1. Chapter 2 How Economic Issues Affect Business © 2010 McGraw-Hill Ryerson Limited Slides by Professor Tim Richardson of the School of Marketing and eBusiness, Seneca College and the Dept. of Management, University of Toronto (UTSC)

2. Chapter 2 Slide 2 Learning Objectives 1.Capitalism and free markets – supply, demand, and equilibrium 2.Socialism: negatives and positives 3.Understand communism 4.Canada’s “mixed” economic system 5.Economic indicators, productivity, and the business cycle

3. Chapter 2 Slide 3 How Economic Conditions Affect Business If you want to understand the underlying situation and conditions in which Canadian businesses operate, it is essential that you: have some grasp of economics, be aware of the impact of the global environment, and understand the role of the federal and provincial governments in Canada.

4. Chapter 2 Slide 4 Economics There are two major branches of economics: Macroeconomics looks at the operation of a nation’s economy as a whole. Microeconomics looks at the behaviour of people and organizations in particular markets. Example: Macroeconomics looks at how many jobs exist in the whole economy; microeconomics examines how many people will be hired in a particular industry or in a particular region of the country.

5. Chapter 2 Slide 5 Economic Links to Business “Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.” (p. 44 of text) these resources (land, labour, capital goods, entrepreneurship, and knowledge) are called factors of production.

6. Chapter 2 Slide 6 The Wealth of Nations in 1776 defined capitalism as a system of rights and freedoms: He believed that people will work hard if they have incentives for doing so—that is, if they know that they will be rewarded. Economic Theory of Wealth Creation: Adam Smith

7. Chapter 2 Slide 7 Economic Theory of Wealth Creation: Adam Smith The Wealth of Nations – Right to Make a Profit – Right to Private Property – Right to Buy or Sell – Freedom to Compete – Freedom from Government Interference

8. Chapter 2 Slide 8 Capitalism Today Giving back Today, more businesspeople are becoming concerned about social issues and their obligation to return to society some of what they’ve earned.

9. Chapter 2 Slide 9 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

10. Chapter 2 Slide 10 Different 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 the results of that production. Socialism: some free market and some government allocation. Most countries have a mixed economy.

11. Chapter 2 Slide 11 Capitalism Defined an economic system in which all or most of the factors of production and distribution (e.g., land, factories, railroads, stores) are privately owned (not owned by the government) and are operated for profit. Capitalism is the popular term used to describe free-market economies.

12. Chapter 2 Slide 12 Capitalism: Free-market Economies The free market is one in which decisions about what to produce and in what quantities are made by the market. —that is, by buyers and sellers negotiating prices for goods and services. No country is purely capitalist; no market is truly free.

13. Chapter 2 Slide 13 The Foundations of Capitalism How a free market works - Many buyers and sellers trading freely determine the prices at which they will exchange goods and services. How prices are determined - The constant interplay between supply and demand determines an equilibrium price at which a transaction will occur.

14. Chapter 2 Slide 14 The Foundations of Socialism Socialism is an economic system based on the premise that some, if not most, basic businesses, such as steel mills, coal mines, and utilities, should be owned by the government so that the profits can be evenly distributed among the people.

15. Chapter 2 Slide 15 The Foundations of Communism Communism is an economic and political system in which the state (the government) makes almost all economic decisions and owns almost all of the major factors of production. Communism affects personal choices more than socialism does. Some communist countries have not allowed their citizens to practise certain religions, change jobs, or move to the town of their choice.

16. Chapter 2 Slide 16 Recent Economic Trends Canada: We have a mixed economy, as the government has always played a major role in the Canadian 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.

17. Chapter 2 Slide 17 Recent Economic Trends Socialism and communism, for their part, haven’t always created enough jobs or wealth to keep economies growing quickly enough. As a consequence, communist governments are disappearing and socialist governments have been cutting back on social programs and lowering taxes for businesses and workers.

18. Chapter 2 Slide 18 The Economic Concept of Supply and Demand Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Generally speaking, the amount supplied will increase as the price increases because sellers can make more money with a higher price.

19. Chapter 2 Slide 19 Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. Generally speaking, the quantity demanded will increase as the price decreases. The Economic Concept of Supply and Demand

20. Chapter 2 Slide 20 The place where quantity demanded and supplied meet is called the equilibrium point. The Economic Concept of Supply and Demand: The Equilibrium Point

21. Chapter 2 Slide 21 Market price, then, is determined by supply and demand. The Economic Concept of Supply and Demand In the long run, that price would become the market price.

22. Chapter 2 Slide 22 Competition Within Free Markets Four different degrees of competition exist: (1) perfect competition (2) monopolistic competition (3) oligopoly (4) monopoly

23. Chapter 2 Slide 23 Sellers One Many Monopoly Oligopoly MonopolisticCompetition Perfect Competition Competition Within Free Markets

24. Chapter 2 Slide 24 Competition Within Free Markets Perfect competition exists when there are many sellers in a market and no seller is large enough to dictate the price of a product.

25. Chapter 2 Slide 25 Competition Within Free Markets Monopolistic competition exists when a large number of sellers produce products that are very similar but are perceived by buyers as different.

26. Chapter 2 Slide 26 Competition Within Free Markets An oligopoly occurs when a few sellers dominate a market. Oligopolies exist in industries that produce products in the areas of oil and gas, tobacco, automobiles, aluminum, and aircraft.

27. Chapter 2 Slide 27 Competition Within Free Markets Oligopoly: One reason some industries remain in the hands of a few sellers is that the initial investment required to enter the business is tremendous – like the airline industry.

28. Chapter 2 Slide 28 Competition Within Free Markets A monopoly occurs when there is only one seller for a good or service, and that one seller controls the total supply of a product and the price. Traditionally, monopolies were common in areas such as water, electricity, and telephone services that were considered essential services.

29. The Canadian Economy Key Economic Indicators GDP: gross domestic product Unemployment rate Housing starts Commodity prices Stock markets Price indexes: Consumer Price Index (CPI), Producer Price Index (PPI) Another important statistic is the increase or decrease in productivity.

30. Chapter 2 Slide 30 Economics and Business Gross Domestic Product (GDP): the total goods and services produced by the economy. This is how we measure how well the economy is doing! A major influence on the growth of GDP is how productive the workforce is —that is, how much output workers create with a given amount of input.

31. The Canadian Economy Standard of living refers to the amount of goods and services people can buy with the money they have. Quality of life refers to the general well-being of a society in terms of political freedom, a clean natural environment, education, health care, safety, free time, and everything else that leads to satisfaction and joy.

32. Productivity in Canada Productivity is measured by dividing the total output of goods and services of a given period by the total hours of labour required to produce them. An increase in productivity means that a worker can produce more goods and services in the same period of time than before, usually through the use of machinery or other equipment.

33. Productivity in Canada Productivity and technology Productivity has gone up in recent years because computers and other technology have made the process of production faster and easier for many workers. The higher productivity is, the lower costs are in producing products, and the lower prices can be. Since Canada is a service economy, productivity is an issue because firms are so labour-intensive.

34. Productivity in Canada

35. Unemployment Types of unemployment Frictional unemployment refers to those people who have quit work because they didn’t like the job, the boss, or the working conditions, and who haven’t yet found a new job. Structural unemployment refers to unemployment caused by the restructuring of firms.

36. Unemployment Types of unemployment Cyclical unemployment occurs because of a recession or a similar downturn in the business cycle. Seasonal unemployment Occurs when demand varies during the year.

37. Canadian Unemployment

38. Chapter 2 Slide 38 Inflation and the CPI Consumer Price Index (CPI) is the index economists use to measure the effects of inflation. Inflation refers to a general rise in the prices of goods and services over time. Disinflation describes a condition where price increases are slowing (i.e., the inflation rate is declining). Deflation means that prices are actually declining.

39. Chapter 2 Slide 39 The Business Cycle Business cycles (also known as economic cycles) are the periodic rises and falls that occur in economies over time. An economic boom is just what it sounds like— business is booming. Recession is two or more consecutive quarters of decline in the GDP. A depression is a severe recession usually accompanied by deflation.

40. Chapter 2 Slide 40 Chapter Summary 1.Capitalism and free markets – supply, demand, and equilibrium – In capitalist countries, businesspeople decide what to produce, how much to pay workers, and how much to charge for goods and services. 2.Socialism: negatives and positives – Socialism creates more social equity, but socialist economies tend to have a higher unemployment rate and a slower growth rate than capitalist economies.

41. Chapter 2 Slide 41 Chapter Summary 3.Understand communism – Communism is more restrictive when it comes to personal freedoms. 4.Canada’s “mixed” economic system – A mixed economy has most of the benefits of wealth creation that free markets bring plus the benefits of greater social equality and concern for the environment that socialism offers. 5.Economic indicators, productivity, and the business cycle