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MGTA05H3 Study Guide - Midterm Guide: Monopolistic Competition, Planned Economy, Mixed Economy

Management (MGT)
Course Code
H Laurence
Study Guide

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MGTA05 Midterm Review
Topics covered for the midterm.
1. Profit
2. Command, Mixed and Market-based Economic Systems
3. Degrees of Competition
4. Legal Forms for Carrying on Business in Canada
5. Sources of Finance
6. Small and Entrepreneurial Businesses
7. Large Businesses
Text: Sections A, B, C and D
NOTE: all material in the textbook is examinable, even if that material was not discussed
in class. So do review the textbook and make your review notes on the material in it.
Basic knowledge
What is a profit?
How is a profit calculated?
Which items are “Revenue” – money coming in?
Which items are “Expenses” – money going out?
A typical question would give you various dollar amounts for a period or a
particular business. You need to determine which amounts items are revenue and
which items are expenses in order to calculate the profit.
Another typical question would ask you to compare profits from two different
businesses. You would be asked to determine which business produces a greater
Think like a manager
You could be asked to decide which business you would prefer to support. You
have two businesses, each generating a profit. If conditions were to change, so
would the profits. You need to decide which business to support to earn the
maximum profit. You could also be asked to justify your choice – to give good
reasons why you would support one business over the other.
Return on Shareholder Equity
Basic Knowledge
For our purposes, return on shareholder equity is the profit generated divided by
the amount of the shareholder investment. You should be able to calculate the
return on shareholder investment by determining the profit and the amount of the
shareholder investment. Note that the shareholder investment is the amount of the
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shareholders own money that the shareholder has invested, usually by purchasing
shares of the corporation carrying on the business.
You should also be able to compare returns on shareholder equity for different
amounts of shareholder investment. If a shareholder borrows money to invest in
the business, that amount does not increase the amount of the shareholder equity.
The shareholder may, however, make a profit from that borrowed money. If the
shareholder pays the lender less in interest than the shareholder generates in profit
on that borrowed money, the shareholder benefits. This benefit illustrates the
value of what is called “leverage” – the value of borrowing money. Leverage,
however, has a risk. If the borrower realizes a loss, the borrower must find the
money to repay loans from somewhere other than the business profits.
Think like a manager
You could be asked to determine whether or not to borrow money to invest in a
business. When would you want to borrow a little or none at all? When you want
to borrow a lot? Why? You should be able to prepare an argument and then apply
it to the facts of a case.
Command, Mixed and Market-based Economies
Basic Knowledge
You should be able to distinguish between command economies, market-based
economies and mixed economies. Remember that these distinctions come from a
theory about government involvement in the marketplace. The distinctions form
an ideal continuum running from no government involvement at all (market
economies) through some government involvement (mixed economies) to
complete control by government (command economies). Real economies are
almost all mixed economies – the government has some involvement. The degree
of that involvement varies. If the government controls almost all economic
activity, and does not base its decisions on profitability, the economy is
characterized as a command economy. If the government regulates the economy
very little and allows private enterprise lots of room for making profit, the
economy is characterized as a market economy. Economies between these end
points are mixed economies. The key behind the whole theory seems to be the
extent to which market forces and the making of profit govern economic
You should be able to distinguish the different kinds of economies, noting the
characteristics of each.
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