BBA-PT XXXIV Business Management Chapter 3

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Questions and Answers

Which of the following best defines the formal economy?

  • Economic activities not monitored or taxed by the government.
  • All jobs recognized as income sources on which income taxes must be paid. (correct)
  • Economic activities that only affect microeconomics.
  • The change in the general level of economic activity.

The informal economy is included when calculating a country's GDP.

False (B)

What is one impact of strong economic growth on a company's profits?

Relatively high profits

The study of large-scale economies, like a country, is known as ________.

<p>macroeconomics</p> Signup and view all the answers

Match the economic term with its definition:

<p>Economic Growth = Change in the general level of economic activity. Macroeconomics = Study of large-scale economies. Informal Economy = Economic activities not monitored or taxed by the government. Microeconomics = Focuses on the business or industry.</p> Signup and view all the answers

When the economy is weak, what generally happens to demand for a company's products?

<p>Demand is typically low. (C)</p> Signup and view all the answers

Microeconomics focuses on the economy of an entire country.

<p>False (B)</p> Signup and view all the answers

What is another name for the informal economy?

<p>Grey economy</p> Signup and view all the answers

Economic conditions reflect the level of ________ and production for a particular area or industry.

<p>consumption</p> Signup and view all the answers

Which economic factor directly affects the income levels of consumers?

<p>Economic growth. (B)</p> Signup and view all the answers

Which of the following best defines a recession?

<p>A period of two or more consecutive quarters of negative economic growth. (A)</p> Signup and view all the answers

A low unemployment level is considered an indicator of economic decline.

<p>False (B)</p> Signup and view all the answers

What is the term for unemployment that results from people being between jobs?

<p>frictional unemployment</p> Signup and view all the answers

What occurs when the quantity supplied exceeds the quantity demanded?

<p>Surplus (D)</p> Signup and view all the answers

The market value of all final products and services in a country is known as the ______.

<p>Gross Domestic Product (GDP)</p> Signup and view all the answers

A shortage occurs when the quantity supplied by firms is more than the quantity demanded by customers.

<p>False (B)</p> Signup and view all the answers

What does CPI measure?

<p>The change in prices for a market basket of consumer products (D)</p> Signup and view all the answers

What term describes the price at which the quantity supplied and demanded are equal?

<p>Equilibrium price</p> Signup and view all the answers

______ policy affects the amount of funds available at commercial banks and therefore affects interest rates.

<p>Monetary</p> Signup and view all the answers

Match the type of unemployment with its definition:

<p>Frictional unemployment = People who are between jobs Seasonal unemployment = People whose services are not needed during some seasons Cyclical unemployment = People who are unemployed because of poor economic conditions Structural unemployment = People who are unemployed because they do not have adequate skills</p> Signup and view all the answers

Which of the following is primarily impacted by Fiscal policy?

<p>Government spending and taxes (B)</p> Signup and view all the answers

Which of the following is a cause of cost-push inflation?

<p>Higher costs of supplies and materials (C)</p> Signup and view all the answers

What is a potential effect of strong consumer demand?

<p>Pressure on wages and reduced unemployment (A)</p> Signup and view all the answers

Reduced personal income tax rates generally decrease the demand for products and services.

<p>False (B)</p> Signup and view all the answers

Demand-pull inflation occurs when prices increase due to increased supply.

<p>False (B)</p> Signup and view all the answers

When market interest rates decrease, a company's cost of borrowing increases.

<p>False (B)</p> Signup and view all the answers

What is one consequence of a government budget deficit?

<p>Government borrowing</p> Signup and view all the answers

If a firm anticipates shortages, what action might they take that contributes to inflation?

<p>increase prices</p> Signup and view all the answers

_____ taxes are imposed on specific products, such as tobacco, increasing prices for consumers.

<p>Excise</p> Signup and view all the answers

What is one factor that can discourage consumers from purchasing products on credit?

<p>High interest rates</p> Signup and view all the answers

A change in the price of oil that impacts gasoline prices and transportation costs is an example of ______ inflation.

<p>cost-push</p> Signup and view all the answers

How does decreasing corporate taxes generally affect a company?

<p>Increases after-tax earnings (B)</p> Signup and view all the answers

Market prices are determined by the interaction of supply and ______.

<p>demand</p> Signup and view all the answers

Match the following terms with their descriptions:

<p>Demand = The willingness and ability of a person to buy a product Supply = The willingness and ability of a supplier to produce a product Market Price = Determined by the interaction of supply and demand Equilibrium = The point where supply and demand intersect</p> Signup and view all the answers

Match the following concepts with their definitions:

<p>Surplus = Quantity supplied exceeds quantity demanded Shortage = Quantity demanded exceeds quantity supplied Equilibrium = Quantity supplied equals quantity demanded Fiscal Policy = Government spending and taxation</p> Signup and view all the answers

How does higher consumer income generally affect demand?

<p>It generally results in a higher demand for products or services. (C)</p> Signup and view all the answers

Quantity demanded is higher when the price is higher.

<p>False (B)</p> Signup and view all the answers

What is one factor that influences a firm's decision to supply products to the market?

<p>Market price</p> Signup and view all the answers

Companies may postpone expansion when ______ are too high.

<p>interest rates</p> Signup and view all the answers

What happens to the quantity supplied when the price is higher?

<p>Quantity supplied is higher (A)</p> Signup and view all the answers

Flashcards

Macroeconomics

The study of large-scale economies, like a whole country.

Microeconomics

The study of individual businesses or industries within a larger economy.

Formal Economy

Jobs where income is reported and taxes are paid, officially recognized by the government.

Informal Economy

Economic activities that are not monitored or taxed by the government, operate outside the official system.

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Economic Growth

The overall growth or decline of an economy's activity, measured by things like income levels and spending.

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Inflation

A situation where prices of goods and services rise consistently over time.

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Interest Rates

The cost of borrowing money, expressed as a percentage of the loan amount.

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Supply and Demand

The relationship between the amount of a product or service available and the demand for it.

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Government Policy

Actions taken by governments to influence the economy, using tools like interest rates and taxes.

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Monetary Policy

Government policy focusing on controlling the money supply and interest rates.

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Recession

A period with two consecutive quarters of decreasing economic growth.

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Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country's borders during a specific period.

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Consumer Price Index (CPI)

Measures the overall level of prices for a basket of consumer goods and services.

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Frictional Unemployment

Unemployment due to normal turnover in the workforce, such as people between jobs.

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Seasonal Unemployment

Unemployment due to seasonal changes in demand for labor, like ski instructors in the summer.

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Cyclical Unemployment

Unemployment caused by a decline in economic activity, like during a recession.

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Structural Unemployment

Unemployment due to a mismatch between the skills of workers and the requirements of available jobs.

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Cost-Push Inflation

Inflation caused by increases in the costs of production, leading to higher prices.

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Demand-Pull Inflation

Inflation caused by strong consumer demand, leading to higher prices.

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Cost-Push Inflation

A situation where businesses increase prices due to higher costs of production.

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Consumer Demand Impact on Employment

When consumer demand is strong, it can potentially lead to higher wages and lower unemployment levels as businesses compete for workers.

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Firms' Response to Increased Costs

Businesses may raise prices to compensate for increased expenses, such as higher interest rates or production costs.

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Interest Rates Impacting Consumer Spending

High interest rates can discourage consumers from buying products on credit, as the loan payments become more expensive.

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Interest Rates Impacting Business Investment

Businesses might delay expansion or new projects if interest rates are high, as borrowing money becomes more costly.

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Market Price

The price at which a product or service is bought and sold in a market.

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Demand

The total amount of a product that consumers are willing and able to buy at different prices.

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Supply

The total amount of a product that producers are willing and able to supply at different prices.

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Equilibrium Price

The point where supply and demand meet, determining the market price at which the quantity produced equals the quantity consumers want to buy.

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Supply & Demand Schedule

A table or graph that shows the relationship between the price of a product and the quantity demanded or supplied.

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Surplus

Occurs when the quantity of a product supplied by firms exceeds the quantity demanded by customers. This means there's more of the product available than people are willing to buy.

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Shortage

Occurs when the quantity of a product demanded by customers exceeds the quantity supplied by firms. This means there's not enough of the product to meet everyone's needs.

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Fiscal Policy

A type of government policy that uses taxes and spending to influence the economy. It aims to create jobs, stimulate economic growth, or manage inflation.

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Reduced Personal Income Tax Rates

A government policy that encourages economic activity by reducing tax rates. This increases after-tax incomes, leading to higher consumer spending and boosted demand.

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Corporate Taxes

A government policy that impacts after-tax earnings of businesses. Lower corporate taxes can boost company profits and potentially lead to more investment or jobs.

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Excise Taxes

A type of tax levied on specific goods like tobacco or fuel. These taxes increase the final price consumers pay, potentially discouraging consumption of those goods.

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Government Budget Deficit

A situation where a government spends more than it collects in taxes and other revenues. This requires borrowing to cover the difference, which can increase demand for loanable funds and potentially raise interest rates.

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Government Spending

A type of fiscal policy that uses government spending to directly influence the economy. This could involve funding infrastructure projects, providing subsidies to businesses, or increasing social welfare programs.

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Study Notes

BBA-PT XXXIV Business Management

  • Course title: Introduction to Business
  • Edition: 4e
  • Instructor: Milaika Capella Ras, MBA
  • Email: [email protected]
  • Session date: January 20, 2025
  • University: Inter-Continental University of the Caribbean
  • Accreditation: ACBSP, ACCREDITED

Chapter 3: Prepare for the Road Ahead - Assessing Economic Conditions

  • Chapter Topics:
    • Formal vs. informal economy
    • Economic growth
    • Inflation
    • Interest rates
    • Supply and demand
    • Government policy (monetary + fiscal)

Economic Conditions

  • Reflect level of consumption and production in a country, area, or industry
  • Affect business revenues and expenses, impacting business value

Two Main Divisions in Economics

  • Macroeconomics: Study of large-scale economies (e.g., a country)
  • Microeconomics: Focuses on individual businesses or industries

Formal vs. Informal Economy

  • Formal economy: Recognized jobs, income sources with paid taxes, included in GDP
  • Informal economy: Economic activities not monitored or taxed by the government (grey economy)

Economic Growth

  • Change in overall economic activity (e.g., total worker income)
  • High volumes of spending result in higher revenues for businesses selling products/services
  • Strong growth leads to strong demand, higher business profits
  • Weak growth leads to lower demand, lower business profits

Recession

  • Two or more consecutive quarters of negative economic growth
  • Lowers demand for goods/services
  • Reduces business revenue
  • May cause businesses to shut down facilities

Economic Growth Indicators

  • Gross Domestic Product (GDP): Market value of all final products and services in a country
  • Aggregate Expenditures: Total amount of spending in the economy
  • Unemployment level: Low unemployment indicates stronger growth

Alternative Economic Growth Indicators

  • Unemployment level
  • Industrial production level
  • New housing starts
  • Personal income level

Unemployment Types

  • Frictional unemployment: People in-between jobs
  • Seasonal unemployment: Jobs not needed during certain seasons
  • Cyclical unemployment: Unemployed due to poor economic conditions
  • Structural unemployment: Lack of adequate job skills

Inflation

  • Increase in general level of product/service prices over time
  • Measured by percentage changes in the Consumer Price Index (CPI)
  • CPI tracks a basket of prices across many consumer products (groceries, housing, gasoline, etc.)

Types of Inflation

  • Cost-push inflation: Higher prices charged to firms due to increased costs (e.g., oil price change impacting gasoline, aluminum prices impacting packaging costs)
  • Demand-pull inflation: Increased demand for products/services leading to shortages and price increases (e.g., strong consumer demand creating shortages in production)

Interest Rates

  • Represent cost of borrowing money
  • Higher interest rates increase borrowing costs for businesses, potentially reducing profits
  • High interest rates may discourage consumer borrowing for certain products/services
  • Businesses might postpone expansion during high interest rate periods

Market Price Determination

  • Determined by supply and demand interaction
  • Total demand for a product by all customers
  • Supply of that product from businesses

Demand

  • Willingness and ability of someone to buy a product
  • Influenced by consumer income and preferences
  • Higher income generally leads to higher demand
  • Quantity demanded is higher when the price is lower

Supply

  • Willingness and ability of a supplier to produce a product
  • Influenced by production expenses, competition, government policy
  • Quantity supplied is higher when the price is higher

Supply and Demand Interaction

  • Surplus: Quantity supplied by firms is more than customers demand
  • Shortage: Quantity supplied by firms is less than customers demand
  • Equilibrium price: Quantity supplied equals quantity demanded

Government Policy

  • Monetary policy: Affects the availability of funds at commercial banks, influencing interest rates
  • Fiscal policy: Affects taxes on consumers, impacting consumer spending, affecting business performance, also used to tax firm earnings

Fiscal Policy Considerations

  • Sets tax rates and government spending
  • Budget deficit occurs when government spending exceeds revenue
  • Government borrowing is used to cover budget deficits, potentially driving up interest rates

How Government Policies Affect Business Performance

  • Affects revenue, operating expenses, interest expenses, earnings, taxes, and after-tax earnings

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