Chapter 1 Copyright © 2011 by Nelson Education Ltd. 1 Understanding Evolving Economic Systems and Competition Understanding Evolving Economic Systems and Competition Prepared by Norm Althouse University of Calgary Prepared by Norm Althouse University of Calgary

Chapter 1 LEARNING OUTCOMES Copyright © 2011 by Nelson Education Ltd. 2 1 Understand the primary features of the world’s economic systems. 2 Explain what economics is and how the three sectors of the economy are linked. 3 Show how economic growth, full employment, and price stability indicate a nation’s economic health. 4 Define inflation, and discuss how is it measured and what causes it. 5 Describe how the Bank of Canada uses monetary policy, and how governments use fiscal policy to achieve their macroeconomic goals. 6 Discuss the basic microeconomic concepts of demand and supply, and how they establish prices. 7 Explain the four types of market structure. 8 List some of the trends that are reshaping micro- and macroeconomic environments.

Chapter 1 Economics Copyright © 2011 by Nelson Education Ltd. 3 How choices made by governments and their agencies affect prices, the distribution of factors of production, employment, standard of living, etc. How choices made by governments and their agencies affect prices, the distribution of factors of production, employment, standard of living, etc. Economics An economic system is the combination of policies, laws, and choices made by a nation’s government to establish the systems that determine what goods and services are produced and how they are allocated.

Chapter 1 Factors of Production Copyright © 2011 by Nelson Education Ltd. 4 knowledge entrepreneurship capital labour natural resources Resources used to create goods and services Resources used to create goods and services

Chapter 1 Economic Systems 5 Copyright © 2011 by Nelson Education Ltd. Primary Economic Systems Primary Economic Systems Market Economies Command Economies Socialism Mixed Economies Primary difference is how they manage the factors of production Primary difference is how they manage the factors of production

Chapter 1 HOW BUSINESS AND ECONOMIES WORK Copyright © 2011 by Nelson Education Ltd. 6 Macroeconomics is the study of the economy as a whole. Macroeconomics is the study of the economy as a whole. Microeconomics focuses on individual parts of the economy. Microeconomics focuses on individual parts of the economy. Economics is the study of how a society uses scarce resources to produce and distribute goods and services. Microscope = small, magnified view

Chapter 1 Economics as a circular flow Copyright © 2011 by Nelson Education Ltd.7

Chapter 1 MACROECONOMICS: THE BIG PICTURE Copyright © 2011 by Nelson Education Ltd. 8 Price Stability Full Employment Economic Growth Macroeconomics Has 3 Main Goals Macroeconomics Has 3 Main Goals

Chapter 1 Economic Growth Copyright © 2011 by Nelson Education Ltd. 9 An increase in a nation’s output of goods and services is economic growth. The more a nation produces, the higher its standard of living. Drawbacks of Economic Growth Pollution Strain on public facilities Drawbacks of Economic Growth Pollution Strain on public facilities GDP: The total market value of final goods and services produced within a nation’s border. GNP: Measures what is produced by a nation regardless of where the factors of production are. = Fort McMurray!

Chapter 1 Business Cycles Copyright © 2011 by Nelson Education Ltd. 10 Output Income Employment Prices Recession: A decline in GDP over two consecutive quarters An increase in business activity results in a rise in: Eventually these all peak and decline Eventually these all peak and decline

Chapter 1 Boom and bust economic cycles Copyright © 2011 by Nelson Education Ltd.11 Time GDP growth rate recession boom bust +ve -ve

Chapter 1 Not always a smooth ride Copyright © 2011 by Nelson Education Ltd.12

Chapter Recession in Canada Copyright © 2011 by Nelson Education Ltd.13

Chapter 1 Keeping People on the Job Copyright © 2011 by Nelson Education Ltd. 14 Types of Unemployment Frictional Structural Cyclical Seasonal

Chapter 1 Keeping Prices Steady Copyright © 2011 by Nelson Education Ltd. 15 Demand for goods and services is greater than the supply Demand for goods and services is greater than the supply Demand-Pull Inflation Increases in production costs push up prices Cost-Push Inflation The average of all prices of goods and services is rising The average of all prices of goods and services is rising Inflation

Chapter 1 How Inflation is Measured Copyright © 2011 by Nelson Education Ltd. 16 Index of prices of a “market basket” of goods/services purchased by consumers Consumer Price Index (CPI) Prices paid by producers for raw materials, partially finished goods, and finished products Producer Price Index (PPI)

Chapter 1 ACHIEVING MACROECONOMIC GOALS 17 Copyright © 2011 by Nelson Education Ltd. Contractionary Policy Expansionary Policy Monetary Policy SpendingSpendingTaxationTaxation Fiscal Policy

Chapter 1 Governments’ other roles Copyright © 2011 by Nelson Education Ltd. 18 Governments’ other roles in the economy Governments’ other roles in the economy Provider of Essential Services Taxation Agent Provider of Incentives Competitor Customer Regulator

Chapter 1 Microeconomics Copyright © 2011 by Nelson Education Ltd.19 microeconomics is concerned with how prices and quantities of goods and services behave in the marketplace – the study of the economic activities of individuals, households, businesses and industries.

Chapter 1 Demand curve Copyright © 2011 by Nelson Education Ltd.20 Demand Curve: a graph showing the quantity of a good or service that can be sold at various prices

Chapter 1 The Demand Curve can Shift Copyright © 2011 by Nelson Education Ltd.21 Causes of Demand Change: change in customer demand changes in fashion or taste change in price of related products expectations about future prices change in number of buyers

Chapter 1 The demand curve can move in either direction Copyright © 2011 by Nelson Education Ltd.22

Chapter 1 Supply Curve Copyright © 2011 by Nelson Education Ltd.23 Supply Curve: a graph showing the quantity of a good or service that a business will provide at various prices

Chapter 1 Copyright © 2011 by Nelson Education Ltd.24 The Supply Curve can Shift Causes of Supply Change: new technology change in price of resources change in price of related products change in number of producers change in taxes

Chapter 1 25 Copyright © 2011 by Nelson Education Ltd. Equilibrium The quantity of a good or service demanded equals the quantity supplied

Chapter 1 26 Copyright © 2011 by Nelson Education Ltd. Elastic vs inelastic demand Price Quantity the market demands Elastic demand curve – demand increases/decreases quickly as price drops/increases Inelastic demand curve – demand does not change much when price changes

Chapter 1 27 Copyright © 2011 by Nelson Education Ltd. Elastic vs inelastic supply Price Quantity the market supplies Elastic supply curve – supply increases/decreases quickly as price increases/drops Inelastic supply curve – supply does not change much when price changes

Chapter 1 28 Copyright © 2011 by Nelson Education Ltd. Implosive and explosive cobwebs Price Quantity Supply curve for hogs Demand curve for pork An imploding cobweb!

Chapter 1 29 Copyright © 2011 by Nelson Education Ltd. Implosive and explosive cobwebs Price Quantity Supply curve for hogs Demand curve for pork An exploding cobweb!

Chapter 1 30 Copyright © 2011 by Nelson Education Ltd. Forecasting demand – consumer durables Consumer durables aka “white goods” = fridges and stoves Some cyclical demand – each new house = one new fridge But core demand = lifetime of a fridge 13 year life = 1/13 th replaced each year Penetration rate - % of households with a fridge. Also, # of fridges per household Hard to postpone replacement = no recession will last forever

Chapter 1 31 Copyright © 2011 by Nelson Education Ltd. Goods that we tend to buy more than one of a year Band-aids; washing-up liquid; beer; Mars bars; sun-screen Demand = # of consumers x consumption per consumer per year What is the maximum # of Mars bars you can eat in a year? Forecasting demand – consumables

Chapter 1 Competing in a Free Market Copyright © 2011 by Nelson Education Ltd. 32 Four Types of Market Structures OligopolyOligopoly Perfect Competition MonopolisticCompetitionMonopolisticCompetition Pure Monopoly

Chapter 1 Types of market structures Copyright © 2011 by Nelson Education Ltd.33

Chapter 1 TRENDS IN ECONOMIC SYSTEMS Copyright © 2011 by Nelson Education Ltd. 34 Meeting Competitive Challenges Competitive Workforces Entrepreneurial Spirit Spreads Macroeconomic And Microeconomic Trends Macroeconomic And Microeconomic Trends Demographic Distortions The size of the last recession