Midterm Review

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University of Toronto St. George
Rotman Commerce
Chris Bovaird

Midterm Review for MGTA03-H3  A business is an organization that produces or sells goods or services in an effort to make a profit. o It is an organized effort  To provide goods and services  Wants or needs o Not all organized efforts are business  I.E. church, temple, mosque, sports leagues o Provides something for someone  Example: UTSC->tuition o Profit motive  People don’t start churches in order to make a profit o Businesses are motivated by profits  What you pay is more than what they spent to make/provide the product  Therefore they make a profit o Profit is the difference between:  $$$ in (revenues or sales) and $$$ out (costs and expenses) o Profit is the fundamental reason for businesses to exist  Profit is what remains after a business’ expenses have been subtracted from its revenues.  Expenses are the money a business spends producing its goods and services and generally running the business  Revenues are the money the business earns selling its products or services  An economic system is the way in which a nation allocated its resources among its citizens.  Factors of production are the resources used to produce goods and services.  There are 5 factors of production and they are: o Labour which is the mental and physical training and talents of people; sometimes called human resources. o Capital which is the finds needed to operate an enterprise.  Revenue from the sale of products is a key and ongoing source of capital once a business has opened its doors. o Entrepreneur is an individual who organizes and manages labour, capital, and natural resources, to produce goods and services to earn a profit, but who also runs the risk of failure. o Natural resources are items used in the production of goods and services in their natural state, including land, water, mineral deposits, and trees. o Information Resources are information such as market forecasts, economic data, and specialized knowledge of employees that is useful to a business and that helps it achieve its goals.  Types of Economic Systems: o Command economy is an economic system in which government controls all or most factors of production and makes all or most production decisions  Socialism is a kind of command economy in which the government owns and operates the main industries, while individuals own and operate less crucial industries,  Communism is a type of command economy in which the government owns and operates all industries. o Market economy is an economic system in which individuals control all or most factors of production and make all or most production decisions.  A market is a mechanism for exchange between the buyers and sellers of a particular good or service.  Capitalism is a kind of market economy offering private ownership of the factors of production and of profits from business activity.  Mixed market economy is an economic system with elements of both a command economy and a market economy. o Privatization is the transfer of activities from the government to the public sector. o In market economies, Deregulation occurs and it is the reduction in the number of laws affecting business activity Interaction between business and government:  Canada has a mixed economic system  The government as a customer: o It buys thousands of different products and services from business firms. o It is also the largest purchaser of advertising in Canada. o Many businesses depends on the government purchasing  Government as competitor: o They also complete with business through Crown corporations which are accountable to a minister of parliament for their conduct. o Crown corporations exist at provincial and federal levels o They account for a significant and wide variety of economic activity in Canada  Government as a Regulator: o Federal and provincial governments in Canada regulate businesses through many administrative boards, tribunals, or commissions. o The reason for regulating business activities are protecting competition, protecting consumers, achieving social goals, and protecting the environment.  Protecting Competition:  Do this to ensure that a healthy competition exists among business firms.  Competition is crucial for a market economy  Competition policy tries to eliminate restrictive trade practices and thereby stimulate maximum production, distribution, and employment.  Protecting consumers:  The federal government has initiated many programs that protect consumers.  Consumers are also protected by municipal bylaws  Achieving social goals:  Promotes the well-being of our society  Social goals include, universal access to health care, safe workplaces, employment insurance, and decent pensions  Protecting the environment:  Example: the Canada Water Act which controls water quality in fresh and marine waters.  Government as a Taxation Agent: o Taxes are imposed and collected by federal, provincial and local governments  Revenue taxes are taxes whose main purpose is to fund government services and programs.  Progressive revenue taxes are taxes levied at a higher rate on higher-income taxpayers and at a lower rate on lower-income taxpayers  Regressive revenue taxes are taxes that cause poorer people to pay a higher percentage of income than richer people pay  Restrictive taxes are taxes levied to control certain activities that legislators believe should be controlled.  Government as provider or incentives: o Offer incentives that help stimulate economic development o Also offer incentive through the many services they provide to business firms through government organizations  Government as provider of essential services: o All three levels of government facilitate business activity through the wide variety of services they supply, the minting of money, the armed forces, and statistical data on which to base business decisions. o Tries to maintain stability through fiscal and monetary policy o Provincial and municipal governments provide streets, sewage and sanitation systems, police and fire departments, utilities, hospitals, and education.  Supply and Demand in a market economy:  A market economy consists of many different markets o Demand is the willingness and ability of buyers to purchase a product or service o Supply is the willingness and ability of producers to offer a good or service for sale. o Law of demand is the principle that buyers will purchase (demand) more of a product as price drops o Law of supply is the principle that producers will offer (supply) more of a product as price rises. o Market price (or equilibrium price) is the profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal o Surplus is the situation in which quantity supplied exceeds quantity demanded o Shortage is the situation in which quantity demanded exceeds quantity supplied  When there are shortages of commodities, the price of the commodity rises and there may be an increase in criminal behaviour  Private enterprise and competition in a market economy: o Market economies rely on a private enterprise system o A private enterprise is an economic system characterized by private property rights, freedom of choice, profits and competition. o Private property rights is idea that the ownership of the resources to create wealth is in the hands of individuals o Freedom of choice is the idea that you can sell your labour to any employer that you choose and also choose which product your buy. o Profits can lead some people to abandon the security of working for someone else and to assume the risks of entrepreneurship. o Competition is the vying among businesses in a particular market or industry to best satisfy consumer demands and earn profits.  Degrees of competition: o Perfect competition is a market or industry characterized by a very large number of small firms producing an identical product so that none of the firms has any ability to influence price.  For perfect competition to exist two conditions must be met:  All firms in an industry must be small  The number of firms in the industry must be large o Monopolistic competition is a market of industry characterized by a large number of firms supplying products that are similar but distinctive enough from one another to give firms some ability to influence price.  Example: Coca Cola and Pepsi  All of these types of business can still enter or leave the market easily o Oligopoly is a market or industry characterized by a small number of very large firms that have the power to influence the price of their products and/or resources. o Monopoly is a market or industry with only one producer, who can set the price of its product and/or resources o Natural monopoly is a market or industry in which having only one producer is most efficient because it can meet of the consumers’ demand for the product.  Two types of command (planned) economy o Communist economies (N. Korea, Cuba): The government owns/controls almost all of the factors of productions, makes almost 100% of the economic decisions o Socialist economies (china): the government owns/controls the majority of the factors of productions, including principal industries, make most of the economic decisions.  Market economies are economic systems where individuals own most of the factors of production and make most of the decisions regarding the two key economic questions. o 2 types of market economy  Mixed economy(Canada, USA, Britain): private individuals own/control the majority of the factors o production, including principal industries, makes most of the economic decisions  Capitalist economy: all factors of production owned by private individuals, the state plays no role in making economic decisions.  Market: exchanges between buyers and sellers  In a market economy, prices and the volume of transactions are set by buyers and sellers, acting independently.  Degrees of competition is the ability of buyers and sellers to negotiate “good” prices, or have leverage over one another depends on number of buyers and sellers in the market  Four degrees of competition o Pure or perfect competition  Lots and lots of suppliers  All more or less the same  Most of them are all  They must sell at the same price  Example: carton of milk o Monopolistic Competition:  Lots and lots of suppliers  Most of them are small  Most more or less the same  Some are big, can differentiate themselves  Most sell at the same price  A few can charge a little extra  Ex: coffee shops vs. Starbucks also clothing  Oligopoly: o Small numbers of suppliers (3,4 or 5) o All “large” o Each tries to differentiate themselves o Industry hard to enter, hard to exit o Suppliers watch each other, act in concert o Much latitude to set price  Example: Canadian banking industry,  Example: Microsoft  Microsoft, however, was a monopoly for one product : Internet Explorer  Was in the news for ‘internet explorer’  In 2001 did not have 100% market share o But used that power to bully and intimidate its suppliers and buyers  Acted as if they were the only supplier of internet  Monopoly: o Only one supplier o Has (by definition) 100% market share o Can set whatever price it likes  Example: LCBO o Called monopoly because the goal is to own all of the real estate* Chapter 2: Understand the environments of business:  All businesses operate within a larger external environment  This external environment consists of everything outside an organization’s boundaries that might affect it.  External environment plays a major role in determining the success or failure of any organization  The economic environment refers to the condition of the economic systems in which an organization operates  Three key goals of the Canadian economic system are economic growth, economic stability and full employment  To measure economic growth we use tools such as aggregate output, standard of living, gross domestic product, and productivity.  The main threats of economic stability are inflation, and unemployment  The business cycle has patterns of short term ups and downs in an economy o The business cycle has four recognizable phases and they are, peak, recession, trough, and recovery o Recession is the period during which aggregate output, as measured by real GDP, declines o Depression is a particularly severe and long-lasting recession o Aggregate output is the total quantity of goods and services produced by an economic system during a given period. o Standard of living is the total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic systems. o Gross domestic product is the total value of all goods and services produced within a given period by a national economy through domestic factors of production. o Gross national product is the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.  GPI has been falling since the 1970s. o GDP per capita meaning GDP per person  We get this by dividing a person’s total GDP by the total population of a country. o Real GDP meaning that GDP has been adjusted  It is calculated to account for changes in currency values and price changes o Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different counties are about the same. o Productivity is the measure of economic growth that compares how much a system produces with the recourses need to produce it. o Two factors that hinder the growth of an economic system are balance of trade and national debt  Balance of trade is the total of a country’s exports (sales to other countries) minus its imports (purchases from other countries)  A positive balance of trade results when a country exports more than it imports. This would help economic growth.  A negative balance or trade deficit results when a country imports more than it exports. This would inhibit economic growth.  National debt is the total amount of money that the government owes its
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