Chapter 1▯ 01.12.12
External environment: pressure from governments and society + new technology changes economic environment
Internal environment: What to produce (marketing and operations)
▯ ▯ How to price these products (marketing and ﬁnance)
▯ ▯ How many people to hire and wages (human resources and ﬁnance)
Critical success factors: Better training and technology to improve worker productivity help to build a workforce
committed to meeting the quality needs of the customer and build long-term relationships with them. This results in
both higher revenues and cost savings, helping the company achieve better ﬁnancial performance
Factors of production: the resources used to create goods and services
- natural resources: commodities that are useful inputs in their natural state
▯ - labour: economic contributions of people
- capital: the inputs, such as tools, machinery, equipment, and buildings, used to produce goods and get them to the customer
- Sometimes the term capital is also used to mean the money that buys machinery, factories, and other production and
distribution facilities. However, because money itself produces nothing, it is not one of the basic inputs. Rather, it is a
means of acquiring the inputs. Therefore, in this context, capital does not include money.
- entrepreneurs: people who combine the inputs of natural resources, labour, and capital to produce goods or services with the
intention of making a proﬁt or accomplishing a not-for-proﬁt goal
- knowledge: the combined talents and skills of the workforce
Economics: the study of how a society uses scarce resources to produce and distribute goods and services.
Economic system: the combination of policies, laws, and choices made by a nationʼs governments to establish the
systems that determine what goods and services are produced and how they are allocated.
Market economy (private enterprise system; capitalism): based on competition in the marketplace and private
ownership of the factors of production (resources).
• Large number of people and businesses buy and sell products freely.
• Purely, all factors of production are owned privately and the government does not try to set prices or coordinate
• Rights: to own property, to make a proﬁt, to make free choices, and to compete.
• Property rights are central to a market economy.
• Main incentive is proﬁt, which encourages entrepreneurship.
• Proﬁt necessary for producing goods and services, building plants, paying dividends and taxes, and
Command economy (planned economy): characterized by government ownership of virtually all resources and
economic decision making by central-government planning
• tight controls over most aspects of people's lives (careers, where they work, what they can buy, etc.) result in lower
productivity (no incentive or rewards)
• Errors in planning and resource allocation led to shortages
• North Korea and Cuba are the best remaining examples of command economic systems.
Socialism: the basic industries are owned by the government or by the private sector under strong government
• State-controlled: critical large-scale industries such as transportation, communications, and utilities (smaller
businesses may be privately owned)
• To varying degrees, the state also determines the goals of businesses, the prices and selection of goods, and the
rights of workers.
Citizens typically receive a higher level of services, such as health care and unemployment beneﬁts, , resulting in
higher taxes and unemployment
Mixed economies: combine several economic systems
• ex. An economy in which the government owns certain industries, but the private sector owns others
• In Canada, some industries are at least partly owned by the government (e.g., communications, transportation, and
utilities industries), but most activities are carried on by private enterprises, as in a market system.
• The few factors of production owned by the government include some public lands, Canada Post, and some
• Government is extensively involved in the economic system through taxing, spending, and welfare activities.
• Canada tries to achieve many social goals—income redistribution (transfer payments) and Canada Pension
Plan, for example—that might not be attempted in purely capitalist systems.
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What is produced?
Economic How much is produced?
How is it produced?
For who is it produced?
Decisions made by:
What products to produce
How to price them
Decisions How many people
of to employ
How much to pay
How much to expand
Circular ﬂow: the movement of inputs and outputs among households, businesses, and governments; a way of
showing how the sectors of the economy interact
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GDP: The total GNP: Measures what is
Three main goals of Macroeconomics market value of final produced by a nation
goods and services regardless of where the
Economic growth > Full employment > Price stability produced within a factors of production are.
▯ ▯ ▯ nation’s border.
increase in a - The condition Inﬂation's
nationʼs output when all people higher prices
of goods who want to work reduce Income Eventually these
and services and work have purchasing all peak and decline
Drawbacks: jobs power: value Employment
Pollution Deﬁned as 94%-96% Prices
Strain on public money can
Business Cycles: Upward and downward changes in the level of economic activity
Recession: A decline in GDP that lasts for two consecutive quarters
Unemployment rate: percentage of the total labour force that is not working but is actively looking for work.
Frictional short-term unemployment that is not related to the business cycle
caused by a mismatch between available jobs and the skills of available workers in an industry or a region;
Structural not related to the business cycle
Cyclical occurs when a downturn in the business cycle reduces the demand for labour throughout the economy
Seasonal occurs during speciﬁc seasons in certain industries
Frictional: Involuntary Cyclical: Seasonal:
includes people who are ex. If the birthrate declines, In a long recession, it is retail workers hired for the
unemployed while waiting to fewer teachers will be widespread, and even people December buying season,
start a better job, reentering the with good job skills can't ﬁnd
needed. Or the available road construction, and
job market, and those entering workers in an area might lack jobs. The government can partly restaurant employees in
for the ﬁrst time, such as new the skills that employers counteract cyclical winter ski areas.
college graduates. This type of unemployment with programs
want. Retraining and skill- that boost the economy.
unemployment is always building programs are often
present and has little impact on required to reduce structural