The Crisis of Capitalism
• supply, demand, and
the business cycle
If you want to understand the underlying situation and conditions
in which Canadian businesses operate, it is essential that you:
have some grasp of
be aware of the impact of
the global environment
understand the role of the
federal and provincial
governments in Canada
There are two major branches of economics:
the operation of a
nation’s economy as a
the behaviour of people
and organizations in
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macroeconomics looks at how
many jobs exist in the whole
microeconomics examines how
many people will be hired in a
particular industry or in a particular
region of the country.
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. 30 of text)
What are these resources?
Economic Theory of Wealth Creation: Adam Smith, in his book “The
Wealth of Nations (1776)” believed that people will work hard if they have
incentives for doing so—that is, if they know that they will be rewarded.
Right to Make a Profit
Right to Private Property
Right to Buy or Sell
Freedom to Compete
Freedom from Government
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Giving back…today, more businesspeople are becoming concerned
about social issues and their obligation to return to society some
of what they’ve earned.
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Three Economic Systems
• laissez-faire / little
• free market
• goods and services
are sold in a free
market to those who
can pay for them
• socialist or state
• some free market and
• centrally-planned /
• gov’t owns and
• the gov’t decides
what will be produced
and who will consume
the results of that
Capitalism - an economic system in which all or most of the
factors of production and distribution are privately owned (not
owned by the government) and are operated for profit.
Capitalism: Free-market Economies
The free market is
one in which
decisions about what
to produce and in
what quantities are
made by the
prices for goods and
The Foundations of Capitalism - Many buyers and sellers trading
freely determine the prices at which they will exchange goods and
services. The constant interplay between supply and demand
determines an equilibrium price at which a transaction will occur.
The Foundations of Socialism - 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 Foundations of Communism - 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
Communism affects personal choices more than socialism does.
Recent Economic Trends
Communist countries: moved to
capitalist forms of economies to
improve their standards of living.
Socialist countries: They have
reduced government’s role in their
USA moving towards more socialist
policies as a result of the poor
economy (stimulus package, buy
The Economic Concept of Supply and Demand
Supply - quantity of
manufacturers or owners
are willing to sell at
different prices at a
Figures 2.1 and 2.2
Demand - quantity of
products that people are
willing to buy at different
prices at a specific time.
The place where quantity demanded and supplied meet is called
the equilibrium point.
In the long run, that price would become the market price
4 Different Degrees of Competition Exists within Free Markets:
perfect competition | monopolistic competition | oligopoly | monopoly
Perfect competition exists when there are many sellers in a market
and no seller is large enough to dictate the price of a product.
Monopolistic competition exists when a large number of sellers
produce products that are very similar but are perceived by buyers
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.
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.
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.
The Canadian Economy - Key Economic Indicators
GDP | Unemployment rate | Housing starts | Commodity prices |
Stock markets | Price indexes: Consumer Price Index (CPI),
Producer Price Index (PPI) | Increase or decrease in productivity
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
create with a
given amount of
The Canadian EconomyStandardof
the amount of goods
and services people
can buy with the
money they have.
the general well-being of
a society in terms of
political freedom, a clean
education, health care,
safety, free time, and
everything else that leads
to satisfaction and joy
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Productivity - measured by dividing the total output of goods and
services of a given period by the total hours of labour required to
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.
Productivity has gone up in recent years because computers and
other technology have made the process of
production faster and easier
for many workers.
Since Canada is a
productivity is an
firms are so
= lower prices
= lower costs in producing
Types of unemployment
Frictional - people who
have quit work and who
haven’t yet found a new job
Structural - unemployment
caused by the restructuring
Cyclical - occurs because of
a recession or a similar
downturn in the business
Seasonal - when demand
varies during the year
Consumer Price Index (CPI) is the index economists use to
measure the effects of inflation.
• a general rise in the prices of goods and services
• a condition where price increases are slowing (i.e.,
the inflation rate is declining).
• prices are actually declining
The business cycle - (also known as economic cycle) is the periodic
rise and fall that occurs in economies over time
Typical pattern of
short-term ups and
Recession = two or
quarters of decline
in the GDP
Depression = a
Exercise: Impacts of Recession
Is recession always bad
Name three types of
businesses that would
be likely to increase
sales during a recession
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.
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.
• Communism is more restrictive when it comes to personal freedoms.
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.
Economic indicators, productivity, and the business cycle