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Chapter 1-5

MGTA01 Midterm Review Chapter 1-5 Notes.docx

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) Chapter 1: Understanding the Canadian Business System o Business: an organization that produces or sells goods or services in an effort to make a profit o Profit is what remains after a business’s expenses have been subtracted from its revenues o Businesses exist to earn profits Economic Systems Around the World o Allocates a nation’s resources among its citizens o Factors of production: the basic resources that a country’s businesses use to produce goods and services o Four factors of production: labour, capital, entrepreneurs, and natural resources Labour: o People who work for a company o Human resources Capital o Financial resources needed to operate an enterprise o Personal investment by owners for small businesses Entrepreneurs o People who accept the opportunities and risks involved in creating and operating businesses Natural Resources o Land, water, mineral deposits, and trees o Include all physical resources Information Resources o Specialized expertise and knowledge of people o Various forms of economic data for their work o Creation of new information or the repackaging of existing information for new users and different audiences Types of Economic Systems o Manage factors of production o Ownership can be private or by government o Can differ in the way that decisions are made about production and allocation o Command economy: relies on a centralized government to control all or most factors of production and to make all or most production and allocation decisions o Market economy: individuals – producers and consumers – control production and allocation decisions through supply and demand Command Economies o Communism and socialism o Communism is a system in which the government owns and operates all sources of production o Socialism: the government owns and operates only selected major industries Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) Market Economies o Mechanism for exchange between the buyers and sellers of a particular good or service o Capitalism: sanctions the private ownership of the factor of production and encourages entrepreneurship by offering profits as an incentive o Operation of demand and supply Mixed Market Economies o Command and market economies are viewed as opposites o Mixed market economy: system featuring characteristics of both command and market economies o Privatization: the process of converting government enterprises into privately owned companies o Deregulation: the reduction in the number of laws affecting business activity and in the powers of government enforcement agencies Interactions Between Business and Government Government as Customer o Buys thousands different products and services from business firms o Largest purchaser of advertising in Canada Government as Competitor o Competes with business through Crown corporations o Exists for provincial and federal level Government as Regulator o Regulate through many administrative boards, tribunals, or commissions o Provincial boards and commissions also regulate business through their decisions o Protecting competition, protecting consumers, achieving social goals, and protecting the environment Government as Taxation Agent o Revenue taxes are levied by governments primarily to provide revenue to fund various services and programs o Progressive revenue taxes are levied at a higher rate on higher-income taxpayers and at a lower rate on lower-income taxpayers o Regressive revenue taxes are levied at the same rate regardless of a person’s income o Restrictive taxes are levied partially for the revenue they provide, but also because legislative bodies believe that the products in question should be controlled Government as Provider of Incentives o Help stimulate economic development Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) o Offer incentives through the many services they provide to business firms through government organizations o Municipal tax rebates for companies Government as Provider of Essential Services o Facilitate business activity through the wide variety of services they supply o Examples: highways, postal service and minting money o Maintain stability through fiscal and monetary policy o Sewage, hospitals and police o These activities create the kind of stability that encourages business activity The Canadian Market Economy Demand and Supply in a Market Economy o Inputs used by a business and the products created by business have their own markets o Decide what inputs to buy, what to make and in what quantities, and what prices to charge o Customers decide what to buy and how much they want to pay The Laws of Demand and Supply o Decisions about what to buy and what to sell are determined primarily by the forces of demand and supply o Demand is the willingness and ability of buyers to purchase a product or a service o Supply is the willingness and ability of producers to offer a good or service for sale o Law of demand: buyers will purchase more of a product as its price drops and less of a product as its price increases o Law of supply: producers will offer more of a product for sale as its price rises and less as its price drops The Demand and Supply Schedule o Obtained from marketing research and other systematic studies of the market o Understand the relationships among different levels of demand and supply at different price levels Demand and Supply Curves o Demand curve shows how many products will be demanded at different prices o Supply curve shows how many units of a product will be supplied at different prices o When the demand and supply curves are plotted on the same graph, the point at which they intersect is the market price or equilibrium price – the price at which the quantity of goods demanded and the quantity of goods supplied are equal Surpluses and Shortages o Surplus: a situation in which the quantity supplied exceeds the quantity demanded Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) o Shortage: the quantity demanded will be greater than the quantity supplied o Finding the equilibrium point Private Enterprise and Competition in a Market Economy o Private enterprise: allows individuals to pursue their own interests with minimal government restriction o Requires private property rights, freedom choice, profits, and competition 1. Private property rights: ownership of the resources used to create wealth is in the hands of individuals 2. Freedom of choice: the choice to buy, sell and hire 3. Profits: the lure of profits leads some people to abandon the security of working for someone else and to assume the risks of entrepreneurship. The anticipated profits also influence individuals’ choice of which goods or services to produce 4. Competition: if profits motivate individuals to start businesses, competition motivates them to operate those businesses efficiently. It occurs when two or more businesses vie for the same resources or customers Perfect Competition o All firms in an industry must be small o The number of firms in the industry must be large o No single firm is powerful enough to influence the price of its products o Prices are determined by supply and demand o The products of each firm are so similar that buyers view them as identical to those of other firms o Both buyers and sellers know the prices that others are paying and receiving in the marketplace o Easy to leave or enter the market o Prices are set exclusively by supply and demand and accepted by both sellers and buyers Monopolistic Competition o Fewer sellers involved than perfect competition o Many sellers try to make products at least seem to differ from those of competitors o Businesses may be large or small o Can still enter or leave the market easily o Gives sellers some control over prices Oligopoly o When an industry has only a handful of sellers o Sellers are quite large o It is difficult for a new competitors to enter the industry because large capital investment is needed Business Volume 1: Custom 2 ndEdition Textbook Notes (MGTA01 2013) o Have more control over their strategies than monopolistically competitive firms, but the actions of one firm can significantly affect the sales of every other firm in the industry Monopoly o When an industry or market has only one producer o Gives a firm complete control over the price of its product o Consumer demand will fall as its price rises o Competition Act forbid many monopolies, and the prices charged by so called “natural monopolies” are closely watched by provincial utilities boards o Natural monopolies are found in industries in which are company can most efficiently supply all the product or service that is needed Chapter 2: Understanding the Environments of Business The Economic Environment o External environment: which consists of everything outside an organization’s boundaries that might affect it o Economic environment: refers to the conditions of the economic system in which an organization operates Economic Growth o Less than 2.5% of the population works in agriculture o Increased because we have been able to increase total output in the agricultural sector The Business Cycle o Pattern of short-term ups and downs in an economy o Has 4 phases: peak, recession, through, and recovery o Recession is a period during which aggregated output declines o Long-term recession  depression Aggregate Output and the Standard Living o Main measure of growth is aggregate output: the total quantity of goods and services produced by an economic system during a period o An increase in aggregate output is growth o When output grows more quickly than the population, two things follow: output per capita – the quantity of goods and services per person – goes up and the system provides relatively more of the goods and services that people want o People living in an economic system benefit from a higher standard of living Gross Domestic Product o Refers to the total value of all goods and services produced within a given period by a national economy through domestic factors of production o Increase GDP = economic growth Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) Gross National Product o Gross national product (GNP) refers to 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 o Profits earned by foreign firms in Canada are included in GDP o Redefining Progress has proposed a more realistic measure to assess economic activity – the Genuine Progress Indicator (GPI) o GPI treats activities that hard the environment or our quality of life as costs and gives them negative values Real Growth Rates o Growth rate of GDP adjusted for inflation and changes in the values of the country’s currency o Growth depends on output increasing at a faster rate than population GDP per Capita o GDP per capita means GDP per person o Dividing total GDP by the total population of a country Real GDP o Nominal GDP: GDP measured in current dollars or with all components valued at current prices o Real GDP: GDP calculated to account for changes in currency values and price changes Purchasing Power Parity o The principle that exchange rates are set so that the prices of similar products in different countries are about the same Productivity o Measure of economic growth that compares how much a system produces with the resources needed to produce it o If more products are being produced with fewer factors of production, what happens to the prices of these products? They go down o Standard of living improves only through increases in productivity o Factors that can help or hinder the growth of an economic systems: balance of trade and the national debt Balance of Trade o The economic value of all the products that a country exports minus the economic value of its imported products o A positive balance of trade results when a country exports more than it imports  helps economic growth  creditor nation o Negative balance of trade results when a country imports more than it exports  inhibits economic growth  trade deficit Business Volume 1: Custom 2 ndEdition Textbook Notes (MGTA01 2013) National Debt o Amount of money that the government owes its creditors o Government takes in revenues and has expenses o Budget deficits: the government spent more money each year than it took in o Sells bonds o Competes with every other potential borrower Economic Stability o Stability: a condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate o Factors that threaten stability: inflation, deflation, and unemployment Inflation o Occurs when there are widespread price increases throughout an economic system o Occurs when the amount of money injected into an economy outstrips the increase in actual output o Decreases the purchasing power of your money o Measure inflation by price increases o Consumer price index (CPI) measures changes in the cost of a “basket” of 600 different goods and services that a typical family might buy Deflation o Falling prices o May fall because industrial productivity is increasing and cost savings can be passed onto costumers, or because consumers have high levels of debt and are therefore unwilling to buy very much Unemployment o Level of joblessness among people actively seeking work o Fictional unemployment: people are out of work temporarily while looking for a new job o Seasonal unemployment: people are out of work because of the seasonal nature of their jobs o Cyclical unemployment: people are out of work because of a downturn in the business cycle Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) o Structural unemployment: people are unemployed because they lack the skills needed to perform available jobs o If government cut taxes or spending more money on the economy, prices in general may go up because increased consumer demand, but then inflation sets in, and purchasing power declines Managing the Canadian Economy o Government acts to manage the Canadian economic system through two sets of policies: fiscal and monetary o Manages the collection and spending of its revenues through fiscal policies o Tax increases can function as fiscal policies, not only to increase revenues but to manage the economy as well o When the growth rate of the economy is decreasing, tax cuts will normally stimulate renewed economic growth o Monetary polices focus on controlling the size of the nation’s money supply o Higher interest rates make money more expensive to borrow and thereby reduce spending  tight monetary policy o Lower interest rates make money less expensive to borrow and thereby increase spending  easy monetary policy o Fiscal policy and monetary policy make up stabilization policy: government economic policy whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices The Business Environment o Three most serious issues facing Canadian businesses: 1. Taxation 2. The value of the Canadian dollar 3. The need for an education/skilled workforce The Industry Environment o Managers must understand the company’s competitive situation, and then develop a competitive strategy to exploit opportunities in the industry Rivalry Among Existing Competitors o Rivalry in intense price competition, elaborate advertising campaigns, and an increased emphasis on customer service Threat of Potential Entrants o If it is easy for new competitors to enter a market, competition will likely be intense and the industry will not be very attractive o Some industries are very capital-intensive and are therefore difficult to enter Suppliers o The amount of bargaining power suppliers have in relation to buyers helps determine how competitive an industry is Business Volume 1: Custom 2 ndEdition Textbook Notes (MGTA01 2013) o The power of suppliers is influenced by the number of substitute products that are available Buyers o When there are only a few buyers and many supplies, the buyers have a great deal of bargaining power Substitutes o Many substitute products  industry is more competitive Emerging Challenges and Opportunities in the Business Environment o Most successful firms are dealing with challenges and opportunities in today’s business environment by focusing on their core competencies – the skills and resources with which they compete best and create the most value for owners o They outsource non-core business processes, paying suppliers and distributors to perform then and thereby increasing their reliance on suppliers o Often involve globally dispersed processes and supply chains o Most publicized steps that companies have taken to respond to challenges and opportunities in the business environment: outsourcing Outsourcing o The strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or serviced Chapter 3: Understanding Entrepreneurship, Small Business, and New Venture Creation Small Business o Industry Canada is the main federal government agency responsible for small business o Relies on two distinct sources of information, both provided by statistics Canada: the Business Register and the Labour Force Survey o To be included in the register, a business must have at least one paid employee, annual sales of $30 000 or more, or be incorporated o Goods-producing business in the register is considered small if it has fewer than 100 employees o Service-producing business is considered small if it has fewer than 50 employees o LFS uses information from individuals to make estimates of employment and unemployment levels o Individuals are classified as self-employed if they are working owners of a business that is either incorporated or unincorporated, if they work for themselves but do not have a business, or if they work without pay in a family business o Industry Canada reports that there are 2.2 million “business establishments” in Canada and about 2.5 million people who are “self-employed” Business Volume 1: Custom 2 ndEdition Textbook Notes (MGTA01 2013) o Unincorporated business operated by a self-employed person would not be counted among the 2.2 million businesses o Majority of businesses in Canada have no employees, nor are they incorporated o Small business: an owner-managed business with less than 100 employees The New Venture/Firm o It is considered to be new if it has become operational within the previous 12 months, if it adopts any of the main organizational forms and if it sells goods or services o A new venture as a recently formed commercial organization that provides goods and/or services for sale Entrepreneurship o Entrepreneurship is the process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on that opportunity o Entrepreneurs are people who organize and seize opportunities o Small businesses often provide an environment to use personal attributes o People who exhibit entrepreneurial characteristics and create something new within an existing large firm or organization are called intrapreneurs The Role of Small and New Businesses in the Canadian Economy Small Businesses o Close to 98% of all businesses in Canada are small o Small: >100 employees o Medium: 100-499 o Large: <500 o Private sector generally refers to the part of the economy that is made up of companies and organizations that are not owned or controlled by the government o Small businesses account for over 2/3 of employment in four industries: non- institutional healthcare (90%), the construction industry (77%), other services (73%), and accommodation and food (69%) o Contribution small businesses make to the economy in terms of GDP New Ventures o Most of the growth in firms occurred in the services-producing and goods- producing sector o Women are playing a bigger role o Increasing more than men o Can only be classified as a new business when the employees were acquired The Entrepreneurial Process o Entrepreneur must identify a business opportunity and access the resources needed to capitalize on it o Three key process elements: the entrepreneur, the opportunity, and resources Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013) o Venture’s next phase of development will result in one of the following outcomes, growth, stability, decline, or demise The Entrepreneur o Varied characteristics o Identify an opportunity and access resources Identifying Opportunities o Generating ideas for new or improved products, processes, or serviced, screening those ideas so that the one that presents the best opportunity can be developed, and then developing the opportunity Idea Generation o Involves abandoning traditional assumptions about how things work and how they ought to be, and seeing what others do not o Majority originate from events relating to work or everyday life o Work experience is the most common (45-85%) o Personal interest/hobby (16%) Screening o Key part of process o Weed out the “dead-end” venture ideas, more time and effort you can devote to the ones that remain o A product or service that creates or adds value for the customer is one that solves a significant problem, or meets a significant need in new or different ways o Competitive advantage exists when potential customers see the product or service as better than that of competitors o Longer markets are in a state of
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