MGMT 100 - Chapter 2 Notes

Economic Challenges Facing Business Today

Introduction to Economics

Economics is the study of the choices people and governments make when deciding how to use their resources.
It examines how resources are maintained and divided, and how government policies impact standards of living.

Microeconomics: Understanding Small Economic Units

Microeconomics focuses on the economic decisions and behaviors of small units, such as individual consumers, families, and businesses, and how they utilize their resources.

Demand

Demand is defined as the willingness and ability of buyers to purchase goods and services.
It is driven by a variety of factors:
- Price of substitute and complementary items: Competition plays a critical role.
- Larger economic events: Broad economic conditions can influence consumer purchasing.
- Consumer preferences: Tastes and trends directly affect what consumers want.
- Consumer incomes: Higher incomes often lead to higher demand for certain goods.
- Number of buyers: A larger consumer base typically increases overall demand.
- Buyers’ outlook for the future: Optimism or pessimism about future economic conditions impacts current buying habits.

Demand Curve

A demand curve is a graphical representation of the amount of a product that buyers will purchase at different prices.
Factors that shift the Demand Curve:
- Customer preferences: Increase shifts right, decrease shifts left.
- Number of buyers: Increase shifts right, decrease shifts left.
- Buyers’ incomes: Increase shifts right, decrease shifts left.
- Prices of substitute goods: Increase shifts right (as consumers switch from the now more expensive substitute), decrease shifts left.
- Prices of complementary goods: Decrease shifts right (as the complementary good becomes cheaper, increasing demand for the main good), increase shifts left.
- Future expectations: Becoming more optimistic shifts right, more pessimistic shifts left.

Supply

Supply represents the willingness and ability of sellers to provide goods and services.
Key drivers of supply include:
- Factors of production: These are central to the overall supply of goods and services (e.g., labor, capital, natural resources, entrepreneurship).
- Cost of inputs: Higher input costs generally reduce supply.
- Technologies: Advancements can increase efficiency and thus supply.
- Taxes: Higher taxes on production can decrease supply.
- Number of suppliers: More suppliers typically lead to increased overall supply.

Supply Curve

A supply curve is a graph that illustrates the relationship between different prices and the amount of goods that sellers will offer for sale, irrespective of demand.
Factors that shift the Supply Curve:
- Costs of inputs: Decrease shifts right, increase shifts left.
- Costs of technologies: Decrease shifts right, increase shifts left.
- Taxes: Decrease shifts right, increase shifts left.
- Number of suppliers: Increase shifts right, decrease shifts left.

How Demand and Supply Interact

The equilibrium price is the point where the supply and demand curves intersect.
At this price, the quantity demanded equals the quantity supplied, and buyers and sellers naturally make choices that restore this equilibrium if temporarily disrupted.

Macroeconomics: Issues for the Entire Economy

Macroeconomics is the study of a nation’s overall economic issues.
It explores how an economy allocates and maintains resources and how government policies impact citizens' standards of living.
Political, social, and legal conditions significantly differ across countries, influencing their economic systems.

Major Types of Economic Systems

Economies are generally categorized into three main types:

Private Enterprise System (Capitalism or Market-Driven Economy)
- Businesses primarily meet the needs and demands of consumers.
- They are rewarded through profit, with decisions largely driven by competition rather than government intervention.
- Four Degrees of Competition within Capitalism:
  - Pure Competition:
    - Characteristics: Many buyers and sellers, exchange similar products (e.g., agricultural commodities), no single participant significantly influences price.
    - Ease of Entry: Easy for new firms.
    - Control over Price: None by individual firms.
    - Example: Small-scale farmer in Ontario.
  - Monopolistic Competition:
    - Characteristics: Large numbers of buyers and sellers, differentiated products (e.g., branding, unique features), which provides some ability to influence price.
    - Ease of Entry: Somewhat difficult.
    - Control over Price: Some by individual firms.
    - Example: Local fitness center.
  - Oligopoly:
    - Characteristics: Few sellers, high start-up costs limit new competitors, which provides some ability to influence price.
    - Ease of Entry: Difficult.
    - Control over Price: Some by individual firms.
    - Example: Telecommunications companies like Bell and Rogers.
  - Monopoly:
    - Characteristics: A single seller controls trade and therefore has considerable influence over price.
    - Types: Can be a natural monopoly (e.g., utilities where one provider is most efficient due to infrastructure) or a regulated monopoly (where government permits a single provider but oversees pricing/service).
    - Ease of Entry: Regulated by government.
    - Control over Price: Considerable in a pure monopoly; limited in a regulated monopoly.
    - Example: Rawlings Sporting Goods, exclusive supplier of major-league baseballs.
Planned Economies
- An economic system where business ownership, profits, and resource allocation are primarily shaped by a central plan to meet government goals.
- Socialism:
  - Characteristics: Government owns and operates major industries (e.g., energy, communications).
  - Private Ownership: Some private ownership is allowed, typically in sectors like retail and certain manufacturing.
  - Management: Much government planning is involved; state enterprises are managed directly by government bureaucrats.
  - Profits: Only the private sector generates profits; limited incentives in state enterprises.
  - Employee Rights: Workers may choose occupations and join unions, but government influences many career decisions.
- Communism:
  - Characteristics: All property is theoretically shared equally by the people under the direction of a central government.
  - Ownership: Government owns nearly all means of production with very few exceptions (e.g., small private plots of land).
  - Management: Centralized management controls all state enterprises, often based on three- to five-year plans.
  - Profits: Not allowed.
  - Individual Choice: Individuals generally do not have significant choice in jobs or purchases.
  - Employee Rights: Limited employee rights in exchange for promised protection against unemployment.
  - Worker Incentives: Historically limited, though incentives are slowly emerging in some communist countries.
Mixed Market Economies
- An economic system that combines elements from both private enterprise (capitalism) and planned economies to varying degrees.
- The specific mix of public and private enterprise can differ significantly from one country to another.
- Privatization: This is the process of converting government-owned and -operated companies or industries into privately-held businesses, often seen in mixed economies.
- Ownership: A strong private sector coexists with public enterprises.
- Management: Management in the private sector resembles capitalism; professionals may manage state enterprises.
- Profits: Private sector entrepreneurs and investors receive profits (minus taxes), often subject to high taxes. State enterprises are also expected to produce returns.
- Employee Rights: Workers may choose their own jobs and join labour unions, which can become quite strong.
- Worker Incentives: Capitalist-style incentives operate in the private sector; more limited incentives influence public sector activities.

Economic Performance

An ideal economic system aims to provide a stable business environment and sustained growth for its citizens.

Business Cycles

A nation’s economy progresses through various stages of the business cycle:
- Prosperity: Characterized by low unemployment, high consumer confidence and purchasing, and expanding businesses.
- Recession: A period of economic contraction lasting for six months or longer. Consumers become cautious with purchases, and businesses reduce production and expansion.
- Depression: An extended and severe recession.
- Recovery: A stage marked by declining unemployment, increasing business activity, and renewed consumer confidence.

Productivity and Gross Domestic Product (GDP)

Productivity: This is the relationship between the number of units produced (output) and the number of human and other production inputs needed to produce them. It is expressed as a ratio:
ext{Productivity} = rac{ ext{Output}}{ ext{Input}}
Gross Domestic Product (GDP): This is the sum of all goods and services produced within a country during a specific time period, typically a year.

Price Level Changes

Inflation: Refers to rising prices, often caused by a combination of excessive consumer demand and higher costs for raw materials, component parts, human resources, and other factors of production.
- Core inflation rate: The inflation rate after volatile energy prices and food prices have been removed.
- Demand-pull inflation: Occurs due to excessive consumer demand.
- Cost-push inflation: Results from increases in the costs of the factors of production.
- Hyperinflation: An extreme economic situation marked by soaring and uncontrollable prices.
Deflation: The opposite of inflation, characterized by a sustained fall in overall prices.

Consumer Price Index (CPI) and Employment Levels

Consumer Price Index (CPI): A measurement used to track changing prices. It indicates the monthly average change in prices of a