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Chapter Review

Key Takeaways

  • Economics is the study of how individuals, businesses, governments and nations allocate their limited resources to satisfy their unlimited wants and needs. It is how a society uses scarce resources to produce and distribute goods and services. The resources of a person, a firm, or a nation are limited, and in economics, this limitation is known as scarcity.
  • In Canada, the government and the free-market system guide the economy together.
  • Microeconomics is the study of individuals and business decisions. Macroeconomics looks at the decisions of countries and governments. These two branches of economics appear to be different, but in reality, they’re interdependent and complement each other.
  • Resources are the inputs used to produce outputs. The circular flow model is simply a way of depicting how money circulates through the economy from individuals to firms in the form of labour and buying goods and services. Then, from firms to individuals in the form of wages and providing goods/services.
  • Productivity refers to how efficiently goods and services are being produced.
  • A free market economy is an economic system where the laws of supply and demand determine prices, and the government has limited or no involvement. People decide how to use factors of production, such as land, labour, capital, and physical resources. In a market economy, producers decide what to produce, how much to charge, and what to sell.
  • A mixed economy is an economic system where some resources are planned for by the government, while citizens control others. The world’s dominant economic organization is a mixed economy.
  • A planned economy is a system where the state determines production levels and regulates prices. In a centrally planned economy, the state uses advanced planning mechanisms to determine production levels, rather than supply and demand.
  • Capitalism is an economic system that promotes the creation and ownership of capital and wealth. A free market system is a capitalist system that focuses on the unfettered exchange of goods and services, with little or no interference by the government.
  • Socialism is an economic and political system where the means of production are owned by the public or the state, rather than private individuals. It’s based on the idea that shared ownership of resources leads to a more equal society. Socialism is generally considered a planned economy, where the government controls the production of goods and services, rather than a market economy.
  • Communism is a political and economic system that aims to eliminate class struggles by having the public own the means of production, such as factories and mines. In a communist society, there is no private property or currency, and wealth is shared equally or based on need. Communism is not the same as a planned economy, but communism is often associated with centrally planned economies.
  • Economists generally agree there are four different degrees of competition: 1) perfect competition, 2) monopolistic competition, 3) oligopoly, and 4) monopoly. Porter’s Five Forces model is used to identify and analyze an industry’s competitive forces. Perfect competition exists when there are many consumers buying a standardized product from numerous small businesses. In monopolistic competition, we still have many sellers (as we had under perfect competition). Now, however, they do not sell identical products. Oligopoly means a few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In terms of the number of sellers and degree of competition, a monopoly lies at the opposite end of the spectrum from perfect competition.
  • The law of supply and demand is an economic theory that explains how the relationship between supply and demand determines prices. When supply is greater than demand, prices fall, and when demand is greater than supply, prices rise.
  • Supply is the quantity of a product that sellers are willing to sell at various prices. The quantity of a product that a business is willing to sell depends on its price.
  • Demand is the quantity of a product that buyers are willing to purchase at various prices. The quantity of a product that people are willing to buy depends on its price.
  • The Equilibrium Price is the state in which market supply and demand balance each other.
  • The world’s economies share three main goals: growth, high employment, and price stability. Economists measure the performance of an economy by looking at GDP, GNP and other measures.
  • The gross domestic product (GDP) is defined as the market value of all goods and services produced by the economy in a given year.
  • Gross national product (GNP) is the value of all products and services produced by the citizens of a country, both domestically and internationally, minus income earned by foreign residents.
  • The economic ups and downs resulting from expansion and contraction constitute the business cycle (also referred to as the industry life cycle). During prosperity, the economy expands, unemployment is low, incomes rise, and consumers buy more products. A slowdown in economic activity is called a recession. A recession is followed by a recovery or expansion in which the economy starts growing again. If, however, a recession lasts a long time (perhaps a decade or so), while unemployment remains very high and production is severely curtailed, the economy could sink into a depression.
  • Statistics Canada tracks unemployment and reports the unemployment rate—the percentage of the labour force that is at least 15 years old, unemployed, and actively seeking work.
  • Price stability occurs when the average price for goods and services either does not change or changes very little. When the overall price level goes up, we have inflation. When the price level goes down (which rarely happens), we have deflation.
  • The consumer price index (CPI) measures the rate of inflation by determining price changes of a hypothetical basket of goods, such as food, housing, clothing, medical care, appliances, automobiles, and so forth, bought by a typical household.
  • The producer price index (PPI) tracks the average change in prices at the wholesale level (e.g., raw materials, product components that require further processing, and finished goods sold to retailers).
  • Monetary policy is exercised by the Bank of Canada, which is empowered to take various actions that decrease or increase the money supply and raise or lower short-term interest rates, making it harder or easier to borrow money.
  • Fiscal policy relies on the government’s powers of spending and taxation. Both taxation and government spending can be used to reduce or increase the total supply of money in the economy — the total amount, in other words, that businesses and consumers have to spend.
  • The national debt is also referred to as Canada’s public debt. According to the Department of Finance Canada, Government Debt in Canada increased to CAD 1134.49 billion in 2022 from CAD 1048.75 billion in 2021.
  • Money is anything that is acceptable as payment for goods and services. For money to be used as a medium of exchange, it must be divisible, portable, durable, and difficult to counterfeit. M-1 is the narrowest measure, and it includes the most liquid forms of money — the forms, such as cash and chequing account funds, which are spent immediately. M-2 includes everything in M-1 plus near-cash items invested for the short term — savings accounts, time deposits and money market mutual funds.
  • The Bank of Canada’s four main areas of responsibility are: monetary policy, financial systems, currency, and funds management.
  • The World Bank is an important source of economic assistance for poor and developing countries. With backing from wealthy donor countries (such as Canada, the United States, Japan, Germany, and the United Kingdom), the World Bank provides loans, grants, and guarantees to some of the world’s poorest nations.
  • The International Monetary Fund (IMF) is governed by and accountable to its 191 member countries and has three critical missions: furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity.
  • Currencies are traded in the foreign exchange market. Like any other market, when something is exchanged, there is a price. In the foreign exchange market, a currency is bought and sold, and the price of that currency is given in some other currency. That price is expressed as an exchange rate.
  • Digital currencies are currencies that are only accessible with computers or mobile phones because they only exist in electronic form.

Download the “Chapter in Review” for
Chapter 3: Economics and Banking [PDF].

End-of-Chapter Exercises

 

  1. Unemployment Rate. Visit Statistics Canada and locate the most recent unemployment reports. Can you find annual employment rates by industry? Which industry has the most employment? Share your findings with the class and/or professor.
  2. Inflation Rate. Visit Statistics Canada and locate the most recent inflation reports. In which province is inflation rising the fastest? Is the government taking any action to combat rising inflation rates? Share your findings with the class and/or professor.
  3. Pros and Cons of Economies. Use the Internet to search the pros and cons of each of the different types of economies. Which economy makes the most sense to you? Why? Share your conclusions with the class and/or professor.
  4. Gross Domestic Product (GDP). Use the Internet to locate the most recent GDP reports. Which countries have the highest GDP per capita? What does “per capita” mean? Why is GDP per capita in developing countries lower as compared to GDP per capita in developed countries? Share your findings with the class and/or professor.
  5. Surplus and Shortage. Use the Internet to locate an example in which a surplus of a product led to decreased prices. Similarly, locate an example in which a shortage of a product led to increased prices. What eventually happened in each case? Share your findings with the class and/or professor.
  6. Government Assistance. Use the Internet to locate an example in which the government (Canadian or U.S.) provided funds in assistance to a business. Is the government supporting businesses by providing funds consistent with a free market system? Explain how this might distort the system. Share your findings with the class and/or professor.
  7. Economic Indicators. Explain how current inflation and unemployment rates affect you personally. Explain how they may affect you as a manager. Share your thoughts with the class and/or professor.
  8. Government Roles. The government plays a variety of roles in the Canadian mixed economy. Use the Internet to locate an example of when the government has been a customer, a regulator, a taxation agent, and a provider of services.  Discuss with the class and/or professor whether government involvement in each role is excessive, or about right. What criteria did you use to make your assessments?
  9. Getting Acquainted with Canadian Banks. Visit the website of a bank that is near where you are located. Locate the current interest rates on investments as well as on loans. What are the latest bank policies shared on the website? What other kinds of information does the website provide? Share your findings with the class and/or professor.
  10. Competitive Analysis. Use Porter’s Five Forces analysis to analyze the competitive positions of any one of the following companies: Toyota, Walmart, First Choice Hair Cutters, Canadian Tire, or Cara Foods. Describe the five forces and how they affect the company’s operations and strategies. Share your findings with the class and/or professor.
  11. Monetary Policy Simulation: You’re in Control. How would it feel to be in control of the monetary policy of a country? Play MoPoS, the Monetary Policy Simulation Game. Download the game, then play. You will act out the role of a fictitious central bank by implementing monetary policy in a simple virtual economy, all the while observing the limitations of monetary policy. Write a brief summary of your experience. What did you learn from playing the simulation? Share your summary with your class and/or professor.
  12. Supply and Demand Simulation. Visit the Lemonade Stand Free Trial game. Using information you learned in this chapter, write a brief summary about your experience as an entrepreneur dealing with economic factors of supply and demand and environmental conditions that may impact your business. Consider how much revenue you made each time you played the game and the reasons for your business success or failure. Share your summary with your class and/or professor.
  13. Fiscal Policy Game. This game, The Fiscal Ship, allows you to practice your decision-making as it pertains to fiscal policy based on the U.S. economy. Give it a try by visiting the Federal Reserve Bank of St. Louis website. What did you learn? Was it difficult to make the right decisions to help put the Fiscal Ship on the right course? Share your thoughts about the game with your class and/or professor.

Self-Check Exercise: Economics and Banking Quiz

Check your understanding of this chapter’s concepts by completing this short self-check quiz.

Additional Resources

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This chapter compiles content from various Open Educational Resources (OER). For details, please refer to the Attributions page.

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