Chapter 2: How Economic Issues Effect Business - PDF

## Chapter 2: How Economic Issues Effect Business ### Cover The book cover is titled "Understanding Canadian Business," Eleventh Canadian Edition, by Nickels, McHugh, McHugh, Cossa, and Stevens. Prepared by Dr. C. McLarney, Dalhousie University © 2022 McGraw Hill Limited ### Learning Objectives...

## Chapter 2: How Economic Issues Effect Business ### Cover The book cover is titled "Understanding Canadian Business," Eleventh Canadian Edition, by Nickels, McHugh, McHugh, Cossa, and Stevens. Prepared by Dr. C. McLarney, Dalhousie University © 2022 McGraw Hill Limited ### Learning Objectives 1. Describe basic economics. 2. Explain what capitalism is and how free markets work. 3. Explain the benefits and negative consequences of socialism and communism. 4. Describe the mixed economy of Canada. 5. Illustrate the significance of key economic indicators and the business cycle. ### 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. ### 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 behavior of people and organizations in particular markets. ### Resource Development The study of how to increase resources and the creation of the conditions that will make better use of those resources. ### Growth Economics and Adam Smith * *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. ### Understanding Free-Market Capitalism The economic system that has led to wealth creation in much of the world is known as capitalism. Under **capitalism**, all or most of the factors of production and distribution—such as land, factories, railroads, and stores—are owned by individuals (i.e., not owned by the government). ### 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**. ### 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. *The image shows a Farm Boy store with the tagline "It's all about the food." Macroeconomics looks at the operation of a nation's economy as a whole, and microeconomics looks at the behavior of people and organizations in particular markets. Capitalism is the popular term used to describe free-market economies. ### 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. ### 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. ### Equilibrium Point ... place where quantity demanded and supplied meet is called the equilibrium point. This is the price at which a transaction will occur – means world famous Nathan's Hotdogs on Coney Island, New York must sell at a price which is roughly what people are willing to pay, if they charge too much, they'll lose customers The following images illustrate economic concepts on supply and demand: * **Image:** Supply Curve - A graph showing the supply curve, with price on the y-axis and quantity of T-shirts on the x-axis. * **Image:** Demand Curve - A graph showing the demand curve, with price on the y-axis and quantity of T-shirts on the x-axis. * **Image:** The Economic Concept of Supply and Demand: The Equilibrium Point - The intersection of the supply and demand curves, marking the equilibrium point. ### Competition Within Free Markets Four different degrees of competition exist: 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly The following image illustrate the perfect competition in the market: *The image is a one way, left to right arrow. From left to right* *One >> Monopoly >> Oligopoly >> Monopolistic Competition >> Many >> Perfect Competition* ### Competition Within Free Markets: Perfect Competition Perfect competition exists when there are many sellers in a market and no seller is large enough to dictate the price of a product. Perfect competition is what would exist at a flea market, or an ethnic community where everybody is a small player and nobody dominates. ### Competition Within Free Markets: Oligopoly 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. Oligopolies in Canada also exist in the banking sector where we have a few big players, and no small banks. * 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. ### Competition Within Free Markets: Monopoly 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. ### Understanding Free-Market Capitalism Under capitalism, all or most of the factors of production and distribution—such as land, factories, railroads, and stores—are owned by individuals (i.e., not owned by the government). They are operated for profit, and business people, not government officials, decide what to produce and how much, what to charge, and how much to pay workers. ### Understanding 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. Communists once held power in many nations around the world, is slowly disappearing as an economic form with North Korea and Cuba as one of the few countries still communist. ### Understanding 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 profits can be evenly distributed among the people. ### Canada's Mixed Economy Like most other nations of the world, Canada has a mixed economy. The degree of government involvement in the economy today—in areas such as health care, education, and business regulation, just to name a few—is a matter of some debate. ### 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. ### 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. ### The Canadian Economy, pt. 2 **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. ### 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. ### Productivity in Canada, pt. 2 * 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. ### Unemployment | Type | Description | | :------------------------ | :------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | | Frictional 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. It also refers to those people who are entering the labour force for the first time (e.g., new graduates) or are returning to the labour force after significant time away (e.g., parents who reared children). | | Structural unemployment | Structural unemployment refers to unemployment caused by the restructuring of firms. | | Cyclical unemployment | Cyclical unemployment occurs because of a recession or a similar downturn in the business cycle. | | Seasonal unemployment | Seasonal unemployment occurs when demand varies during the year. | ### Unemployment rate graph * The unemployment rate in Canada between 1989 and 2019 is graphically presented, sourced from Statistics Canada.* ### 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. ### 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. ### The Business Cycle, pt. 2 *The image shows a chart of a business cycle. The cycle depicts a sinusoidal curve, with labeled phases including Boom, Recession, Depression, and Recovery. A straight line trending upwards is also shown, representing potential economic growth over the same period.* ### Chapter Summary 1. **Economics** * the study of how society chooses to employ resources to produce goods and services and distribute them for consumption * two major branches: * macroeconomics studies the operation of a nation's economy as a whole * microeconomics studies the behaviour of people and organizations in particular markets 2. **Capitalism and free markets** * Capitalism is an economic system in which all or most of the means of production and distribution are privately owned and operated for profit. * The free market is one in which decisions about what to produce and in what quantities are made by the market 3. **Socialism and communism** * socialism based on the premise that some businesses should be owned by the government. * communism, the government owns almost all major production facilities and dictates what gets produced and by whom. 4. **Canada's "mixed" economic system** * part capitalist and part socialist, some businesses are privately owned, but taxes tend to be high to distribute income more evenly among the population 5. **Economic indicators and the business cycle** * GDP, unemployment, inflation, productivity * business cycle: boom, recession, depression, recovery