Transcript Notes for Chapter Two - UPEI Virtual Learning Environment

CHAPTERS 2 & 4
THE AFFECTS OF ECONOMIC ISSUES AND
GOVERNMENT ON BUSINESS
Bus101
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.
Capitalism and free markets
Socialism: negatives and positives
Understand communism
Canada’s mixed economic system
Economic indicators, productivity, and the
business cycle
Six roles played by government in business
Responsibilities of the orders of government
Monetary and Fiscal Policy
Bus101
HOW ECONOMIC CONDITIONS AFFECT BUSINESS
If you want to understand the underlying situation
and conditions in which Canadian businesses
operate, it is essential that you:
1. have some grasp of economics,
2. be aware of the impact of the global
environment, and
3. understand the role of the federal and
provincial governments in Canada.
DIFFERENT ECONOMIC SYSTEMS

Capitalism: individuals seeking profits produce goods
and services.

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
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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 the results of that
production.
Socialism: some free market and some government
allocation.
Most countries have a mixed economy, including
Canada.
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.

FREE MARKET – HOW PRICES ARE DETERMINED
Prices are not determined by sellers, they are
determined by buyers and sellers negotiated.
 A price that is acceptable to both buyers and
sellers is determined in the microeconomic
concepts of supply and demand.
 Supply: The quantity of products that
manufacturers or owners are willing to sell at
different prices at a specific time.
 Demand: The quantity of products that people are
willing to buy at different prices at a specific time.

SUPPLY AND DEMAND CURVES
EQUILIBRIUM POINT AND MARKET PRICE
At the crossing point of the supply and demand
curves, the quantity demanded and the
quantity supplied are equal, known as the
equilibrium point or equilibrium price.
 Market price: The price determined by supply
and demand.

COMPETITION WITHIN FREE MARKETS

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Perfect competition: The market situation in which there
are many sellers in a market and no seller is large
enough to dictate the price of a product.
Monopolistic competition: The market situation in which
a large number of sellers produce products that are very
similar but that are perceived by buyers as different.
Oligopoly: A form of competition in which just a few
sellers dominate the market.
Monopoly: A market in which there is only one seller for
a product or service.
UNDERSTANDING SOCIALISM
Socialism: An economic system based on the
premise that some, if not most, basic
businesses should be owned by the
government so that profits can be evenly
distributed among the people.
 Most socialist countries have not kept up with
the more capitalist countries in new inventions,
job creation or wealth creation in the past
decade.

UNDERSTANDING COMMUNISM

Communism: An economic and political system
in which the state (the government) makes all
economic decisions and owns almost all of the
major factors of production.
 Shortages
of many items may develop
 Affects personal choices
 Doesn’t inspire business people to work hard (no
incentives)
THE TREND TOWARD MIXED ECONOMIES
There are two major economic systems in the world
today:
1. Free-market economy: An economy in which the
market largely determines what goods and
services are produced, who gets them, and how
the economy grows.
2. Command economy: An economy in which the
government largely decides what goods and
services are produced, who gets them, and how
the economy will grow.
COMPARISONS OF KEY ECONOMIC SYSTEMS
CANADA’S MIXED ECONOMY
Mixed economy: Economic systems in which
some allocation of resources is made by the
market and some by the government.
 Key economic indicators:
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GDP
Productivity
Unemployment rate
Price indexes
GROSS DOMESTIC PRODUCT
GDP: The total value of goods and services
produced in a country in a given year.
 Standard of living: The amount of goods and
services people can buy with the money they have.
 Quality of life: The general well-being of a society in
terms of political freedom, a clean natural
environment, education, health care, safety, free
time, and everything else that leads to satisfaction
and joy.

PRODUCTIVITY IN CANADA
Productivity is the total output of goods and
services in a given period divided by the total
hours of labor required to provide them.
 Anything that increases productivity or reduces
labor costs makes a business, and a country,
more competitive because prices can be lower.

THE UNEMPLOYMENT RATE

Unemployment rate: The percentage of the
labour force that actively seeks work but is
unable to find work at a given time.
THE PRICE INDEXES
Inflation: A general rise in the prices of goods and
services over time.
 Disinflation: A situation in which price increases
are slowing (the inflation rate is declining).
 Deflation: A situation in which prices are declining.
 Stagflation: A situation in which the economy is
slowing but prices are going up regardless.
 Consumer Price Index (CPI): Monthly statistic that
measures the pace of inflation or deflation.

THE BUSINESS CYCLE
Business cycles (economic cycles): The periodic
rises and falls that occur in economics over
time. There are four phases:
1. Boom
2. Recession
3. Depression
4. Recovery

GOVERNMENTS AND BUSINESS
 Incentives
 Customer
 Essential
Services
 Regulator
 Competitor
 Taxation
Agent
FEDERAL GOVERNMENT
Trade Regulations and Promotion
 Incorporation of Federal Companies
 Banking and Monetary Systems
 National Defence
 Unemployment Programs
 Immigration
 Criminal Law
 Fisheries

PROVINCIAL GOVERNMENT
Education
 Labour Law
 Property Law
 Municipal Affairs
 Health and Social Services
 Administration of Justice
 Direct Taxation

MUNICIPAL GOVERNMENT
 Essential
Services
 Planning
 Incentives
 Industry
 Taxes
Support
GOVERNMENT FINANCIAL POLICY
Monetary
Fiscal
Policy
Policy
SUMMARY
It is important to have an understanding of
both business and government
 Capitalism, Communism and Socialism are
general forms of government
 Canada has a mixed economy
 In a free market prices are determined by
negotiation related to supply and demand
 There are 4 different types of competition in a
free market

SUMMARY CONTINUED
Key economic indicators include the GDP,
Productivity, Unemployment and Price Indices
 There are 4 phases in the business cycle
 There are 6 roles which government plays in
relation to business
 Sample roles are provided for each order of
government
 Monetary and fiscal policies are vitally important
to the economy and therefore to business.
