The Framework for Business Chapter 2: ECONOMICS The Framework for Business Prepared by Valerie Miceli, Seneca College Copyright © 2011 by Nelson Education Limited

LOOKING AHEAD 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 Copyright © 2011 by Nelson Education Limited

LOOKING AHEAD 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 Limited

LO1 Why Economics Matters Economics represent the flow of resources Economics are forces that impact your business and personal life Better decisions More money The economy is financial and social Economics is about choices Page 15 When gas prices fluctuate (MACRO), what do you choose to cut from your budget (MICRO)? Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

MACROECONOMICS VERSUS MICROECONOMICS: SAME SCENE, DIFFERENT TAKES Country’s overall economy Microeconomics Consumers Families Businesses Page 15 Discuss how macroeconomics and microeconomics effect your every day life. What would happen if the price of a cup of coffee on campus increased to $2.00? $3.00? Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

Economic Systems: Different Ways to Allocate Resources Free Market Planned Economies Capitalism Socialism Communism Page 16 Discuss the Free Market System in Canada and why it works. Discuss the move of most economies to “mixed” systems. Mixed Economies Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

LO2 Capitalism: The Free Market System Private ownership Economic freedom Fair competition Innovation and hard work Businesses offer value to: Customers Employees Suppliers Pages 16-18 Discuss the key players of a free market system. Who are the players? What is the role of the government? What happens when all players are not active participants in the free market system. Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

THE FUNDEMENTAL RIGHTS OF CAPITALISM 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 Pages 17-18 Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

FOUR DEGREES OF COMPETITION Pure Competition Monopolistic Competition Oligopoly Monopoly Pages 18-19 Ask the students to give an example of each type of competition. Discuss the examples given in the text. Discuss natural monopolies and government encouraged monopolies. Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

SUPPLY AND DEMAND: FUNDAMENTALS OF A FREE MARKET SYSTEM The foundations of a free market How much can we make/sell? How much will consumers buy? At what price will consumers buy? Interaction of buyers and sellers Impacts prices Allows for the entrance of competition Page 20 Discuss the equilibrium price as it relates to buyers and sellers. How does the interaction impact prices? What happens when competition enters? Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

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 Page 20 Exhibit 2.1 Note that as prices rise, the quantity usually rises, curve moves upward. Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

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 Pages 21-22 Exhibit 2.2 Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

EQUILIBRIUM PRICE Forces of supply and demand drive equilibrium price The point where supply and demand intersect Equilibrium price is the market price Pages 20-21 Exhibit 2.3 Discuss the pizza example outlined in the text. Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

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. The program was cancelled almost immediately! Page 21 Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

LO3 Planned Economies: Socialism and Communism Government controls key enterprises that directly affects public welfare: utilities, telecommunications, health care Higher taxes are designed to distribute wealth more evenly through society Communism Public ownership of all enterprise Controlled by a strong central government Pages 21-22 Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

LO4 Mixed Economies: The Story of the Future Market and planned economies don’t meet all of society’s 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/supports enterprises such as: Postal service, universities, parks, libraries, health care, education, defence Page 22 Discuss the fact that many nations are moving toward a market economy but they must still balance the need for social programs. Privatization means formerly government controlled enterprises are being converted to private sector ownership/management. Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

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? Page 22 What industries should be regulated? Why? “ Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

LO5 Evaluating Economic Performance: What’s Working? Gross Domestic Product Employment Level The Business Cycle Pages 22-25 Click on the link to Statistics Canada to review economic measures, and key economic indicators.. Explain how these statistics work together to provide a conceptual view of the economy. Price Levels Productivity Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

THE BUSINESS CYCLE Copyright © 2011 by Nelson Education Limited Page 24 Exhibit 2.4 Ask the students to explain the two key phases of the business cycle: contraction and expansion Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

LO6 Managing the Economy Through Fiscal and Monetary Policy The goal is controlled, sustained growth through both fiscal and monetary policy Pages 25-26 Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

MANAGING THE ECONOMY Fiscal Policy Monetary Policy Taxation and spending decisions influence the economy These decisions are designed to encourage growth, boost employment and curb inflation Monetary Policy Actions that shape the economy by influencing interest rates and the supply of money Controlled by the Bank of Canada Pages 25-26 Discuss fiscal policy as it relates to political philosophy. Discuss budget surplus, budget deficit and federal debt. Click on the icon to reference the Canada’s National Debt Clock to see in real numbers how the debt is growing. Discuss the role of the Bank of Canada Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

FEDERAL GOVERNMENT REVENUE AND EXPENSES 2007-8 Page 26 Exhibit 2.5 Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

MONEY SUPPLY: M1 AND M2 M1 Money Supply - all currency—paper bills and metal coins—plus checking accounts and traveler’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) Page 26 Money Supply: is the total amount of money within the overall economy. The Bank of Canada helps to guide the economy by influencing the size of the money supply. Can you explain how The Bank of Canada attempts to control inflation rates by controlling the money supply? Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

BANKS MULTIPLYING MONEY The bank must hold 2% of your deposit based on requirements by the Bank of Canada. You deposit $5,000 The bank loans Ayesha $4,900 Ayesha buys a car from Mohamed for $4,900 Mohamed deposits the $4,900 Page 27 Although you still have $5,000, the money supply has increased to $9,900. Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

THE BANK OF CANADA In addition to managing Canada’s monetary policy, the Bank of Canada: Provides banking services for other banks and the government Coordinates the check clearing process Maintains the federal government’s chequing account Keeps the currency supply in good condition Page 27 Who is the current Bank of Canada Governor? Explain the importance of the CDIC (SADC) as it relates to the banking system. When and why was the CDIC created? Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

GOVERNMENT’S ROLE? “ For a free market to function humanely, it must find a way to provide a decent standard of living for everyone, including the desperately poor, the very young, the very old, and the sick. What do you think? “ Copyright © 2011 by Nelson Education Limited Copyright © 2011 by Nelson Education Limited

LOOKING BACK 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 the economy measured? How does fiscal and monetary policy impact the economy? Copyright © 2011 by Nelson Education Limited