nickels 6e/copyright © 2007 mcgraw-hill ryerson chapter 2 how economic issues affect business
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Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Chapter 2
How Economic Issues Affect Business
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Learning Goals
1. 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.
2. Define socialism and its benefits and negative consequences.
3. Describe communism and the challenges of such a system.
4. Describe the mixed economy of Canada.5. 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
o Economic concepts are the basis for most major business decisions.
o Both global economy and Canadian economy have an effect on Canadian business.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
What is Economics?
o 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
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:
1) Create a biography on Adam Smith for your notes.
2) You must hand in your biography at the end of class.
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
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
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
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
CommunismCommunism
SocialismSocialism
CapitalismCapitalism
(Highly Controlled (Highly Controlled by Governmentby Government))
(Little Control by Government)
MixedMixed
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
Supply Curve
Quantity(S)Quantity(S)
HighHigh
HighHighLowLow
Price(P)Price(P)
SS
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Demand Curve
Price(P)Price(P)
Quantity(D)Quantity(D)
HighHigh
HighHighLowLow
DD
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
QuantityQuantity
HighHigh
HighHighLowLow
PricePrice
Equilibrium Point
Market EquilibriumMarket Equilibrium
SS DD
SurplusSurplus
ShortageShortage
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Free-Market Competition
Monopolistic Monopolistic
CompetitionCompetitionOligopolyOligopoly
OneOne
SellersSellers
ManyMany
MonopolyMonopoly Perfect CompetitionPerfect Competition
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
Canadian Economy
Key Economic Indicators:1. The gross domestic product (GDP) and
the importance of productivity2. The unemployment rate: frictional,
structural cyclical and seasonal3. 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
Business Cycles
oRecession
oDepression
oRecovery
oBoom