreign currency. Global companies deal with exchange rates every day because their transactions occur between multiple countries

Question 47

Government Debt

Answer 47

National debt
Provincial debt
Municipal debt
Budget deficit

Question 48

Debt

Answer 48

= an existing/outstanding debt owing

Question 49

Deficit

Answer 49

Deficit = the negative difference between tax revenue brought in (cash in) and government spending (cash out).

Question 50

national debt (federal debt)

Answer 50

is debt accumulated by the government. All local, regional, or national governments can have debt, but a large national debt can
be especially problematic for individuals and businesses because this debt can affect the economy as a whole

Question 51

budget deficit

Answer 51

is the negative difference between incoming tax revenues (or receipts) and outgoing government expenditures. Like a bank overdraft, a deficit means the cash outflows are greater than the cash inflows in a given period. If a government has a budget deficit, the government must borrow money to pay the amount owing. This new borrowed amount gets added to the outstanding government debt. In Canada, since there are three levels of government, there can be three levels of debt: municipal, provincial, and federal.

Question 52

The National Debt
Why is it important?

Answer 52

It impacts the amount of tax dollars available to spend.
It affects how much interest expense has to be paid on the outstanding debt?
It affects how much money the government has left to spend on education, healthcare and other services

Question 53

Why is debt bad for a country?

Answer 53

Lowers country’s credit rating

Austerity programs (cuts)

Less efficient use of time

The doctrine of Ricardian equivalence

Question 54

The doctrine of Ricardian equivalence

Answer 54

(may lead consumers and businesses to believe their taxes will be raised in the future to pay off the growing debt. To prepare for this, consumers and businesses end up saving their money instead of spending it, leading to a worsening of the economic problem)

Question 55

Austerity programs (cuts)

Answer 55

government austerity programs are required to reduce the debt. The combination of higher taxes to generate revenue and lower government spending to reduce costs lowers overall demand and, therefore, slows the economy.

Question 56

What happens if a country goes bankrupt?

Answer 56

Every country has debt, so why does it matter? When debt increases and gets too high, a series of problems can arise. First, a country’s credit rating can be lowered, leading to higher borrowing costs and causing a further increase in the debt load, which occurred in the United States. In August 2011, Standard & Poor’s, a global credit-rating agency, lowered the United States’s credit rating from AAA
to AA+ because of a lack of confidence in the government’s plan to reduce its debt. While other credit-rating companies did not lower the government’s rating, global stock markets took a tumble the following day.

Many European countries also face a debt crisis. Greece, Ireland, and Portugal have required significant financial assistance and bailouts from their European neighbours. In July 2011, Standard & Poor’s reduced Greece’s credit rating from B to CCC, the lowest-rated country in the world in S&P’s rankings

Question 57

With extreme debt
The government can’t pay:

Answer 57

Hospitals, doctors, nurses
Paramedics
Firemen
Police officers
School teachers
Libraries
Garbage collection
Street plows
Road maintence

Question 58

Inflation

Answer 58

= prices rising

The rise in the price level of goods and services is called inflation

Managers are encouraged to reduce costs to increase net profits. However, over time prices generally rise, costs increase, and doing business becomes more expensive.

Question 59

Deflation

Answer 59

= prices falling
is the opposite of inflation. Deflation occurs when the price level of goods is falling.

Prices can fall for a couple of reasons. First, industrial productivity can increase and cost savings can be passed on to customers in the form of lower prices. On the other hand, customers with high debt may not be able to buy very much, thus reducing demand. Some economists believe deflation can be more problematic than inflation. Since consumers tend to expect prices to fall, they will sometimes stop spending their money altogether, anticipating even lower prices.

Question 60

Interest rates

Answer 60

= a fee charged, usually a percentage, by a lender to a borrower for the use of funds

Interest rates can affect businesses in two ways. First, interest rates can affect the cost of borrowing (interest expense on mortgages, bank loans, capital investments, and so on).

Question 61

Where do we see interest rates?

Answer 61

Home mortgage
Car loan
Credit card
Other bank loan

Question 62

Unemployment

Answer 62

occurs when qualified individuals actively looking for work are unable to secure employment. Unemployment can be detrimental to both businesses and the economy. People who are unemployed have less disposable income and often cannot afford basic goods and services.

Question 63

Types of Unemployment

Answer 63

Frictional
Cyclical
Structural
Seasonal

Question 64

Frictional unemployment

Answer 64

Normal labour market turnover, not a downturn in the economy.

Examples:
-New college graduates

-Mothers looking for work

-Anyone looking for his or her first job

-Employed workers who are laid off also fall under this category.

-People are constantly entering and exiting the labour force.

is caused by normal labour market turnover, not a downturn in the economy. New college graduates, mothers looking for work, or anyone looking for his or her first job are a few examples. Employed workers who are laid off also fall under this category. Frictional unemployment is unlikely to disappear, since people are constantly entering and exiting the labour force.

Question 65

Cyclical unemployment,

Answer 65

pace of the economy, or the “business cycle.”

Example:
-Economy slow/bad=high

-Economy growing/good=low

on the other hand, is related to the pace of the economy, or the “business cycle.” When the economy slows down or is in a recession, cyclical unemployment
is high. Alternatively, when the economy is growing and expanding, cyclical unemployment is low

Question 66

Structural unemployment

Answer 66

occurs for two reasons:

1) either the available jobs do not correspond to the skills of the labour force or
2) unemployed individuals do not live in a region where jobs are available.

prevalent where there has been a technological change and old jobs have been discontinued and new jobs created.

Question 67

Seasonal unemployment

Answer 67

is unemployment caused by the seasonal nature of the job. For example, a garden centre may hire workers for the spring and lay them off in the fall. Similarly, a construction company may hire contract workers in the summer and not in the winter.