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Chapter 2 Fall 2008 Bom Economics


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Chapter 2 Fall 2008 Bom Economics

  1. 1. Chapter 2 How Economic Issues Affect Business
  2. 2. Economic Links to Business <ul><li>Economic concepts are the basis for most major business decisions. </li></ul><ul><li>Both the global economy and the Canadian economy have an effect on Canadian business. </li></ul><ul><li>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”. </li></ul>
  3. 3. Economic Theory of Wealth Creation: Adam Smith <ul><li>The Wealth of Nations in 1776 defined Capitalism as a system of rights and freedoms: </li></ul><ul><ul><li>Right to Make a Profit </li></ul></ul><ul><ul><li>Right to Private Property </li></ul></ul><ul><ul><li>Right to Buy or Sell </li></ul></ul><ul><ul><li>Freedom to Compete </li></ul></ul><ul><ul><li>Freedom from Government Interference </li></ul></ul>
  4. 4. Three Economic Systems Communism Socialism Capitalism (Highly Controlled by Government ) (Little Control by Government ) Mixed
  5. 5. Economic Systems <ul><li>Capitalism - individuals seeking profits produce goods and services. </li></ul><ul><ul><li>Goods and services are sold in a free market to those who can pay for them. </li></ul></ul><ul><li>Communism - the government decides what will be produced and who will consume that production. </li></ul><ul><li>Socialism - some free market and some government allocation. </li></ul><ul><li>Most countries have a Mixed Economy </li></ul>
  6. 6. The Foundations of Capitalism <ul><li>How a free market works - many buyers and sellers trading freely determine prices at which they will exchange goods and services </li></ul><ul><li>How prices are determined - the constant interplay between supply and demand determines an equilibrium price at which a transaction will occur </li></ul>
  7. 7. Benefits and Limitations of Free-Markets <ul><li>Inequality of wealth - causes national and world tension. </li></ul><ul><li>Greed may compromise ethics. </li></ul><ul><li>There is a potential for environmental damage. </li></ul><ul><li>Limitations push country towards Socialism = government regulation. </li></ul>
  8. 8. Free-Market Competition Monopolistic Competition Oligopoly One Sellers Many Monopoly Perfect Competition
  9. 9. COMMUNISM <ul><li>All citizens are supposed to be equal </li></ul><ul><li>Government controls all business practices and decides how money is distributed </li></ul><ul><li>Karl Marx was the father of communism. He wrote the famous book “The Communist Manifesto” </li></ul>
  10. 10. Supply Curve Quantity(S) High High Low Price(P) S
  11. 11. Demand Curve Price(P) Quantity(D) High High Low D
  12. 12. Quantity High High Low Price Equilibrium Point Market Equilibrium S D Surplus Shortage
  13. 13. Progress Assessment <ul><li>How do business people know what to produce and in what quantity? </li></ul><ul><li>How are prices determined? </li></ul><ul><li>Describe the four degrees of competition. </li></ul><ul><li>What are some of the limitations of free markets? </li></ul><ul><li>What are some limitations of free markets? </li></ul>
  14. 14. Recent Economic Trends <ul><li>Canada - we have a mixed economy, as the government has always played a major role in the economy </li></ul><ul><li>Communist countries - they have moved to capitalist forms of economies to improve their standards of living </li></ul><ul><li>Socialist countries - they have reduced government’s role in their economies </li></ul>
  15. 15. Canadian Economy <ul><li>Key Economic Indicators: </li></ul><ul><ul><li>The gross domestic product (GDP) and the importance of productivity </li></ul></ul><ul><ul><li>The unemployment rate: frictional, structural cyclical and seasonal </li></ul></ul><ul><ul><li>The price indexes: inflation, disinflation, deflation, consumer price index (CPI), industrial product price index (IPPI), and raw materials price index (RMPI) </li></ul></ul>
  16. 16. Economics and Business <ul><li>Strong Economy - Business prospers </li></ul><ul><li>Weak Economy - Business declines </li></ul><ul><li>Gross Domestic Product (GDP) - this is the total of goods and services produced by the economy. This is how we measure how well the economy is doing! </li></ul>
  17. 17. Distribution of GDP <ul><li>Employees get their share of GDP via wages </li></ul><ul><li>Employers get their share of GDP via profits </li></ul><ul><li>Governments get their share of GDP via taxes </li></ul><ul><li>What is a fair “share of the pie” is a source for constant debate - it depends on one’s perspective </li></ul>
  18. 18. Inflation & the Components of the CPI Consumer Price Index (CPI) is the index economists use to measure the effects of inflation Food 18.5% Housing 38.0% Clothing 5.0% Transportation 21.5% Medical Care 6.5% Entertainment 5.0% Other Goods and Personal Services 5.5%
  19. 19. Government Intervention <ul><li>In 1929 the stock market crashed </li></ul><ul><li>The crash led to a severe, prolonged Depression </li></ul><ul><li>The hardship forced governments to abandon Adam Smith’s “laissez faire” approach to economics </li></ul><ul><li>Governments looked for ways to intervene in the economy to alleviate the suffering </li></ul>
  20. 20. The National Debt <ul><li>Governments adopted Keynesian economics and deficit spending </li></ul><ul><li>Governments forgot the second part of Keynesian economics -- they did not pay down the debt in good times </li></ul><ul><li>By the 1990s many governments had accumulated large national debts </li></ul><ul><li>Canada is currently $600 billion in debt </li></ul><ul><li>(pop. 37 million = citizen share of debt is approx. $16 000) </li></ul><ul><li>The US is currently $9.6 trillion in debt (pop. 300 million = citizen share of debt is between $31 000-$32 000) </li></ul>
  21. 21. Who Pays the Least Taxes? France Germany Italy Canada Britain Japan U.S. 0 25 30 35 40 45 50 Total Receipts All levels of government
  22. 22. Business Cycles <ul><ul><li>Recession </li></ul></ul><ul><ul><li>Depression </li></ul></ul><ul><ul><li>Recovery </li></ul></ul><ul><ul><li>Boom </li></ul></ul>