Copyright © 2011 by Nelson Education Ltd. 1 Chapter 2: ECONOMICS The Framework for Business

Copyright © 2011 by Nelson Education Ltd. 2 LOOKING AHEAD How does the economy impact business? What is the free market system and what drives it? What are planned economic systems? What are mixed economic systems? How is economic performance measured? How does fiscal and monetary policy impact the economy? LO1 Define economics and discuss the impact of economics on business LO2 Explain and evaluate the free market system and supply and demand LO3 Explain and evaluate planned market systems LO4 Describe the trend toward mixed market systems LO5 Discuss key terms and tools to evaluate economic performance LO6 Analyze the impact of fiscal and monetary policy on the economy

Copyright © 2011 by Nelson Education Ltd. 3 Economics represent the flow of resources Forces that impact your business and personal life –Better Decisions –More Money The economy is financial and social Economics is about choices WHY ECONOMICS MATTER L01

Copyright © 2011 by Nelson Education Ltd. 4 OOPS! ECONOMIC PREDICTIONS On March 6, 1999, Economist predicted that the price of oil might soon fall as low as $5 per barrel. Two weeks later, the price had risen by 30%, and less than a year later it hit $25 per barrel. By 2008, the price neared $150 per barrel, and some economists predicted it would hit $200. But, by 2009, the price dropped to below $50 per barrel. On January 1, 2005, Charles H. Ferguson, author of Technology Review, predicted, “Google will need brilliant strategy and flawless execution simply to survive.” Google closed 2005 with revenue of $6.1 billion—a 267% increase. Revenue in 2008 was $21.8 billion. Some survival! The federal government predicted a deficit of $33.7 billion for 2009 in its budget announced in January By May, Finance Minister Jim Flaherty revised it to “at least $50 billion”—some revision! L01

Copyright © 2011 by Nelson Education Ltd. 5 CONSUMER CHOICES AND ECONOMICS What choices would you make if the price of a cup of coffee doubled? How would your choices impact various businesses? L01

Copyright © 2011 by Nelson Education Ltd. 6 MACROECONOMICS VS. MICROECONOMICS Same Scene, Different Take Macroeconomics Country’s Overall Economy Microeconomics Consumers, Families, Businesses L01

Copyright © 2011 by Nelson Education Ltd. 7 TRANSFORMATIONAL ECONOMIC TRENDS What if solar power became a viable energy source? What if we found a cure for cancer? What if Big Business could actually shape our minds? L01

Copyright © 2011 by Nelson Education Ltd. 8 ALLOCATING RESOURCES Free Market Mixed Economies CapitalismSocialismCommunism Planned Economies L01

Copyright © 2011 by Nelson Education Ltd. 9 The Free Market: –Private Ownership –Economic Freedom –Fair Competition –Innovation and Hard Work Businesses offer Value to: –Customers –Employees –Suppliers CAPITALISM L02

Copyright © 2011 by Nelson Education Ltd. 10 The right to own a business and keep after-tax profits. The right to private property The right to free choice The right to fair competition RIGHTS OF CAPITALISM L02

Copyright © 2011 by Nelson Education Ltd. 11 Pure Competition Monopolistic Competition Oligopoly Monopoly DEGREES OF COMPETITION L02

Copyright © 2011 by Nelson Education Ltd. 12 Supply and Demand The Foundation of the Free Market –How much can we make/sell? –How much will consumers buy? –At what price? Interaction of buyers and sellers –Impact prices –Entrance of competition FREE MARKET FUNDAMENTALS L02

Copyright © 2011 by Nelson Education Ltd. 13 SUPPLY: HOW MUCH TO PRODUCE? CHARGE? Supply: the relationship between the price of a good and the quantity sellers are willing and able to offer for sale. –Sellers tend to supply a greater quantity as the price rises Supply curve: a graph of the supply relationship. –The supply curve slopes upward to the right showing that quantity supplied increases as price rises L02

Copyright © 2011 by Nelson Education Ltd. 14 DEMAND: HOW MUCH WILL BUYERS PURCHASE? Demand: the relationship between the price of a good and the quantity buyers are willing and can afford to buy. –When price falls, consumers tend to buy more Demand curve: a graph of the demand relationship –The demand curve slopes downward showing that quantity demanded increases as price falls L02

Copyright © 2011 by Nelson Education Ltd. 15 EQUILIBRIUM PRICE Forces of supply and demand drive equilibrium price The point where supply and demand intersect Equilibrium price is the market price. L02

Copyright © 2011 by Nelson Education Ltd. 16 COST OF AN ICE COLD COKE Coke took supply and demand too far.... …installed thermometers in their vending machines Consumers balked at paying more for a cold Coke on a hot day. L02

Copyright © 2011 by Nelson Education Ltd. 17 PLANNED ECONOMIES Communism –Public Ownership of Enterprise –Strong Central Government Socialism –Government Control Key Enterprises –Higher Taxes L03

Copyright © 2011 by Nelson Education Ltd. 18 MIXED ECONOMIES Market and Planned Economies don’t meet all needs –Under pure market economies, the old, young, sick, and the environment could suffer –Planned Economies will not create enough value As a market dominant economy, the Canadian government still owns/regulates a number of enterprises –Postal Service– Parks –Schools– Libraries L04

Copyright © 2011 by Nelson Education Ltd. 19 MIXED ECONOMIES When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. P.J. O’Rourke, political satirist, journalist, writer As Mixed Economies become The Story of the Future, how much government intervention is too much? What industries should be regulated? Why? “ “ L04

Copyright © 2011 by Nelson Education Ltd. 20 EVALUATING THE ECONOMY Unemployment Rate Consumer Price Index Producer Price Index Gross Domestic Product Productivity L05

Copyright © 2011 by Nelson Education Ltd. 21 THE BUSINESS CYCLE L05

Copyright © 2011 by Nelson Education Ltd. 22 GOVERNMENT PLAYS A ROLE IN MANAGING THE ECONOMY The goal is to find: –The right mix of freedom and control –The right balance between taxing and spending –And the right growth rate for the supply of money L05

Copyright © 2011 by Nelson Education Ltd. 23 Fiscal Policy –Taxation –Government Spending Monetary Policy –Supply & Demand of Money Cost of Credit –Controlled by the Bank of Canada Fourteen-person Board Mark J. Carney appointed governor in 2008 MANAGING THE ECONOMY L06

Copyright © 2011 by Nelson Education Ltd. 24 MONEY: M1 AND M2 M1 Money Supply - all currency—paper bills and metal coins—plus checking accounts and traveller’s checks. M2 Money Supply - all M1 plus most savings accounts, money market accounts, and certificates of deposit (low risk savings vehicles with a fixed term). L06

Copyright © 2011 by Nelson Education Ltd. 25 BANKS MULTIPLYING MONEY You deposit $5,000 The bank loans Ayesha $4,900 Ayesha buys a car from Mohamed for $4,900 Mohamed deposits the $4,900 Although you still have $5,000, the money supply has increased to $9,900 Banks usually hold a small percentage of deposits as a reserve—usually about 2% in Canada. L06

Copyright © 2011 by Nelson Education Ltd. 26 FEDERAL GOVERNMENT REVENUE & EXPENSES L06

Copyright © 2011 by Nelson Education Ltd. 27 BANK OF CANADA Conduct Monetary Policy: –Changes in the Bank Rate –Influences Bank Reserves –Open Market Operations Banking services for government and other banks L06

Copyright © 2011 by Nelson Education Ltd. 28 Why is supply and demand the driving force in a free-market system? What is the difference between planned economies and a free- market system? Why is there a trend toward mixed economies? How is the economy measured and controlled? What is the role of the Bank of Canada? LOOKING BACK LO1 Define economics and discuss the impact of economics on business LO2 Explain and evaluate the free market system and supply and demand LO3 Explain and evaluate planned market systems LO4 Describe the trend toward mixed market systems LO5 Discuss key terms and tools to evaluate economic performance LO6 Analyze the impact of fiscal and monetary policy on the economy