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

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 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 class. 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

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 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

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