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BUS106 wk2 ch2 how economic issues affect business


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BUS106 How Economic Issues Affect Business - from UNDERSTANDING CANADIAN BUSINESS, 7th Canadian Edition (custom publication for Seneca) ; published by McGraw-Hill

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BUS106 wk2 ch2 how economic issues affect business

  1. 1. Week 2 Chapter 2 – How Economic Issues Affect Business
  2. 2. Agenda Review of Chapter 1 Ice Breaker Chapter 2 For Next Class
  3. 3. Chapter 1 Review
  4. 4. The Crisis of Capitalism Source:
  5. 5. Learning Objectives Capitalism and free markets • supply, demand, and equilibrium Socialism: negatives and positives Understand communism Canada’s “mixed” economic system Economic indicators, productivity, and the business cycle
  6. 6. 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 understand the role of the federal and provincial governments in Canada
  7. 7. There are two major branches of economics: macroeconomics the operation of a nation’s economy as a whole microeconomics the behaviour of people and organizations in particular markets Image source: 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. E X A M P L E
  8. 8. 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)
  9. 9. What are these resources? Land (natural resources) Labour (workers) Capital (physical assets not money) Entrepreneurs Knowledge factors of production
  10. 10. 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 Interference Image source:
  11. 11. 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. Image source:
  12. 12. Three Economic Systems Capitalism • laissez-faire / little control • free market • goods and services are sold in a free market to those who can pay for them Socialism • socialist or state capitalism • some free market and some government allocation Communism • centrally-planned / highly controlled • gov’t owns and controls resources • the gov’t decides what will be produced and who will consume the results of that production Most countries have a mixed economy
  13. 13. 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.
  14. 14. 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…buyers and sellers negotiating prices for goods and services.
  15. 15. 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.
  16. 16. 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 people.
  17. 17. 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 production. Communism affects personal choices more than socialism does.
  18. 18. 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 economies. USA moving towards more socialist policies as a result of the poor economy (stimulus package, buy American, bailout…)
  19. 19. The Economic Concept of Supply and Demand Supply - quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Figures 2.1 and 2.2 Demand - quantity of products that people are willing to buy at different prices at a specific time.
  20. 20. The place where quantity demanded and supplied meet is called the equilibrium point. Figure 2.3 In the long run, that price would become the market price
  21. 21. 4 Different Degrees of Competition Exists within Free Markets: perfect competition | monopolistic competition | oligopoly | monopoly Source:
  22. 22. Competition Within Free Markets Figure 2.4
  23. 23. Perfect competition exists when there are many sellers in a market and no seller is large enough to dictate the price of a product.
  24. 24. Monopolistic competition exists when a large number of sellers produce products that are very similar but are perceived by buyers as different.
  25. 25. 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.
  26. 26. 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.
  27. 27. 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
  28. 28. 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 much output workers create with a given amount of input.
  29. 29. The Canadian EconomyStandardof living the amount of goods and services people can buy with the money they have. Qualityoflife 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 Image sources:;
  30. 30. Productivity - 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. =
  31. 31. Productivity has gone up in recent years because computers and other technology have made the process of production faster and easier for many workers. higher productivity Since Canada is a service economy, productivity is an issue because firms are so labour-intensive = lower prices = lower costs in producing products
  32. 32. Productivity in Canada
  33. 33. Types of unemployment Frictional - people who have quit work and who haven’t yet found a new job Structural - unemployment caused by the restructuring of firms Cyclical - occurs because of a recession or a similar downturn in the business cycle Seasonal - when demand varies during the year
  34. 34. Canadian Unemployment Rate 2000-2009 Source: 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  35. 35. 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 over time. Inflation • a condition where price increases are slowing (i.e., the inflation rate is declining). Disinflation • prices are actually declining Deflation
  36. 36. 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 downs (peak, recession, trough and recovery) Recession = two or more consecutive quarters of decline in the GDP Depression = a severe recession usually accompanied by deflation
  37. 37. Exercise: Impacts of Recession Is recession always bad for business? Name three types of businesses that would be likely to increase sales during a recession
  38. 38. Chapter Summary 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. Understand communism • 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
  39. 39. 39 Homework
  40. 40. Image source: