IntroductiontoBusinessNickels10ce_BasicPPT_Ch02.pptx

Introduction to Business

1. Prepared by Michael Wade, Seneca College CHAPTER 2 How Economic Issues Affect Business

2. Learning Objectives After you have read and studied this chapter, you should be able to: LO1 Describe basic economics. LO2 Explain what capitalism is and how free markets work. LO3 Compare the benefits and negative consequences of socialism and communism. LO4 Describe the mixed economy of Canada. LO5 Illustrate the significance of key economic indicators and the business cycle.

3. LO1 Explain What Capitalism is and How Free Markets Work Economic concepts are the basis for most major business decisions. Both the global economy and the Canadian economy have an effect on Canadian business. Economics is: the study of how society chooses to employ resources (Factors of Production) to produce goods and services and distribute them for consumption among various competing groups and individuals.

4. Branches of Economics Macroeconomics: the part of economic study that looks at the operation of a nation’s economy as a whole. Microeconomics: the part of economic study that looks at the behaviour of people and organizations in particular markets. Resource development: the study of how to increase resources and the creation of conditions to make better use of those resources (e.g., recycling).

5. Growth Economics and Adam Smith Scottish economist Adam Smith, author of The Wealth of Nations , believed freedom was vital to wealth creation. If people could keep the profits they derived from the land or business they owned and worked, the incentive to work harder was powerful. This incentive would then cause the economy to grow and prosper. Smith is considered the father of modern economics.

6. How Businesses Benefit the Community Smith believed that people work for their own self-interest, but in so doing, actually benefit the economy as a whole. The invisible hand: turns self-directed gain into social and economic benefit for all. Smith assumed that as people became wealthier, they would help others in the community who were less fortunate, by providing jobs or goods and services for sale.

7. LO2 Explain What Capitalism is and How Free Markets Work Capitalism: an economic system in which all or most of the factors of production and distribution are privately owned and operated for profit. Free market: one in which decisions about what to produce and in what quantities are made by the market.

8. How Prices Are Determined In a free market, prices are determined by negotiations between buyers and sellers. Supply: the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand: the quantity of products that people are willing to buy at different prices at a specific time. Market Price: the price determined by supply and demand The Equilibrium Point: the quantity demanded and the quantity supplied are equal .

9. Supply Curve at Various Prices

10. Demand Curve at Various Prices

11. The Equilibrium Point

12. Competition Within Free Markets Perfect Competition: the market situation in which there are many sellers in a market and no seller is large enough to dictate the price of a product. Monopolistic Competition: the market situation in which a large number of sellers produce very similar products that buyers nevertheless perceived as different. Oligopoly: a form of competition in which just a few sellers dominate the market. Monopoly: a market in which there is only one seller for a product or service.

13. Free Market Competition

14. Benefits and Limitations of Free Markets Free markets allow open competition among companies. In a free market, companies must provide customers with quality products at fair prices with good service, or risk loosing those customers. Free markets have provided opportunities for poor people to rise above poverty. Free markets have also brought inequality between rich and poor. They have led to greed, which often dictates how managers and owners act-not always in the best interests of their stakeholders.

15. LO3 Compare the Benefits and Negative Consequences of Socialism and Communism Socialism: an economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be evenly distributed among the people. Results are social equality through economic redistribution, generally by the government through taxation However, this may take away incentive to work for more profit due to the high taxation rates, which pay for various government programs.

16. Understanding Communism 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. Shortages may occur as the government has no idea what and how much to produce; people loose the incentive to work hard as the government takes most of their earnings. Today there is a trend to move toward free markets.

17. The Trend Toward Mixed Economies Free-Market Economy (Capitalism): an economy in which the market largely determines what goods and services are produced, who gets them, and how the economy grows. Command Economy (Communism or Socialism): an economy in which the government largely decides which goods and services are produced, who gets them, and how the economy will grow. Mixed Economies: economic systems in which some allocation of resources is made by the market and some by the government.

18. Comparisons of Key Economic Systems Capitalism (Canada) Socialism (Sweden) Communism (North Korea) Mixed Economy (Canada) Social and Economic Goals Private ownership of land and business. Freedom and the pursuit of happiness. Free trade. Emphasis on freedom and the profit motive for economic growth. Public ownership of major businesses. Some private ownership of smaller businesses and shops. Government control of education, health care, utilities, mining, transportation, and media. Very high taxation. Emphasis on equality. Public ownership of all businesses. Government-run education and health care. Emphasis on equality. Many limitations on freedom, including freedom to own businesses, change jobs, buy and sell homes, and assemble to protest government actions. Private ownership of land and business with government regulation. Government control of some institutions (e.g., mail). High taxation for the common welfare. Emphasis on a balance between freedom and equality. Motivation of Workers Much incentive to work efficiently and hard, because profits are retained by owners. Workers are rewarded for high productivity. Capitalist incentives exist in private businesses. Government control of wages in public institutions limits incentives. Very little incentive to work hard or to produce quality products. Incentives are similar to capitalism except in government-owned enterprises, which have few incentives. Control over Markets Complete freedom of trade within and among nations. No government control of markets. Some markets are controlled by the government and some are free. Trade restrictions among nations vary and include some free trade agreements. Total government control over markets except for illegal transactions. Some government control of trade within and among nations (trade protectionism).

19. Comparisons of Key Economic Systems, cont’d Capitalism (Canada) Socialism (Sweden) Communism (North Korea) Mixed Economy (Canada) Choices in the Market A wide variety of products is available. Almost no scarcity or oversupply exists for long because supply and demand control the market. Variety in the marketplace varies considerably from country to country. Choice is directly related to government involvement in markets. Very little choice among competing products. Similar to capitalism, but scarcity and oversupply may be caused by government involvement in the market (e.g., subsidies for farms). Social Freedoms Freedom of speech, press, assembly, religion, job choice, movement, and elections Similar to mixed economy. Government may restrict job choice, movement among countries, and who may attend upper-level schools (i.e., post-secondary institution). Very limited freedom to protest the government, practice religion, or change houses or jobs. Some restriction on freedoms of assembly and speech. Separation of church and state may limit religious practice in schools.

20. LO4 Describe the Mixed Economy of Canada The Canadian government’s goal is to grow the economy but with some social equality for all citizens. Government involvement includes: health care, education, business regulation, telecommunications etc. The US is Canada’s largest trading partner and has a great influence on our government and culture. The government has passed many laws and regulations that help to maintain the integrity of our Canadian culture. Due to pressure to became more competitive, many industries such as the airlines, banking and transportation are being deregulated. Private-sector industries are now competing with government-funded institutions in areas such as health care, education, and security.

21. LO5 Illustrate the Significance of Key Economic Indicators and the Business Cycle Key Economic Indicators: Gross Domestic Product (GDP): the total value of goods and services produced in a country in a given year. Productivity: workers can produce more goods and services than before in the same time period-leading to decreased production costs and therefore lower prices. The Unemployment Rate: the percentage of the labour force that actively seeks work but is unable to find work at a given time. The four types of unemployment include: frictional, structural, cyclical and seasonal.

22. Canadian Unemployment Rate THE UNEMPLOYMENT RATE IN CANADA 1989-2014 Source: Statistics Canada. Table 282-0002 - Labour force survey estimates (LFS), by sex and detailed age group, annual (persons unless otherwise noted), CANSIM (database). (accessed: 2015-03-04); Statistics Canada, Labour Force Survey, http://www.stats.gov.nl.ca/statistics/Labour/PDF/UnempRate.pdf.

23. The Price Indexes Inflation: A general rise in the prices of goods and services. Disinflation: A situation in which price increases are slowing (the inflation rate is declining). Deflation: A situation in which prices are declining . Stagflation: A situation in which the economy is slowing but prices are going up regardless . Consumer Price Index (CPI): A monthly statistic that measures the pace of inflation or deflation . Human Development Index: A measure of a country’s progress that includes wealth, health, and education .

24. The Business Cycle Business cycles (economic cycles): the periodic rises and falls that occur in economies over time. Boom: periods of economic boom bring jobs, growth, and economic prosperity. Recession: two or more consecutive quarters in the decline of the GDP. Depression: A severe recession. The government in Canada uses fiscal and monetary policy to keep the economy stable.

25. The Business Cycle

26. Chapter Summary LO1 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

27. Chapter Summary, cont’d. L02 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 L03 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 .

28. Chapter Summary, cont’d. LO4 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 LO5 Economic indicators and the business cycle GDP, unemployment, inflation, productivity business cycle: boom, recession, depression, recovery