Part 1 Business in a Global Environment

CHAPTER 3

Economic Challenges Facing Contemporary Business

Chapter Summary: Key Concepts

Chapter 3 Overview

Economics A social science that analyzes the choices people and

governments make in allocating scarce resources.

Microeconomics Study of small economics units, such as individual

consumers, families, and businesses.

Macroeconomics Study of a nation’s overall economic issues, such as how

an economy maintains and allocates resources and how a
government’s policies affect the standard of living of its
citizens.

1 Microeconomics: The Forces of Demand and Supply

Demand The willingness and ability of buyers to purchase goods

and services at different prices.

Supply The willingness and ability of sellers to provide goods and

services for sale at different prices.

Factors driving demand A demand curve is a graph of the amount of a product

buyers will purchase at different prices under a given set
of conditions. The demand curve typically slopes
downward, indicating that buyers will purchase greater
quantities of a good or service as its price falls.
Conversely, consumers will purchase less as prices
increase. The entire curve can shift to the right or left
depending on numerous factors such as customer
preferences, number of buyers, buyers’ incomes, prices of
substitute goods, prices of complementary goods, and how
optimistic or pessimistic future expectations become.

Factors driving supply A supply curve graphically shows the relationship between
different prices and the quantities sellers will offer for
sale, regardless of demand. Generally, as prices rise, the
quantity sellers are willing to produce increases, and vice
versa. The entire curve can also shift right or left
depending on such factors as costs or availability of inputs
(factors of production), costs of technologies, taxes, and
the number of suppliers.

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3–2 Study Guide for Contemporary Business, Second Canadian Edition

How demand and supply interact The equilibrium price identifies the prevailing market
price and is found at the intersection of the supply and
demand curves.

2 Macroeconomics: Issues for the Entire Economy

Capitalism and competition Capitalism (also called market economy or the private
enterprise system) depends on competition. In this kind of
economic system, different industries exhibit different
competitive market structures. There are four basic types
of competition that take place in a private enterprise
system: pure competition, monopolistic competition,
oligopoly, and monopoly.

Planned economies: socialism In a planned economy, the government’s control

and communism determines business ownership, profits, and resource
allocation to accomplish government goals rather than
goals of individuals. Under communism, all property is
shared equally by the people of a community under the
direction of a strong central government. Under socialism,
government owns and operates the major industries.

Mixed market economies In practice, most countries operate mixed market

economies: economic systems that draw from both types
of economies to varying degrees.

Privatization The proportions of private and public enterprise can vary

widely in mixed economies, and the mix frequently
changes. Dozens of countries have converted
government-owned and operated companies into privately
held businesses in a trend known as privatization –
examples include the postal service.

3 Evaluating Economic Performance

Flattening the business cycle A nation’s economy tends to flow through various stages
of a business cycle: prosperity, recession, depression, and
recovery. While the business cycle is normal, many
economists believe that society is capable of preventing
future depressions through effective economic policies.

Productivity and the nation’s Increases in productivity, which is the relationship

GDP between the goods and services produced and the inputs
needed to produce them, generally leads to economic
growth. The measure of these goods and services on which
productivity is calculated is the Gross Domestic Product
(GDP), defined as the sum of all goods and services

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 Economic Challenges Facing Contemporary Business 3–3

produced within a nation’s boundaries in a given year.

Price-level changes Price-level changes are another important indicator of

economic stability within an economy. Inflation is a
sustained rise in prices as a result of increased costs in raw
material, component parts, human resources, or other
factors of production (costs-push inflation). Inflation
devalues money, as persistent price increases reduce the
amount of goods and services people can purchase with a
given amount of money. It can also be caused be excessive
demand (demand-pull inflation). It is commonly measured
by the Consumer Price Index (CPI), a monthly calculation
based on prices of a “market basket,” a compilation of the
goods and services most commonly purchased by urban
consumers. Nations must also guard against deflation, a
period of falling prices when customers put off purchases,
business slows, jobs are lost, and the economy weakens.

Employment levels People need incomes to be consumers – thus, the number

of people employed, or those who currently have jobs, is
an important indicator of how well the economy is doing.
The unemployment rate is the total percentage of people in
the workforce unemployed or actively seeking work.
Unemployment can be grouped into four categories:
frictional, cyclical, structural, or seasonal.

4 Managing the Economy’s Performance

Monetary policy A common method of influencing economic activity is

monetary policy: government action to increase or
decrease the supply of money by changing interest rates or
banking requirements. An expansionary policy increases
the money supply to stimulate business activity and cut the
cost of borrowing. This encourages business decision
makers to make new investments, and in turn, stimulate
employment and economic growth. A restrictive monetary
policy reduces the money supply to curb rising prices,
overexpansion, and overly rapid economic growth. The
Bank of Canada is responsible for implementing the
nation’s monetary policy.

Fiscal policy Another method the government can use to influence the
economy is fiscal policy: taxation and spending decisions
designed to control inflation, reduce unemployment,
improve the general welfare of citizens, and encourage
economic growth. Increased taxes may restrict economic
activity, while lowering taxes and increased government
spending usually fuels economic expansion. A budget

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3–4 Study Guide for Contemporary Business, Second Canadian Edition

deficit occurs when the amount of money a government

spends is more than the amount of money it raises through
taxes. These deficits accumulate into the national debt. A
budget surplus occurs when the government takes in more
money than it spends. A balanced budget occurs when
total tax revenues are equal to total government spending.

5 Global Economic Challenges of the 21st Century

Important economic challenges As the economies of countries around the globe become
increasingly interconnected, governments and businesses
will face many challenges: international terrorism, a shift
to a global information economy, the aging of the world’s
population, the growth of China and India, and
improving/enhancing the competitiveness of every
country’s workforce.

Business Vocabulary
balanced budget microeconomics
budget mixed market economy
budget deficit monetary policy
budget surplus monopolistic competition
communism monopoly
consumer price index (CPI) national debt
core inflation rate oligopoly
cyclical unemployment planned economy
deflation privatization
demand productivity
demand curve pure competition
economics recession
equilibrium price regulated monopoly
expansionary monetary policy restrictive monetary policy
fiscal policy seasonal unemployment
frictional unemployment socialism
gross domestic product (GDP) structural unemployment
hyperinflation supply
inflation supply curve
macroeconomics unemployment rate

Application of Vocabulary
Select the term from the list above that best completes the statements. Write that term in the
space provided.

1. In Canada, changes in price levels are tracked by the _______, which measures the monthly

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 Economic Challenges Facing Contemporary Business 3–5

average changes in prices of goods and services.

2. The term used to describe the study of the overall operations of an economy and its various
components is known as _______.

3. _______ refers to the study of the economic activities of a firm or an individual.

4. A _______ occurs when government grants exclusive rights in a single market to a single firm,
such as a utility company.

5. _______ refers to people who are temporarily out of work but who are looking for a job.

6. The science of allocating scarce resources is known as _______.

7. The _______ depicts the difference in the amount of a good a seller will produce at various
prices.

8. The _______ is the price at which the demand curve and the supply curve intersect.

9. _______ counts people like construction workers, farm labourers or ski instructors who are out
of work due to the time of year.

10. _______ refers to governmental measures like interest rates designed to affect the level of
economic activity through changes in the money supply.

11. When the federal government spends more than it gets from tax revenues, a _______ is the
result.

12. The ability and willingness of buyers to purchase goods and services in the economy is
known as _______.

13. When people are out of work during a recession or other economic downturn, their job loss is
referred to as _______.

14. When prices continue to increase due to costs or demand, the economy is said to be
experiencing a period of _______.

15. Governmental actions concerning tax revenue and expenditures of public funds are referred
to as _______.

16. The _______ measures the number of people who are looking for work but who are unable to
find jobs.

17. In a _______, government controls determine business ownership, profits, and resource
allocation.

18. _______ counts those people who are unable to find work for a long period of time because
they lack the necessary skills for available jobs, or their skills fail to match those needed in the

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3–6 Study Guide for Contemporary Business, Second Canadian Edition

workforce.

19. The _______ depicts the relationship between different prices and the quantity of a good that
buyers will purchase.

20. All else remaining unchanged, an increase in _______ of a product will lower its market
price.

21. When the federal government generates enough revenue through taxation to cover the total
proposed spending for the year, a _______ has been attained.

22. The _______ is the total cumulative borrowing by the federal government to finance budget
deficits.

23. Six months or more of economic contraction counts as a _______.

24. Nearly all of the world’s economies today blend private and public ownership into what is
known as a _______.

25. Under _______, the government owns and operates the key industries that are considered
vital to the public welfare.

26. Under the economic system known as _______, the means of production are owned and
controlled by the government.

27. A(n) _______ is a market situation that features few sellers and substantial entry restrictions.

28. An economic situation characterized by soaring prices is known as _______.

29. The market situation in which a large number of buyers and sellers exchange
well-differentiated products is known as _______.

30. In _______, a large number of buyers and sellers exchange homogeneous products so no
single participant has a significant influence on price.

31. When a firm in the market has no competitors, it is said to have a _______.

32. In a mixed market economy, _______ defines the trend of replacing public ownership with
private ownership.

33. _______ is the inflation rate of an economy after energy and food prices are removed.

34. _______ is the government’s action to increase the money supply.

35. A period of falling prices that erodes values and business confidence is known as _______.

36. The widest measure of a nation’s economic activity, the _______ counts the dollar value of
all the goods and services produced within a nation’s borders.

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 Economic Challenges Facing Contemporary Business 3–7

37. The _______ is the federal government’s plan for how it will raise and spend money during
the coming year.

38. _______ is the government’s attempt at reducing the money supply to curb rising prices,
overexpansion, and rapid economic growth.

39. A nation’s _______ measures the relationship between that nation’s output of goods and
services and the inputs needed to produce them.

40. When a government takes in more money than it spends, it is said to have a _______.

Analysis of Learning Objectives

Learning Objective 3.1: Discuss microeconomics and explain the forces of demand and supply.

True or False

1. ______ Macroeconomics deals with large issues that affect a country’s overall economy.

2. ______ Macroeconomics and microeconomics are not related in any way.

3. ______ Government policy that impacts the overall economy is a good example of a
microeconomic issue.

4. ______ The exchange process between buyer and seller represents the relationship between
supply and demand.

Short Answer

3. List and define the factors that collectively determine demand.

4. List and define the factors that collectively determine supply.

Learning Objective 3.2: Describe macroeconomics and the issues for the entire economy.

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3–8 Study Guide for Contemporary Business, Second Canadian Edition

Fill in. Identify the four basic types of competition.

1. ______ There is only one seller in the industry.

2. ______ Producers are able to differentiate their products.

3. ______ The industry is made up of many firms of similar size whose products are
indistinguishable.

4. ______ Because the industries require large capital investment, there are very few producers.

True or False

5. ______ Most modern economies blend free enterprise with some degree of government
regulation and are known as mixed market economies.

6. ______ Socialism is an economic system in which the government owns all the nation’s
productive capacity.

7. ______ Karl Marx is credited with developing the communist theory.

8. ______ Under communism, the government owns and operates only the basic industries.

9. ______ Mixed-market economies are generally defined by a weak public sector with a
handful of private enterprises.

Learning Objective 3.3: Identify how to evaluate economic performance.

Multiple Choice

1. The stage characterized by low unemployment and strong consumer confidence is called:
a) recovery.
b) recession.
c) depression.
d) prosperity.

2. A contraction in the gross domestic product (GDP) that lasts six months or more is called:
a) prosperity.
b) recession.
c) recovery.
d) depression.

3. When an economic slowdown continues in a downward spiral over a long period of time, we
have:
a) depression.
b) recession.
c) prosperity.

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 Economic Challenges Facing Contemporary Business 3–9

d) recovery.

4. After an economic downturn, when consumer spending begins to increase and business
activity accelerates, the country is in:
a) prosperity.
b) recession.
c) recovery.
d) depression.

True or False

5. ______ A general decline in the prices of goods and services is known as inflation.

6. ______ The most important measure of a company or nation’s efficiency and

competitiveness is its level of productivity.

7. ______ Unemployment is its level of productivity.

8. ______ A core inflation rate includes energy and food-related prices.

9. ______ A rise in the cost of materials or labour can produce cost-push inflation.

10. ______ The most widely used measure of inflation in Canada is the Consumer Price Index
(CPI).

Learning Objective 3.4: Discuss managing the economy’s performance

Short Answer

1. Define monetary policy.

2. Describe two ways countries like Canada aim to help developing countries modernize their
economies.

3. Give examples of how monetary and fiscal policy can be used to combat inflation and
unemployment.

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3 – 10 Study Guide for Contemporary Business, Second Canadian Edition

Learning Objective 3.5: Describe the global economic challenges of the 21st century.

Short Answer

There are four interrelated areas on which Canadian businesses should concentrate to meet the
global economic challenges of the 21st century. Briefly list and explain each.

Self Review
True or False

1. ______ Economics is the study of people and the choices they make in allocating scarce
resources.

2. ______ Microeconomics addresses such questions as how to control inflation.

3. ______ If consumers’ incomes increase, more products may be sold, shifting the demand
curve to the left.

4. ______ If the demand curve shifts to the right, then the number of buyers has decreased.

5. ______ The shift from a manufacturing to a service economy has required workers with
different skills, resulting in structural unemployment.

6. ______ A restrictive monetary policy helps reduce inflation.

7. ______ The aging of the world’s population is proving to be a challenge to the global
economy.

8. ______ Global competitiveness depends on improving working skills to take full advantage
of new technologies that enhance use, management, and control of information.

9. ______ Macroeconomics deals directly with small-scale consumer purchase.

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 Economic Challenges Facing Contemporary Business 3 – 11

10. ______ Policies to reduce unemployment would be primarily a concern of microeconomics.

11. ______ Generally, a decrease in the price of travel will increase the demand for travel.

12. ______ If the price of apples increases, consumers’ demand for apples will also likely
increase.

13. ______ A surplus of a product or service will bring the price of that product or service down.

14. ______ Excess demand for a product tends to generate pressure to push the price back down
toward equilibrium.

15. ______ A restrictive monetary policy reduces the money supply in order to curb rising
prices.

16. ______ When the federal government runs a budget deficit, the national debt is also
increased.

17. ______ In monopolistic competition, the industry requires such large capital investment that
there are very few producers.

18. ______ Oligopolies are market situations, like those in the steel and airline industries, in
which relatively few sellers compete and high start-up costs form barriers to keep out
new competitors.

19. ______ Privatization occurs when private companies are taken over and run by the
government.

20. ______ The Bank of Canada sets and implements monetary policy.

Multiple Choice

1. Which of the following is a macroeconomic issue?

a) inflation.
b) all of the above.
c) unemployment.
d) the business cycle.

2. The common factor that directly impacts both supply and demand is:
a) government policy.
b) advertising.
c) price.
d) gross domestic product.

3. If buyer optimism improves:

a) the demand curve shifts to the right.
b) the demand curve shifts to the left.
c) the supply curve shifts to the right.

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3 – 12 Study Guide for Contemporary Business, Second Canadian Edition

d) the supply curve shifts to the left.

4. The total dollar value of the goods and services produced in a country during a year is known
as:
a) gross domestic product.
b) all of the above.
c) the consumer price index.
d) the business cycle.

5. When the Canadian government influences the economy through government spending and
tax collections, this is referred to as:
a) tax policy.
b) monetary policy.
c) fiscal policy.
d) political maneuvering.

6. During the late fall, retailers tend to hire many people, and in January lay off many of them.
This results in:
a) structural unemployment.
b) seasonal unemployment.
c) cyclical unemployment.
d) frictional unemployment.

7. People with the necessary skills who are temporarily out of work and seeking employment are
classified as:
a) structurally unemployed.
b) cyclically unemployed.
c) seasonally unemployed.
d) frictionally unemployed.

8. When the economy has contracted for six months or more, the nation is in a(n):
a) recession.
b) recovery period.
c) inflationary period.
d) depression.

9. To be competitive in a global economy Canada should:

a) all of the above.
b) be attentive to the aging of the world’s population.
c) be ready to compete with China and India for resources.
d) concentrate on developing a more highly skilled workforce

10. Microeconomics studies the economic actions of:

a) individuals.
b) families.
c) individual firms.
d) all of the above.

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 Economic Challenges Facing Contemporary Business 3 – 13

11. When prices continue to fall, customers and businesses lose confidence and economic
activity is reduced. This phenomenon is known as:
a) recovery.
b) inflation.
c) prosperity.
d) deflation.

Application Exercises
Ron Schmidt is a construction worker. In November, he has experienced unemployment, and is
unable to line up jobs. However, he already has three major roofing projects scheduled for April.

1. What kind of unemployment is Ron experiencing?

2. What suggestions can you make to help Ron find new employment?

Short Essay Questions

3. What is the business cycle? What is meant when we say the business cycle has been
“flattened?”

4. Discuss what may happen as global trade and investments grow, and the risks of world trade
and global expansion for Canadian firms.

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