The Economic Environment

Question 1

What is an economic environment?

Answer 1

Refers to all economic factors which have a bearing on the functioning of a business.
Mostly influenced by the government.
Also influenced by a country’s financial institutions and the international economic organizations and groupings to which it belongs or subscribes.

Question 2

What is the importance of the economic environment?

Answer 2

•better investment choices.
•better competitive strategies
•forecasting of marketing trends
•adjusting economic analysis and interpretation.
•helps managers predict events that might affect company’s future performance

Question 3

List the economic factors

Answer 3

•interest rates
(Increase can slow economic growth and also cause stock prices to drop)
•exchange rates
(Affect the price of imported and domestic goods)
•Tax rates
(Lower tax rates can cause an increase in economic growth because businesses have more money to invest).
•Inflation
(Erodes purchasing power for both consumers and businesses)
•unemployment
(Occurs when individuals actively seeking employment cannot find work)
•wages
(Increasing wages can improve individuals’ purchasing power)

Question 4

List the elements of a business cycle

Answer 4

•prosperity
•recession
•depression
•recovery

Question 5

Discuss prosperity as a stage of the business cycle

Answer 5

•the economy experiences relatively rapid growth.
•interest rates tend to be low.
•production increases.
•employment and wages,corporate profits and output, aggregate demand and the supply of goods and services tend to show sustained uptrends.
•the flow of money through the economy remains healthy.
•there is increase in the money supply

Question 6

Discuss recession

Answer 6

•unemployment rises
•total buying power declines (many consumers become more price and value conscious)
•people ordinarily reduce their consumption of the more expensive convenience foods and save their money.
•organizations consider some revision to their marketing activities.
•promotional efforts emphasize value and utility.

Question 7

Discuss Depression

Answer 7

•extremely high unemployment.
•wages are very low.
•total disposable income is at a minimum.
•consumer spending is lowest.
•consumers lack confidence in the economy.
•governments use both monetary and fiscal policies in attempt to offset the effects of recession,depression and inflation.

Question 8

Discuss Recovery

Answer 8

•high unemployment rate begins to decline.
•total disposable income increases.
•consumers ability to buy increases.
•as the recovery strengthens consumers start spending more.
•organizations maintain high flexibility in their strategies in order to be able to make the needed adjustments as the economy stabilizes.

Question 9

List the two economic policies

Answer 9

•Fiscal policy
•Monetary policy

Question 10

Discuss the fiscal policy

Answer 10

•This is the use of government spending and taxation to influence the economy.
•Governments can reduce spending and increase taxes as a way to help reduce inflation.
•governments influence the economy by changing the level and types of taxes,the extent and composition of spending,and the degree and form of borrowing.

Question 11

List the Fiscal policy tools

Answer 11

•Infrastructure spending
(Government supporting modern infrastructure,the private sector is given the resources it needs to grow and succeed in the long run)
•Education spending
(Public, government funded schools and programs to improve skills in the area of labor)
•Research and development
(Government funded research and development can lead to scientific,technological and medical breakthroughs that may lead to the rise of new industries)
•Incentives for private investment
(Creating a tax policy that rewards innovation and entrepreneurship will encourage private businesses to invest thereby making the economy grow)

Question 12

Discuss monetary policy

Answer 12

•refers to a central bank activities that are directed towards influencing the quantity of money and credit in an economy.
•the overarching objective of central banks is price stability.

Question 13

List the Monetary Policy tools

Answer 13

•open market operations.
•interest rates.
•reserve requirements
•influencing market perceptions.

Question 14

Define reserve requirement.

Answer 14

This is the percentage that banks must keep in reserve and are not allowed to lend.

Question 15

Define an economic system.

Answer 15

This is the way a society produces ,distributes and consumes goods and services.

Question 16

What are the three questions that a society answers to determine their economic system?

Answer 16

•what to produce?
•how to produce?
•for whom to produce for?

Question 17

List the groups of economic systems.

Answer 17

•traditional systems.
•command systems
•market system
•mixed economies(combo of command and market).

Question 18

Discuss a traditional economic system

Answer 18

•it is based on goods,services and work,all of which follow certain established trends.
•it relies a lot on people with little division of labor or specialization.
•it is the most ancient of all types.
•it is basic
•lacks the potential to generate surplus.
•it is highly unsustainable due to its primitive nature
•there is little wastage due to its small output.

Question 19

What are the questions that are answered by the traditional system?

Answer 19

Who decides what to produce?
People follow established trends.

How to produce?
According to the established trends

For whom are the goods and services produced for?
People in the community who need them

Question 20

Discuss the command Economic System

Answer 20

•it is also known as a planned system.
•there is dominant centralized authority (the government) that controls a significant portion of the economic structure.
•the government comes in and exercises control over the resources.
•they are rigid compared to other systems.
•power is centralized so they react slowly to change

Question 21

What is the most important aspect of the Command Economic System?

Answer 21

The government decides what to produce,how to produce and for whom the goods and services are produced for.

Question 22

Discuss the market economic system

Answer 22

Also known as capitalist economy with little government interference.
Regulation comes from the people and the relationship between supply and demand.
It allows private entities to amass a lot of economic power and those who succeed economically control most of the resources.

Question 23

In a market economic system who decides what to produce and how to produce

Answer 23

Businesses

Question 24

In a market economic system for whom are the goods and services produced for?

Answer 24

Consumers

Question 25

What is one important point that you’re not supposed to forget when in comes to market systems?

Answer 25

A pure market system does not exist as all subjects are subject to some form of interference from a central authority.

Question 26

Discuss mixed economic system

Answer 26

•also known as dual system.
•they combine the characteristics of market and command economic systems.
•they face the challenge of finding the right balance between free markets and government control because governments tend to exert much more control than is necessary.

Question 27

In a mixed economic system who decides what to produce and how to produce

Answer 27

Businesses.
But in terms of how to produce,the government regulates certain industries.

Question 28

Define a market structure

Answer 28

Refers to how different industries are classified and differentiated based on their degree and nature of competition for goods and services.

Question 29

List the four types of Market structures

Answer 29

•perfect competition
•monopolistic competition
•oligopoly
•monopoly

Question 30

Give examples of Perfect Competition

Answer 30

Agricultural markets,Bureau de Changes

Question 31

Give examples of monopolistic competition

Answer 31

Restaurants,hair salons,boutiques

Question 32

Give examples of oligopoly

Answer 32

Telecommunications,Airline,Cold Drinks

Question 33

Give examples of monopoly

Answer 33

Public utility companies (e.g public electricity providers,state owned telecommunication companies)

Question 34

Discuss the characteristics of perfect competition

Answer 34

•There are many buyers and sellers
•all the sellers are small sellers in competition with each other
•it has no control over the price
•the products on the market are homogeneous.
•there is no concept of consumer preference.
•all consumers and producers are assumed to have perfect knowledge of price, quality and production methods of products.

Question 35

What are the advantages of perfect competition?

Answer 35

•easy entry
•easy exit
•lower prices for consumers
•more options for consumers
•advertisement is not required
•knowledge of goods and products is dispersed among all buyers and sellers.

Question 36

What are the disadvantages of perfect competition?

Answer 36

•shrinking business market share
•compromised profit margins
•lack of innovation
•no price stability
•wasteful competition
•inability for firms to exploit economies of scale

Question 37

List the characteristics of monopolistic competition

Answer 37

•has many buyers as well as sellers
•products are still homogeneous but sellers sell slightly differentiated products making them price setters.
•consumers have the preference of choosing one product over another.
•consumers are willing to pay a bit more for products with unique features

Question 38

What are advantages of monopolistic competition?

Answer 38

•greater product variety
•easy entry into the market
•easy exit from the market
•improved customer service
•encourages innovation in branding

Question 39

What are the disadvantages of a monopolistic competition?

Answer 39

•results in higher prices
•the firm is not efficient
•firms cannot achieve economies of scale
•profits are confined to the normal minimum
•value of profit or service may not be par with the price
•firms cannot achieve profits needed for investment and research

Question 40

Describe the characteristics of an oligopoly

Answer 40

•consists of a small number of large companies that sell differentiated or identical products.
•their competitive strategies are dependent on each other.
•they are price setters rather than price takers
•companies within an oligopoly collaborate because they recognize that working together is more beneficial than competing against each other
•create agreements to share the market
•oligopolistic firms that collude in formal price fixing arrangements are said to be part of a cartel.

Question 41

Define a cartel

Answer 41

This is when a few firms come together and act like a monopoly.
Instead of competing against each other,they work together.
This is illegal but it is often hard to prove

Question 42

List the conditions that favor collusion

Answer 42

•there are only few firms who knows each other well.
•firms are willing to share reliable information on general and production costs
•they produce similar products using closely related processes
•there is a dominant firm in the market.
•barriers to entry are high.
•no government measures exist to prevent collusion.

Question 43

List the advantages of an oligopoly

Answer 43

•high potential to receive profits
•limited number of companies makes it easier for customers to compare and choose products
•better quality of products and services since brands need to survive
•more competitive prices
•better customer support
•price stability within the market

Question 44

List the disadvantages of an oligopoly

Answer 44

•high barriers to entry for new participants
•anti-competitive behavior limits competition
•companies may defect from the collusion agreement
•illegal price fixing
•creates appearance of choice without really giving one
•inefficient allocation of resources

Question 45

List the sources of monopolies

Answer 45

•government granting a company exclusive rights
•copyrights and patents
•a company having access to a scarce resource
•allow companies to drive down prices to a point where competitors simply cannot survive.

Question 46

List the advantages of a monopoly

Answer 46

•enables it to achieve economies of scale
•employs professional managers who make more efficient use of available resources.
•can grow a market which did not exist previously
•can still make substantial profit without operating at high efficiency
•allows the monopolist to set the rice and make substantial profits

Question 47

List the disadvantages of a monopoly

Answer 47

•lacks customer focus
•higher prices
•less choice for consumers
•no incentive to innovate due to no competition
•no incentive to be efficient
•provision of low-quality goods to save cost of production

Question 48

Describe a monopoly

Answer 48

•this is when a single company represents the whole industry,with no competitor,it is the sole seller of products in the entire market.
•a single company sells a product that is unique and unavailable anywhere else,meaning consumers have to purchase from the company if they want that product
•it has the power to control the market and set prices for its goods,making it a price setter.
•consumers have no alternatives and must pay the price set by the seller.