Chapter 7: Economics Flashcards
What is The Economic Environment? What are the three things it’s made up of?
refers to the economic conditions in which an organization operates
Made up of individuals, businesses, and government
In the Economic Environment: Define Individuals, Businesses including the Five factors of Production, and Government
Individuals
* Makes opportunity costs: the cost of the best forgone alternative
Businesses
* In order for managers to make profit, they have to balance the right combination of inputs that allow for overall firm growth
- Natural resources: include land and raw materials
- Labour: workers, contribute their strengths and talents to create goods/services
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Capital: includes buildings, machines, tools, and other physical components used in producing goods
○ Money is not capital, money can be used to purchase capital - Knowledge: individuals with specialized education, skills, training, and experience, key in gaining competitive advantage
- Entrepreneurs: individuals who establish a business in the pursuit of profit and to serve a need in society - create jobs, etc.
Government
* Purchases goods and services for the welfare and well-being of both its citizens and its business community members
* To guide the economy, the government can influence individual choices with tax credits or business decisions with tax incentives
Analyzing the Economy: Two Approaches?
Microeconomics: is the study of smaller components of the economy, such as individuals and businesses
* Businesses consider whether there is sufficient consumer demand for a new product
Macroeconomics: is the study of larger economic issues involving the economy as a whole
* Is the economy growing?
Define Economic System
is the way the five factors of production are managed
Economic system: define public ownership and private ownership
Public ownership, decisions on production and allocation of resources are made centrally by the government
Private ownership, where individuals can own their own property and make their own
Economic system: Define Market Economy, Communism, Socialism, and Mixed Economy
Market economy (or capitalist economy): is a free market system in which individuals can decide to be employees or owners of their own business
Communism: the economic system that once existed under the Soviet Union, governments owned essentially all the country’s resources and economic decisions were made centrally
Socialism: an economic system whereby the government has large ownership In or control over major industries essential to the country’s economy (Ex. Coat mines, steel mills, health care, banking, etc.)
Mixed Economy
Uses more than one economic system
* Ex. Canada - uses partly socialist because of control in certain industries like Canada Post and some public lands, provincial governments regulate health care and liquor control
What are the four types of competition?
Perfect competition, a monopoly, an oligopoly, and monopolistic competition
Define Perfect (or Pure) competition
Perfect (or Pure) competition: the ideal form of competition
* Characterized by four traits
○ A large number of buyers and sellers act independently
○ The product is undifferentiated
○ With undifferentiated goods, the market determines the price, not the company
There are no barriers to entry - obstacles that may prevent another company entering a given market
Define Monopoly and a Natural Monopoly
Monopoly: opposite to perfect competition, occurs when only one company produces a particular product or service in a given market, as a result, there are no competitors
* As the sole producer, a company is the price setter - it is able to determine the selling price of its products and services
* Significant barriers to entry that prevent other firms from competing in the market must be present
Ex. Canada Post, LCBO, and Rogers Communications
Natural monopoly: occurs when economic and technical conditions only allow for one efficient producer
- Water supplied by a municipality is a natural monopoly
Define an Oligopoly
Oligopoly: when only a few competitors dominate an industry
○ Ex. Commercial aircraft producers
Characterized by high barriers to entry such as capital costs
Define a Monopolistic Competition
Monopolistic Competition: a large number of companies compete, offering products and services that are differentiated in at least a minor way
* Ex. Who sells coffee in Canada? Starbucks, Tim Horton’s, McDonald’s
What are the three primary goals to Canada’s economic system?
Economic growth, economic stability, and employment
Economic Growth: Define a Business cycle and it’s four phases
Business Cycle: to the rise and fall of economic activity over time
○ Expansionary phase is a period when economic activity is rising - goods are being produced and sold, the workforce is expanding, demand for goods is increasing, and the price of goods is rising
§ Sudden Economic boom or slow and steady growth
○ Peak: once the economy has reached its highest point
○ Contraction phase: is the declining economic activity and falling profits
§ Managers usually reduce costs, lay off workers, and halt any plans to invest in the company
○ Trough: is a very low level of economic activity, recovery phase begins after trough
What are the two main measures of economic growth?
GDP and GNP
Economic Growth: Define GDP, GNP, Real GDP, Nominal GDP, and GDP per Capita
○ Gross domestic product (GDP): is the value of final goods and services produced within a country’s borders
○ Gross national product (GNP): is the value of final goods and services produced by a national economy inside and outside of the country’s borders
§ Other words measures income received in Canada, whether earned in Canada or aboard
□ Real GDP: Is GDP adjusted to reflect the effects of inflation, takes out the effect of rising prices
□ Nominal GDP: is measured in current price (price right now)
□ GDP per capita: is the GDP per person in a country
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Economic Growth: Define Productivity, Balance of Trade, Exchange Rates, and National Debt
Productivity
* Productivity measures the level of output versus the level of input in an organization
Balance of Trade
* Balance of Trade is the value of all goods and services a country exports minus of all the goods and services a country imports
* Ideally each country would like to have a trade surplus rather than trade deficit
○ Trade surplus - country exports more goods than it imports
Exchange Rates
An exchange rate is the value of foreign currency compared to a home currency
National Debt
* Debt: borrowed money that must be repaid, usually with interest
* Federal debt, can affect the economy as a whole
As the debt increases, governments spend more money (tax dollars) on additional interest costs - less money to spend on community services
Define Economic Stability
Economic stability: occurs when the amount of money available and the goods produced grow at approximately the same time
Economic Stability: Define inflation with demand-pull inflation and cost-push inflation and deflation
Inflation: input costs, are more expensive and therefore company profits are reduced
* the rise in price level of goods
* Reduces the purchasing power of money: that is, what the value of what money can buy
○ Demand pull inflation: occurs when demand for goods exceeds supply, which tends to push prices up
○ Cost push inflation: results from increases in production costs for businesses, such as raw materials and labour expenses
**Deflation** when the price of goods is falling Ex. The Great Depression: 25% unemployed, consumer had little money, demand dropped, and prices fell
Define Interest rates and how do they affect businesses… also define fixed rate and variable rate
Interest rates:
Affects businesses in two ways
1. Interest rates can affect the cost of borrowing (interest expense on mortgages, bank loans, capital investments, etc.)
2. Interest rates can affect a customer’s ability to buy goods and services
- Fixed rate: is a permanent interest rate that cannot be changed for the term of the loan
- Variable rate: is risker for businesses as they are subject to change
What is the Bank of Canada’s role? what is the bank rate?
- The Bank of Canada: Canada’s central bank and a crown corporation of the federal government, established to regulate the Canadian banking and financial industry to ensure low inflation, high employment and positive economic growth in the long-term
- The interest rates are charged by CIBC, TD, Scotiabank
- The bank rate: is the rate in which the Bank of Canada loans money to the financial institutions across the country
When the government wants to encourage economic growth, it may reduce the bank rate to encourage banks to borrow more money
Define unemployment
Unemployment occurs when qualified individuals actively looking for work are unable to secure employment
Define the types of unemployment (Hint: 4) plus define natural rate of unemployment and full employment
- Frictional unemployment: is caused by normal labour market turnover, not a downturn in the economy Ex. New college grads, mothers looking for work, or anyone in their new job, employed workers who were laid off
- Cyclical unemployment: related to the pace of the economy or the business cycle, when economy slows down, cyclical unemployment is high
- Structural unemployment: two reasons, either the available jobs do not correspond to the skills of the labour force or unemployed individuals do not live in a region where jobs are available
- The natural rate of unemployment: is the total amount of frictional and structural unemployment combined; unemployment that exists with no cyclical unemployment
- Seasonal unemployment: is unemployment caused by the seasonal nature of the job
- Full employment: occurs when only frictional unemployment exists and no structural or cyclical unemployment is present, the quantity demanded equals the quantity of labour supplied
