Management Ch. 1
The Concept of Business & Profit
Business – an organization that produces or sells goods or services in order to make a profit
Profit – what remains after a business’s expenses have been subtracted from its revenues.
Profits reward businesses for taking the risks involved with investing their time & money.
Expenses (Costs) - The money a business spend producing its goods & services & generally running the
Revenues (Sales) - The money a business earns selling its products & services.
In Canada’s economic system Businesses exist to make a profit for owners who are free to set them up
Consumers have a freedom of choice
In choosing how to get profits, businesses MUST take into account what consumers want or need
Someone who can spot a promising opportunity develop a good plan for capitalizing on it can
succeed Involves identifying an unmet need or better way of satisfying needs
Businesses produce most of the goods & services we consume & employ majority of the working
They create most new innovations & provide opportunities for other businesses, which serve as
New forms of technology, service businesses & int’l opportunities promise to keep production,
consumption & employment growing indefinitely
Business profits enhance personal incomes of millions of shareholders and owners
Business taxes help to support govt at all levels
Therefore, businesses are beneficial for all members of society in different ways.
Economic systems around the World
Economic system- allocates a nation’s resources among its citizens
They differ according to who owns & controls these resources
Factors of Production
Labour : The mental and physical training & talents of people ; also called human resources.
Carrying out a business requires a labour force with a variety of skills
Employees who are well-trained & knowledge are an asset to the business
Capital: The funds needed to operate an enterprise Obtaining & using labour & other resources requires capital
Capital is required to start a business & allow it to grow
Major source of capital for small businesses personal investment by owners
Investments can be made by individual entrepreneurs, investors who buy stocks or partners
Revenue – key & ongoing source of capital once a business is started
Entrepreneurs: An individual who organizes and manages the labour, capital and natural resources to
produce good & services to earn a profit, also the one who takes the risk of failure
Natural Resources: Items used in the production of goods & services in their natural state, incl. land,
water, mineral deposits, and trees
Information Resources: Information such as market forecasts, economic data, & specialized knowledge of
employees that is useful to a business & that helps it achieve its goals
Businesses rely heavily on market forecasts, economic data , specialized expertise of ppl
Much of what they do results in the creation of new information or repackaging of existing
information for new users & different audiences
AOL is in the information business
Types of Economic Systems
Economic systems differ in the way that they manage the factors of production and how decisions are
made about production and allocation.
2 basic forms are communism and socialism
Proposed by Karl Marx, communism is a system where the gov’t owns and operates all industries
Marx envisioned a society where ppl contribute according to their abilities & receive economic
benefits according to their needs
Marx expected govt ownership to be temporary until society had matured, but type of system has
Socialism: A command economy where the govt owns and perate the main industries, while individuals
own and operate less crucial industries
Govt owns & operates major industries, while small businesses such as clothing stores &
restaurants are owned privately
Workers in socialist countries choose their profession, but most work for govt
Govt managed enterprises are in efficient b/c workers not hired based on ability, but through
Involves extensive welfare systems with high taxes Socialism declining in popularity due to this
Market Economies Market: A mechanism for exchange between the buyers and sellers of a particular good or service
Sellers are free to charge whichever price & buyers are free to buy from whoever they want
Freedom of choice for buyers and sellers
Capitalism: A kind of market economy offering private ownership of the factors of production and of
profits from business activity.
Employees are free to work wherever they like & companies can manufacture w.e they want to
& consumers can buy whatever they want to
Encourages entrepreneurship by offering profits as an incentive
Supply and demand is the economic basis for market processes
Mixed Market Economies
Mixed Market Economy: It is an economic system with elements of market & command economy. Typical
of most nations’ economies
Privatization: Transfer of activities from the gov’t to public sector
Process of converting gov’t enterprises to privately owned companies
Deregulation: Reduction in the number of law governing business activity & powers of gov’t enforcement
Enables companies to do whatever they want w/out gov’t intervention & simplifies management of
Evident in airlines, banking, trucking, communication
Interactions b/w Business and Gov’t
How Gov’t Influences Business and Government
Government as a Customer:
Gov’t buys thousands of products & services from business firms
Largest purchaser of advertising in Canada
Many businesses are reliant on the govt for a major portion of their revenue
Govt expenditures on goods & services = Billions $$$
Government as Competitor:
Gov’t competes with businesses through Crown Corporations, which are accountable to a minister
of parliament for their conduct
Exist at provincial & federal level & account for a significant amount of economic activity in Canada Government as a Regulator:
Federal & provincial governments in Canada regulate many aspects of business activity
Forms: administrative boards, commissions, tribunals
Federal examples : CRTC ( Canadian Radio-Television & Telecommunications Commission)
CRTC- they make decisions abt which issues & renews broadcast licenses
CWB- regulates prices of wheat
Reasons for regulation: protecting competition, protecting customers, Achieving social goals, & protecting
Government as Taxation Agent:
Taxes are imposed & collection by all 3 levels of govt.
Revenue taxes (income taxes) levied by govts primarily to provide revenue to fund various programs &
Progressive revenue taxes higher rate on higher income taxpayers & lower rate on lower-income
Regressive revenue taxes ( sales tax) levied at the same rate regardless of income levels.
Restrictive taxes (on alcohol, cigs, and gasoline) levied partially for the revenue, but also b/c legislative
bodies believe it needs to be controlled.
Government as Provider of Incentive:
All 3 levels of gov’ts offer incentive programs & services that help stimulate economic development.
Through training programs, building of facilities, interest-free loans & suspension of duties.
Ex: Hyundai & Toyota
Through the services they provide to firms through govt organizations.
Ex: Stats Can, Export Development Corp.
They may or may not stimulate the economy, also create difficulties with trading partners.
Government as Provider of Essential Services:
All 3 levels of gov’t facilitate business activity through the services they supply:
Federal: highways, postal service, minting of money, army, stats on which to base business decisions
Also tries to maintain stability through fiscal & monetary policies.
Provincial & Municipal: streets, sewage, sanitation, police & fire, healthcare, education All of these activities create stability which encourages business activity
Demand & Supply in a Market Economy
Laws of Demand & Supply
On all economic levels, decisions abt what to buy & sell determined by demand & supply.
Demand : willingness & ability of a consumer to purchase a product & service.
Supply: Willingness & ability of a producer to offer a goods or service for sale.
Law of Demand: Buyers will buy more if the price drops and less if it increases.
Law of Supply: Producers will offer more of a product for sale as it’s price rises & less if price drops
Demand & Supply Schedules : assessment of relationships b/w different levels of demand & supply at
different price levels.
Demand Curve : Graph shows how many products will be (bought) demanded at different prices.
Supply Curve: Grpah shows how many products will be supplied at different prices
Market Price or Equilibrium: Profit maximizing price at which:
quantity of goods demanded = quantity of goods supplied
Surplus: Situation when quantity supplied is greater than quantity demanded.
Business will lose money they could’ve made by producing more pizzas.
Shortage: Situation when quantity demanded is greater than quantity supplied.
Leads to higher prices of commodities & increase in criminal behaviour possibly.
Private Enterprise & Competition in a Market Economy
Market economies rely on a private enterprise system.
Private enterprise system: A system characterized by private property, freedom of choice, profits &
Allows individuals to pursue their own interests with minimal govt restriction
Private Property rights: Ownership of resources used to create wealth in in the hands of individuals
Freedom of Choice: You can sell your labour to any employer, choose which products to buy, who to hire,
what to produce
Profits: Profits persuade some ppl to take the risk of an entrepreneurship; anticipated profits can influence
individuals’ choices on which goods & services to produce
Competition: Motivates the efficient running of businesses. Occurs when 2 or more businesses vie for the same resources or customers.
To gain advantage , a business must produce efficiently & be able to sell at a reasonable profit
To achieve goals, business must convince consumers that its products are better or cheaper
Competition forces all businesses to make products better or cheaper.
Degrees of Competition
Perfect Competition has two requirements :
1. All firms in an industry MUST be small.
2. The number of firms in the industry must be large.
Under these conditions, no one single firm is powerful enough to affect the price of a product
Prices are determined by market forces – demand & supply
The 2 conditions reflect these principles:
1. Products are so similar for all firms that buyers view them as identical
2. Both buyers & sellers know the selling & receiving price for others
3. Easy to enter or leave the market for each firm – very small
4. Going prices set by demand & supply & accepted by sellers & buyers
Example: Cdn agriculture
Fewer sellers are involved in monopolistic competition than in perfect, however there is attempt to make
products SEEM different b/c there are still a lot of buyers.
Differentiating strategies include brand names & advertising.
Still easy to come & leave the market although businesses are small & large
Small stores can respond to fashion tastes as quickly as big stores
Product differentiation also gives sellers some control over prices
Small number of very large firms that have the power to influence prices of products & resources.
An oligopoly exists when there are only a few sellers in an industry.
Hard to enter the industry due to large capital investment required
Example: airline, automobile and steel industries
Oligopolists have more control over their strategies than monopolistically competitive, however
one firm can significantly affect the sales of every other firm
For example, when one firm lower their prices, the others follow suit, therefore prices of
comparable goods are similar Monopoly
When an industry only has ONE producer, who can set the price of its product & resources.
Natural Monopoly: A market or industry in which having only 1 producer is most efficient b/c it can meet
all of consumers’ demand for the product.
The need for natural monopoly is constantly being challenged.
EX: Royal Mail in Britain, other companies allowed to compete after 350 yrs.
Firm, complete control over price, however constraint is the drop in demand due to price rise
In Canada, laws such as the Competition Act forbid many monopolies & the price the prices
charged by natural monopolies are watched by provincial utilities board
Ch 2: Understanding the Environment of Business
All businesses regardless of shape, size, location or mission operate within a large external environment.
External Environment: consists of everything outside of an organization’s boundaries that might affect it
it plays a major role in determining the success or failure of an organization.
No single firm can control the environment, they need to be proactive & try to influence the environment
Economic Environment: Conditions of the economic system in which the organization operates.
EX: McDonalds Canada operates in an economic environment characterized by moderate growth,
moderate unemployment & low inflation.
Thus, most ppl can buy from them, but it also means that they have to pay higher wages to attract
employees & they can’t increase their prices.
3 Goals of the Cdn economic system: Growth, Stability & full employment
Business Cycle: Patterns of short-term ups & downs in an economy.
It has 4 recognizable phases: peak, recession, trough, recovery
Recession: Period during which the aggregate output, as measured in GDP, decline for 2 straight quarters. If a recession lasts for a prolonged period, it’s called a Depression.
Aggregate Output & the Standard of Living
Main measure of growth in the business cycle is aggregate output.
Aggregate Output: total quantity of goods & services produced by an economic system during a given
When output grows faster than the population, 2 things follow:
Output per capita- quantity of goods/services per person- goes up & the system provides more of the
goods/services that ppl want.
When these 2 things occur, standard of living gets higher.
Standard of Living: Total quantity & quality of goods/services that ppl can purchase with the currency used
in their economic system.
Growth influences a higher standard of living.
Gross Domestic Product
GDP : total value of goods & services produced within a given period by a national economy thru domestic
factors of production.
If GDP goes up, economic growth occurs.
Thus, profits made by a foreign company in Canada are included.
Gross National Product (GNP) : total value of all goods & services produced by a national economy within a
given period regardless of where the factors of production are located.
Thus, profits made by a Canadian company abroad are included.
Both measures are useful for the economic growth b/c they track an economy’s performance over time.
Genuine Progress Indicator ( GPI ) : treats activities that harm the environment or harm our quality of life
as costs & gives them negative values. Introduced by a company called Redefining Progress.
New GPI measure shows that while GDP has been increasing for many years, GPI has been falling since
GDP and GNP differ, but GDP preferred method for calcula