Chapter 2 notes from the text
- This external environment which consists of everything outside an organization’s boundaries that might affect it-plays a
major role in determining the success or failure of any organization (all businesses operate within this)
- Managers need to compete with environment but should also try to influence the environment
- The economic environment refers to the conditions of the economic system in which an organization operates
- Moderate unemployment means that most people can afford to use the business but the company must pay higher
wages to attract employees
- Low inflation means that the business can’t increase the prices it charges consumers
- 3 Key goals of Canadian Economic System: -Economic Growth, - Economic Stability, - Full employment
- Less than 2.5% works in agriculture. Agricultural production has grown because we have been able to increase total
output in the agricultural sector.
- The short-terms ups and downs in an economy is called the business cycle. It has 4 phases: peak, recession, trough and
- A recession is a period during which aggregate output declines if lasts for prolonged period= depression
- The main measure of growth in the business cycle is aggregate output: the total quantity of goods and services
produced by an economic system during a given period. Increase= growth
- When output grows more quickly than the population, two things follow: output per capita- the quantity of goods and
services- The system provides relatively more of the goods and services that people want.
- When these two things happen, people living in an economic system benefit from higher standard of living (total
quantity of goods and services they can purchase with their currency)
- To know how much this is improving, must know nation’s economic system is growing.
-Gross Domestic Product refers to the total value of all goods and services produced within a given period by a national
economy through domestic factors of production. GDP up= growth of economy.
- 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 factors of production are located.
- Profits earned by a Canadian company abroad are included in GNP but not GDP
- Redefining Progress (organization) has more realistic measure to assess economic activity- the Genuine Progress
Indicator ( GPI). GPI treats activities that harm environment (like oil spills) or our quality of life as costs and gives them
negative values. GPI has been falling since 1970s.
- The real growth rate of GDP- the growth rate of GDP adjusted for inflation and changes in the value of the country’s
currency- is what counts
- Growth depends on output increasing at a faster rate than population
- GDP per capita means GDP per person. We get this by dividing total GDP by the total population of a country
-as a measure of economic well being of average person it is better measure than GDP
-US #1 highest GDP/capita. 2. Ireland 3. Switzerland 4. Canada($28 344)
-“Real GDP” means that GDP has been adjusted
-nominal GDP is GDP measured in current dollars or with all components valued at current prices. This results when
economy has not been adjusted.
-Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different
countries are about the same. (Real GDP accounts for) (gives us a better sense of standards of living around the world).
- Productivity is a measure of economic growth that compares how much a system produces with the resources needed
to produce it eg. Labourer and wage needed to make product.
- -prices go down when more products are produced with fewer factors of production
- Standard of living improves only through increases In productivity
- Real growth in GDP reflects growth in productivity
- Balance of Trade- is the economic value of all products that a country exports minus the economic value of its
- A positive balance of trade results when a country exports more than it imports. Helps economic growth. (creditor
- A negative balance results when a country imports more than it exports. (debtor nation). Inhibits economic growth
(trade deficit). Negatively affects economic growth because money that flows out of country can’t be used to invest in
productive enterprises. - National Debt is the amount of money government owes its creditors.
- Budget Deficit is the result of the government spending more in one year than it takes in during that year. Leads to
- Canada now has budget surplus
- Government raises money through taxes and bonds-securities through which it promises to pay buyers certain
amounts of money by specified dates.
- Bonds can be sold to;individuals, households, banks, insurance companies, industrial corporations, non-profit
organizations, and government agencies (at home and overseas).
- Must also offer decent return on buyer’s investment, this is done by paying interest.
- By selling bonds, government competes with other potential borrowers for available supply of loanable money (less is
available for private borrowing and investment that increases productivity)
- Goal of economic system is stability: a condition in which the amount of money available in economic system and
quantity of goods and services produced in it are growing at the same rate
- Stability threats are inflation, deflation and unemployment.
- Inflation occurs when there are widespread price increases throughout an economic system. Amount of money
injected into economy outstrips increase in actual output. More money to spend, same number of products,
competition for products causes increase in price, high prices erase increase in amount of money in economy,
purchasing power declines.
- Measure inflation by measuring price increases. Consumer price index (CPI) measures changes in the cost of a “basket”
of 600 different goods and services that family may want to buy.
- Changes in CPI reflect changes in the pattern of consumer purchases.
- Deflation is a period of generally falling prices, when this happens Bank reduces interest rates in attempt to increase
- Prices may fall because industrial productivity is increasing and cost savings can be passed on to consumers (good) or
because consumers have high levels of debt and are therefore unwilling to buy very much (bad).
- Unemployment is the level of joblessness among people actively seeking work.
- Frictional unemployment (people are out of work temporarily while looking for a new job).
- Seasonal unemployment (people are out of work because of the seasonal nature of their jobs)
- Cyclical unemployment (people are out of work because of a downturn in the business cycle)
- Structural unemployment (unemployed because they lack skills needed to perform available jobs)
- Unemployment rates are higher for men than women
- When unemployment is low, shortage of labour available for businesses, businesses then compete for available supply
of labour, they raise wages they are willing to pay, which leads to raise of prices for products. Although consumers
have money it is soon erased by higher prices. Purchasing power declines. If wages are too high, businesses have fewer
workers and unemployment rate goes up.
- Unemployment could result in fewer sales, causing companies to cut back further, causing more unemployment.
- If government adds more money, prices go up because of increased consumer demand but inflation sets in and
purchasing power declines.
- Two sets of policies to manage Canadian Economic system: Fiscal and Monetary. Fiscal policies are policies by means of
which governments collect and spend revenues.
- Tax increases can function as fiscal policies, not only to increase revenues but to manage the economy as well. When
there is evidence that the growth rate of the economy is decreasing, tax cuts will normally stimulate renewed
- When the government cuts taxes that people have to pay, government action is being taken to bring stability to the
- Monetary policies are policies by means of which the government controls the size of the nation’s money supply.
Works primarily through the Bank of Canada, the government can influence the ability and willingness of banks
throughout the country to lend money. Can also influence supply of money by prompting interest rates to go up or
- The power of the Bank of Canada to make changes in the supply of money is the centerpiece of the Canadian
government’s monetary policy.---- Principle: Higher interest rates make money more expensive to borrow and
reduce spending by both those who produce goods and services and by those who buy those goods and services. When
the Bank restricts the money supply, we say that it is a tight monetary policy. - Lower interest rates make money less expensive to borrow and increase spending by those who produce goods and
services and by the consumers who buy those goods and services. When the Bank of Canada loosens the money supply
and thus stimulates the economy- we say it is easy monetary policy.
- Bank of Canada can influence the aggregate market for products by influencing the supply of money.
- Fiscal 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
- 3 issues facing Canadian businesses 1. Taxation, 2. Value of Canadian dollar, 3. Need for an educated/skilled workforce
- Consumers and business customers want high quality goods and services with lower prices and immediate delivery.
- Managers must understand the company’s competitive situation, and then develop competitive strategy to exploit
opportunities in the industry
- Good competitive strategies will slow down or stop new competitors from entering industry
- Michael Porter’s 5 forces model is used to analyze 5 important sources of competitive pressure and decide a strategy.
- 1. Rivalry Among Existing Competitors:Rivalry can be seen in price competition, advertising and customer service.
Respond by trying to attain more market power, cutting costs, making price deals with clients and trying to
differentiate from competitors.
- 2. Threat of Potential Entrants: If it is easy for new competitors to enter a market, competition will be intense and
industry won’t be attractive. Some industries(automobile manufacturing) are capital intensive and difficult to enter but
others are easy to enter.
- 3. Suppliers: Amount of bargaining power suppliers have in relation to buyers determines how competitive industry is.
Few suppliers in industry= great bargaining power. Power of suppliers is influenced by number of substitute products
available. Few substitute products= suppliers have more power.
- 4. Buyers: Few buyers, more suppliers= buyers have a lot of bargaining power (Walmart). Buyer puts pressure on
supplier to reduce prices.
- 5. Substitutes: many substitute products available= industry more competitive
- Firms dealing with challenges and opportunities by focusing on their core competencies- skills and resources with
which an organization competes best and creates the most value for owners.
- Outsource non-core business processes, paying suppliers and distributors to perform certain business processes or
provide needed materials or services. Eg. Museum and café….cafe is not main concern and is outsourced to food
service operations (pay roll, training etc). Chapter 3.
- New firms create the most jobs in Canada, they are noted for their entrepreneurship and are small
- Measures used to define a small business would be the number of people the business employs, the company’s sales
revenue, the size of the investment required, or the type of ownership structure the business has
- In collecting and reporting info on small businesses, Industry Canada relies on 2 sources of information provided by
Stats Canada: The business Register (which tracks businesses) and the Labour Force Survey (which tracks