Transcript Economics and Business

Chapter 2
How Economic
Issues Affect
Business
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Learning Goals
1.
2.
3.
4.
5.
Explain what capitalism is and how free
markets work. As part of the discussion,
define supply and demand and explain the
relevance of the equilibrium point.
Define socialism and its benefits and
negative consequences.
Describe communism and the challenges
of such a system.
Describe the mixed economy of Canada.
Discuss Canada’s economic system,
including the significance of key economic
indicators, and the business cycle.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Economic Links to Business
o
o
Economic concepts are the basis for
most major business decisions.
Both global economy and Canadian
economy have an effect on Canadian
business.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
What is Economics?
o
Economics is “the study of
how society chooses to
employ resources to produce
its goods and services and
distribute them for
consumption among various
competing groups and
individuals”.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Micro Vs Macro


Micro (little) Economics looks at
the behaviour of people and
organization in a particular market
Macro (big) Economics looks at
the operation of a nation’s economy
as a whole
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Economic Theory of Wealth
Creation: Adam Smith

The Wealth of Nations in 1776
defined Capitalism as a system of
rights and freedoms:





Right to Make a Profit
Right to Private Property
Right to Buy or Sell
Freedom to Compete
Freedom from Government
Interference
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
In Class Assignment

1)
Time to add to your notes:
Create a biography on Adam
Smith for your notes.
2) You must hand in your
biography at the end of class.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Adam Smith and Freedom

Adam Smith Believed that freedom
was vital to the survival of any
economy
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Adam Smith


As long as people saw economic
rewards (profit or money for
person/family) for their efforts, they
would work long hours and work
hard.
As a result the economy would
prosper with enough to go around
for everyone
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Invisible Hand?


That people do not set out to help
others. That they work for their
own growth.
Invisible Hand: describes the
process that turns self-directed gain
into social and economic benefits
for all.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Theory in a nutshell
The theory of the Invisible Hand states that: if
each consumer is allowed to choose freely what
to buy and
each producer is allowed to choose freely what to
sell and how to produce it,
the market will settle on a product distribution
and prices that are beneficial to all the
individual members of a community, and hence
to the community as a whole.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
In Class Assignment
1) What are your thoughts
on Adam Smith’s theory
2) Do you agree or
disagree. Tell me why.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Three Economic
Systems
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Three Economic Systems
Mixed
Socialism
Communism
Capitalism
(Highly Controlled
by Government)
(Little Control by
Government)
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Economic Systems

Capitalism - individuals seeking profits
produce goods and services.




Goods and services are sold in a free market to
those who can pay for them.
Communism - the government decides
what will be produced and who will consume
that production.
Socialism - some free market and some
government allocation.
Most countries have a Mixed Economy
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Supply Curve
High
Price(P)
S
Low
Quantity(S)
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
High
Demand Curve
High
Price(P)
D
Low
Quantity(D)
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
High
Equilibrium Point
Surplus
High
Market Equilibrium
Price
S
Low
Shortage
Quantity
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
D
High
Free-Market Competition
Monopolistic
Oligopoly
Competition
One
Many
Monopoly
Perfect Competition
Sellers
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Benefits and Limitations of
Free-Markets




Inequality of wealth - causes
national and world tension.
Greed may compromise
ethics.
There is a potential for
environmental damage.
Limitations push country
towards Socialism =
government regulation.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Recent Economic Trends



Canada - we have a mixed
economy, as the government has
always played a major role in the
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.
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Economics and Business



Strong Economy - Business
prospers
Weak Economy - Business
declines
Gross Domestic Product
(GDP) - this is the total goods
and services produced by an
economy; a measurement of
how well the economy is
doing!
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Canadian Economy

Key Economic Indicators:
1.
2.
3.
The gross domestic product (GDP) and
the importance of productivity
The unemployment rate: frictional,
structural cyclical and seasonal
The price indexes: inflation, disinflation,
deflation, consumer price index (CPI),
industrial product price index (IPPI), and
raw materials price index (RMPI)
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson
Business Cycles
oRecession
oDepression
oRecovery
oBoom
Nickels 6e/Copyright © 2007
McGraw-Hill Ryerson