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Chapter 2

Chapter 2 Summary

Rotman Commerce
Course Code
Michael Szlachta

of 8
Chapter 2
Organizational Boundaries and Environments
External environment consists of everything outside an organizations boundaries that
might affect it
Plays a major role in determining the success of any organization
Managers must have an accurate understanding of the environment that they
are facing
Organizational Boundary separates the organization from its environment
When you go in a grocery store, your crossing the boundary into a business
During the time that distributors of various products enter the store, they are
essentially part of the business
Mcdonalds has a contract with coke to distribute only coke products
- Our neighborhood grocery will be influenced not only by an increase in
unemployment in the area but also by the pricing and other marketing policies of its
nearest competitor
The Economic Environment
Economic environment refers to the conditions of the economic system in which an
organization operates.
E.g. mcdonalds Canadian operations are functioning in an economic
environment characterized by negative growth, rising unemployment, and low
Rising unemployment means that people are mostly likely going to eat out at
mcdonalds because its cheaper than other restaurants
many people are also searching for work, easy to hire
low inflation means the mcdonalds has constant prices for its supplies
Three key goals to a Canadian economic system: economic growth, stability and
full employment
Economic Growth
Business cycle the pattern of ups and downs in an economy
Has four phases: peak, recession, trough, recovery
Recession is defined as two consecutive quarters when the economy shrinks,
starts just after the peak of the business cycle is reached and ends with the
trough is reached
A depression occurs when the trough of the business cycle extends two or more
years, economic activity declines, unemployment is high, and consumer buying
Aggregate output the total quantity of goods and services produced by an economic
system during a given period
An increase in aggregate output is growth because when it grows more quickly
than the population, two things usually follow: output per capita the quantity
of goods and services per person - goes up
When these things occur, people experience a higher standard of living
Standard of Living total quantity and quality of goods and services that they can
purchase with their currency
Gross domestic product (GDP) refers to the total value of all goods and services
produced within a given period by a national economy through domestic factors of
If GDP goes up, we experience economic growth
Profits earned by foreign firms in Canada are included in GDP
The real growth rate of GDP the growth rate of GDP adjusted for inflation and
changes in the value of the countrys currency; growth depends on output
increasing at a faster rate than the population
GDP per capita is calculated by dividing total GDP by the population of a country
Real GDP means GDP calculated to account for changes in currency values and
Purchasing power parity the principle that exchange rates are set so that the prices of
similar products in different countries are about the same
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
Profits earned by a Canadian company abroad are included in the GNP
Profits earned by the factory are included in GNP
Productivity a measure of economic growth that compares the output of an economic
system with the resources that are needed to produce the output.
The two factors of production are labour and capital
Prices of the products go down if more products are being produced with fewer
factors of production
The balance of trade the total of a countrys exports minus its imports
a negative balance of trade when a country imports more than exports
a positive balance is when a country exports more than it imports
National debt the total amount of money that a country owes its creditors
Budget deficit the government spent more money than it took in
Stability condition in an economic system in which the amount of money available and
the quantity of goods and services produced are growing at the about the same rate
Inflation - widespread price increases occur throughout an economic system.
Inflation occurs when the amount of money injected into an economy outstrips
the increase in actual output
When this happens, ppl will have more money to spend and prices will go up
because ppl will be competing with one another for the available products
Inflation decreases the purchasing power of your money
Consumer price index (CPI) measures changes in the cost of a basket of 600 different
good and services that a typical family might buy.
Can change from year to year depending on what products are popular