Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Chapter 2 How Economic Issues Affect Business Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Learning Goals 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

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Agenda- March 25th 1. Introduce Economics 2. Textbook Hunt 3. Adam Smith Assignment Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Economic Links to Business 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

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson What is Economics? 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

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 Refer to Page 45- Write down an example for Micro Economics and an example for Macro Economics Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Quick Textbook Hunt: Page 48/49 1. Define Resource development. Include an example. 2. Provide an example for how businesses can contribute to an economic system. 3. Who is Thomas Malthus and what did he believe? 4. What do macroeconomists say about a large population? 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 Time to add to your notes: Create a biography on Adam Smith for your notes. You must hand in your biography at the end of tomorrow’s class. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Agenda- March 30th 1. Make sure your Biography gets passed in. 2. Discussion: Adam Smith and the Invisible Hand 3. In Class Assignment 4. Economic Systems: Capitalism. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

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

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

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

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

Questions starting on page 47(old Text) 48 (new Text) 1. How does a Free Market work? 2. How are prices determined? 3. Define Supply and provide an example. 4. Define Demand and provide an example. 5. What is the key factor in determining the quantity supplied and the quantity demanded? Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

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

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson 1. Free Market Decisions made about what to produce and in what quantities are made by the market (buyers and sellers negotiating prices for goods and services). Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

2. Prices are Determined by… They are determined by buyers and sellers negotiating in the marketplace. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

3. Supply- Refers to producers Quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. The amount supplied will increase as the price increases because sellers can make more money with a higher price. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

4. Demand- refers to consumers 1. The quantity of products that people are willing to buy at different prices at a specific time. Quantity demanded will increase as the price decreases. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson 5. What is the Key Factor? PRICE!!! Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Supply Curve High Price(P) S High Low Quantity(S) Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Demand Curve High Price(P) D Low High Quantity(D) Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Equilibrium Point Surplus High Price Market Equilibrium S D Shortage Low Quantity High Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Agenda- April 1st 1. Entry Card: In your own words describe Supply and Demand. 2. Textbook Search: Perfect competition, monopolistic competition, oligopoly, monopoly 3. Page 52: What are Benefits and Limitations of Free Markets- In your groups. 4. On White Paper: Write down all key phrases and words associated with: Capitalism, Socialism & Communism. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Agenda- April 2nd 1. Name 4 characteristics of a mixed economy. 2. Textbook Search: Free-Market, command, mixed, 3. For your notes: copy the chart on either page 56/55: Comparisons of Key Economic Systems. 4. Read: Understanding Canada’s Economic System. Write basic concepts and examples for: Gross Domestic Product, Productivity in Canada, Productivity in the Services-Producing Sector, The Unemployment Rate, The Price Indexes Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Agenda- April 7th 1. Go over the three economic systems. 2. Go over Textbook Search definitions 3. Benefits and Limitations of Free markets 4. Recent economic trends 5. Textbook Search: inflation, disinflation, deflation, consumer price index, raw materials price index, industrial price index. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Capitalism -factors of production and distribution owned by individuals. - They are operated for profit. - Individuals decide whether to produce goods in their own countries or have them made in other countries. - Also known as: Free market economies. - No country is purely capitalist. - The foundation for Canada, U.S, Austrailia and most developed nations Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Socialism - Belief in wealth creation, however, they believe that wealth should be more evenly distributed among the people. -Basic businesses should be run by the government (ex: steel mills, coal mines) - Governments should be an agency that carries out the distribution and be much more involved in protecting the environment and providing for the poor. - Social Equality is the goal. - Government takes income from wealthier people and redistributes it to poorer people through government programs. -Free education, health care and child care - Problem: takes away from incentives to work hard, as their profits will be heavily taxed. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Communism - The government makes almost all economic decisions and owns almost all of the major factors of production. - It affects personal choices. - *Governments have no way of knowing what to produce because prices don’t reflect supply and demand as they do in free markets. - Does not inspire business people to work hard, because the government takes care of earnings. - Most suffer from severe economic depression. To Discuss: Do you think that lack of incentive (what’s in it for you) is a large problem when considering what economic system to implement? Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Textbook Hunt Answers Free Market Economy: the market itself largely determines what goods and services are produced, who gets them and how the economy grows. (otherwise knows as capitalism) Command Economy: Government largely decides what good and services are produced, who gets them, and how the economy will grow. Mixed Economies: Some allocation of resources is made by the market and some by the government Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Textbook Hunt Answers Part 2 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: A large number of sellers produce products that are very similar but are perceived by buyers as different. **Product differentiation (the creation of real or perceived product differences) is the key to success. Ex: promotional battles between fast-food restaurants. Oligopoly: A form of competition in which just a few sellers dominate the market (example: areas of oil and gas, tobacco, automobiles). Monopoly: A market in which there is only one seller for a product or service. “Journal Entry:” Consider two restaurants/clothing chains that sell similar products. Explain how you make a choice between the two. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

New Textbook Hunt- Page 61 Inflation, Disinflation, deflation, stagflation, consumer prices index, business cycles, recession, depression Progress Reports to complete: Page 53, 55, 62 Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

Free-Market Competition Monopolistic Competition Oligopoly 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

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Canadian Economy Key Economic Indicators: 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

Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson Business Cycles Recession Depression Recovery Boom Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson