CHAPTER 2: THE ECONOMIC ENVIRONMENT OF BUSINESS
THE ECONOMIC ENVIRONMENT:
• Economic environment ▯refers to the economic conditions in which an
• An economic condition or variable can include: job growth, consumer confidence,
• What makes up an economic environment? ▯individuals, businesses, and the
government are the 3 key groups.
• One economic decisions affects another.
• An individual is forced to make spending choices; the choice to purchase one
thing automatically precludes the possibility of purchasing others.
• This type of decision is referred to as opportunity cost – the best alternative
• In order for businesses to make a profit, managers have to balance the right
combination of inputs, allowing for efficiency, productivity, and overall firm
• These inputs are known as the five factors of production
1. Natural resources
• Include land and raw materials below or above ground, such as soil, rocks,
minerals, trees, fruits, and vegetables.
• Raw materials also includes living organisms such as fish or agricultural products
such as milk or eggs.
• Ie) shell corporation, oil is a raw material that needs to be refined before it
becomes inventory and sold for profit.
• Ie) McCain foods uses potatoes as a raw material to make French fries, once they
are shipped to grocery stores the French fries become a good available for the
consumer to purchase.
• Refers to the workers
• Employees that contribute their skills and strengths to create goods and services
for the owners of the business.
CAPITAL: • Includes buildings, machines, tools, and other physical components used in
producing goods and services.
• Eg: CIBC uses capital such as buildings , computers, calculators, and safes to
operate its financial services business
• Money is not a capital, it is an investment, since it cannot create or produce
anything on its own to earn income.
• One of the most important factor of production in todays economy.
• Knowledge workers: individuals with specialized education, skills, training and
• Eg: google, facebook and twitter are built on their employees knowledge and
• By encouraging creativity at work, new knowledge can be developed and people
can be empowered to work better.
• ‘knowledge based economies”: for example are economies which involve the
production, distribution, and consumption of knowledge and info.
• individuals who establish a business in the pursuit of profit and to serve a need in
• Owners, decision makers and risk takers.
• Unlike employees they have no guarantee they have an income in return for their
work and effort.
• Governments have a broader role.
• They purchase goods an services for the welfare and wellbeing of both its citizens
and its businesscommunity members.
• Responsible for making laws, regulations, and policies to manage the country’s
• To guide the economy to the right direction, the government can influence
individual choices with tax credits or business decisions with tax incentives.
• Eg: federal government encourages individuals to save for their retirement by
allowing a tax deduction if they contribute to a registered and retirement savings
• The government can also encourage innovation in order for the economy to grow.
• One challenge for the Canadian government is to ensure qualified and skilled
labour is available in the country to support economic growth.
ANALYZING THE ECONOMY: TWO APPROACHES
• Microeconomics: the study of smaller components of the economy such as
individuals and businesses.
• Ie: economists of microeconomics analyze consumer demand and existing supply. • Macroeconomics: study of larger economic issues involving the economy as a
• more complex since it considers evaluating data for larger groups of people and
• examples of issues in macroeconomics: unemployment, consumption, inflation,
gross domestic product and price levels.
• The role of the government is also studied at this level.
• Economic policies are one way in which a government can influence an economic