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

2. 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
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3. 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
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4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.
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Copyright © 2011 by Nelson Education Limited

14. 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
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Copyright © 2011 by Nelson Education Limited

15. 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

16. 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

17. 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

18. 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

19. 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
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Copyright © 2011 by Nelson Education Limited

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

21. 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

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

23. 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

24. 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

25. 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

26. 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

27. 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