Basic Ch02

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1Copyright 2010 by McGraw-Hill RyersonUnderstanding Canadian Business, 7th Cdn Edition

How Economic Issues

Affect Business

C H A P T E R

T W O

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Affect Business


Learning Objectives

1. Explain what capitalism is and how free marketswork. As part of this discussion, define supply anddemand and explain the relevance of the equilibriumpoint.

2. Define socialism and its benefits and negativeconsequences.

3. Understand communism and the challenges of sucha system.

4. Describe the mixed economy of Canada.

5. Discuss the significance of key economic indicators,and the business cycle.

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LO1 How Economic Conditions AffectBusiness

o Economic concepts are the basis for most majorbusiness decisions.

o Both the global economy and the Canadian

economy have an effect on Canadian business.

o Economics is the study of how society choosesto employ resources to produce its goods and

services and distribute them for consumptionamong various competing groups andindividuals.

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Branches of Economics

o Macroeconomics: looks at the operation of anations economy as a whole.

o Microeconomics: looks at the behaviour of

people and organizations in a particular market.

o Resource Development: the study of how toincrease resources and the creation of

conditions to make better use of them.

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Growth Economics and Adam Smith

o Adam Smith believed freedom was vital to wealthcreation.

o If people could keep the profits they derived fromthe land or business they owned and worked, theincentive to work harder was powerful.

o This incentive would then cause the economy toprosper.

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How Businesses Benefit

the Community

o Smith believed that people work for their own self-interest, but in so doing, actually benefit theeconomy as a whole.

o The invisible hand turns self-directed gain intosocial and economic benefit for all.

o As people became wealthier, they would help

others in the community who were less fortunate.

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Understanding Free-Market Capitalism

o Capitalism: an economic system in which all ormost of the factors of production anddistribution are privately owned and operated

for profit.

o Free Market: one in which decisions about whatto produce and in what quantities are made bythe market.

o Prices are determined by buyers and sellers

who negotiate in the marketplace.

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The Economic Concepts of Supply and Demandand the Equilibrium Point

o Supply: the quantity of products thatmanufacturers or owners are willing to sell atdifferent prices at a specific time.

o Demand: the quantity of products that people arewilling to buy at different prices at a specific time.

o The Equilibrium Point: the place where quantitydemanded and supplied meet.

o Market Price: the price determined by supply anddemand

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Supply Curve at Various Prices

Figure 2.1

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Demand Curve at Various Prices

Figure 2.2

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Equilibrium Demand and Supply

Figure 2.3

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Free-Market Competition

Monopolistic

CompetitionOligopoly

One

Sellers

Many

Monopoly Perfect Competition

Figure 2.4

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Competition Within Free Markets

o Perfect Competition: the market situation in whichthere are many sellers in a market and no seller is

large enough to dictate the price of a product.

o Monopolistic Competition: the market situation in which

a large number of sellers produce products that arevery similar but that are perceived by buyers asdifferent.

o Oligopoly: a form of competition in which just a few

sellers dominate the market.

o Monopoly: a market in which there is only one seller fora product or service.

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Benefits and Limitationsof Free Markets

Inequality of wealth causes national andworld tension.

Greed may compromise ethics.

Potential for environmental damage. Limitations push country towards

socialism = government regulation.

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Copyright 2010 by McGraw-Hill RyersonUnderstanding Canadian Business, 7th Cdn Edition

LO2 Understanding Socialism

o Socialism: an economic system based on thepremise that some, if not most, basic

businesses should be owned by thegovernment so that profits can be evenly

distributed among the people.o Results are social equality through economic

redistribution.

o However, this may take away incentive to workfor more profit due to the high taxation rates,which pay for various government programs.

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LO3 Understanding Communism

o Communism: an economic and political systemin which the state (the government) makes all

economic decisions and owns almost all of themajor factors of production.

o Shortages may occur as the government has noidea what and how much to produce; peoplelose the incentive to work hard as the

government takes most of their earnings.

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The Three Economic Systems

Communism

Socialism

Capitalism

(Highlycontrolled bygovernment)

(Little controlby

government)

Mixed

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The Trend TowardMixed Economies

o Free-Market Economy (Capitalism): an economy inwhich the market largely determines which goods andservices are produced, who gets them, and how theeconomy grows.

o Command Economy (Communism or Socialism): an

economy in which the government largely decideswhich goods and services are produced, who getsthem, and how the economy will grow.

o Mixed Economies: economic systems in which some

allocation of resources is made by the market andsome by the government.

o Canada has a mixed economy.

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LO4 Canadas Mixed Economy

o The Canadian governments goal is to growthe economy but with some social equality forall citizens.

o Government involvement includes: health care,education, business regulation, etc.

o The US is Canadas largest trading partner andhas a great influence on our government andculture.

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Canadas Mixed Economy

o Many laws and regulations have been passedto ensure our cultural identity and that certainbusinesses remain under Canadian control(ownership).

o Recently the government has begunderegulating many industries includingairlines, banks, and the trucking industry, inan effort to remain competitive.

o Private-sector industries are now competingwith government-funded institutions in areassuch as health care, education, and security.

LO5 Understanding Canadas

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LO5 Understanding Canada s

Economic System

o Strong Economy: Business prospers,employment up, wages good, strong revenues

for government to provide goods and services.

o Weak Economy: Business declines,employment and wages fall, governmentrevenues decline, often resulting in governmentbudget deficits.

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Key Economic Indicators

o The gross domestic product (GDP) and theimportance of productivity.

o The unemployment rate: frictional, structuralcyclical, and seasonal.

o The price indexes: inflation, disinflation,deflation, consumer price index (CPI),industrial product price index (IPPI), and raw

materials price index (RMPI).

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Canadian GDP Real Growth Rate

[Catch Figure 2.6]

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Canadian Unemployment Rate

[Catch Figure 2.7]

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The Business Cycle

oBoom: Brings jobs, growth, and economicprosperity.

o Recession: Two or more consecutive quarters of

decline in the GDP.o Depression: Severe recession usuallyaccompanied by deflation.

o Recovery: Occurs when the economy stabilizesand starts to grow.

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Summary

1) Capitalism occurs when most factors of production are privatelyowned and operated for a profit.

2) A free market is one where decisions about what to produce andhow much are made by the markets.

3) There is an equilibrium point between demand and supply,determined by the price.

4) Socialism occurs when basic factors of production are controlled bythe government.

5) Communism occurs when the government controls most factors ofproduction.

6) Canada has a mixed economy (capitalist and socialist) with a trendtoward less government intervention or control.

Documents

Basic Ch02