CHAPTER 2 - How economic issues affect business

CHAPTER 2 How economic issues affect business 1 HOW ECONOMIC CONDITIONS AFFECT BUSINESS 2 If you want to understand the underlying situation and conditions in which Canadian businesses operate, it is essential that you: have some grasp of economics, be aware of the impact of the global environment, and understand the role of the federal and provincial governments in Canada. ECONOMICS 3 There are two major branches of economics: Macroeconomics looks at the operation of a nation’s economy as a whole. Microeconomics looks at the behaviour of people and organizations in particular markets. Macroeconomics looks at how many jobs exist in the whole economy; microeconomics examines how many people will be hired in a particular industry or in a particular region of the country. ECONOMIC LINKS TO BUSINESS 4 “Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.” These resources land, labour, capital goods, entrepreneurship, and knowledge Are called factors of production ECONOMIC THEORY OF WEALTH CREATION: ADAM SMITH 5 The Wealth of Nations in 1776 defined capitalism as a system of rights and freedoms: He believed that people will work hard if they have incentives for doing so—that is, if they know that they will be rewarded. ECONOMIC THEORY OF WEALTH CREATION: ADAM SMITH 6 The Wealth of Nations Right to Make a Profit Right to Private Property Right to Buy or Sell Freedom to Compete Freedom from Government Interference THREE (FOUR) ECONOMIC SYSTEMS 7 Communism Socialism Capitalism (Highly Controlled) (Little Control) Mixed CAPITALISM DEFINED 8 Capitalism: individuals seeking profits produce goods and services. Goods and services are sold in a free market to those who can pay for them. All or most of the factors of production and distribution (e.g., land, factories, railroads, stores) are privately owned (not owned by the government) and are operated for profit. Popular term used to describe free-market economies The free market is one in which decisions about what to produce and in what quantities are made by the market. — that is, by buyers and sellers negotiating prices for goods and services. No country is purely capitalist; no market is truly free. THE FOUNDATIONS OF SOCIALISM 9 Socialism: some free market and some government allocation Socialism is an economic system based on the premise that some, if not most, basic businesses, such as steel mills, coal mines, and utilities, should be owned by the government so that the profits can be evenly distributed among the people. Government makes more of the purchase decisions, rather than individuals THE FOUNDATIONS OF COMMUNISM 10 Communism: the government decides what will be produced and who will consume the results of that production. Communism is an economic and political system in which the state (the government) makes almost all economic decisions and owns almost all of the major factors of production. Communism affects personal choices more than socialism does. Some communist countries have not allowed their citizens to practice certain religions, change jobs, or move to the town of their choice. RECENT ECONOMIC TRENDS 11 Most countries have a mixed economy, which falls between capitalism and socialism. Canada: We have a mixed economy, as the government has always played a major role in the Canadian economy. Communist countries: They have moved to capitalist forms of economies to improve their standards of living. Socialist countries: They have reduced government’s role in their economies. Free markets 12 How a free market works Many buyers and sellers trading freely determine the prices at which they will exchange goods and services. How prices are determined The constant interplay between supply and demand determines an equilibrium price at which a transaction will occur. Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Generally speaking, the amount supplied will increase as the price increases because sellers can make more money with a higher price. THE ECONOMIC CONCEPT OF SUPPLY AND DEMAND 13 Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. Generally speaking, the quantity demanded will increase as the price decreases The economic concept of supply and demand 14 The place where quantity demanded and supplied meet is called the equilibrium point. The economic concept of supply and demand 15 In the long run, that price would become the market price. Market price, then, is determined by supply and demand. The economic concept of supply and demand 16 Competition within free markets 17 Four different degrees of competition exist: perfect competition monopolistic competition oligopoly monopoly Competition within free markets 18 Sellers One Many Monopoly Oligopoly Monopolistic Competition Perfect Competition Competition within free markets 19 Perfect competition exists when there are many sellers in a market and no seller is large enough to dictate the price of a product. Monopolistic competition exists when a large number of sellers produce products that are very similar but are perceived by buyers as different. Competition within free markets 20 An oligopoly occurs when a few sellers dominate a market. Oligopolies exist in industries that produce products in the areas of oil and gas, tobacco, automobiles, aluminum, and aircraft. Oligopolies in Canada also exist in the banking sector where we have a few big players, and no small banks. Oligopoly: One reason some industries remain in the hands of a few sellers is that the initial investment required to enter the business is tremendous – like the airline industry. Competition within free markets 21 A monopoly occurs when there is only one seller for a good or service, and that one seller controls the total supply of a product and the price. Traditionally, monopolies were common in areas such as water, electricity, and telephone services that were considered essential services. The Canadian economy 22 Economics and business 23 Gross Domestic Product (GDP): the total goods and services produced by the economy. This is how we measure how well the economy is doing! A major influence on the growth of GDP is how productive the workforce is —that is, how much output workers create with a given amount of input. Productivity in Canada 24 Productivity is measured by dividing the total output of goods and services of a given period by the total hours of labour required to produce them. An increase in productivity means that a worker can produce more goods and services in the same period of time than before, usually through the use of machinery or other equipment. Productivity in Canada 25 unemployment 26 Types of Unemployment Frictional unemployment refers to those people who have quit work because they didn’t like the job, the boss, or the working conditions, and who haven’t yet found a new job. Structural unemployment refers to unemployment caused by the restructuring of firms. unemployment 27 Types of Unemployment Cyclical unemployment occurs because of a recession or a similar downturn in the business cycle. Seasonal unemployment Occurs when demand varies during the year. Inflation and the cpi 28 Consumer Price Index (CPI) is the index economists use to measure the effects of inflation. Inflation refers to a general rise in the prices of goods and services over time. Disinflation describes a condition where price increases are slowing (i.e., the inflation rate is declining). Deflation means that prices are actually declining. The business cycle 29 Business cycles (also known as economic cycles) are the periodic rises and falls that occur in economies over time. An Economic Boom is just what it sounds like—business is booming. A Recession is two or more consecutive quarters of decline in the GDP. A Depression is a severe recession usually accompanied by deflation.