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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