Chapter 2 Fall 2008 Bom Economics
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Transcript of Chapter 2 Fall 2008 Bom Economics
Chapter 2
How Economic Issues Affect Business
Economic Links to Business
o Economic concepts are the basis for most major business decisions.
o Both the global economy and the Canadian economy have an effect on Canadian business.
o 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”.
Economic Theory of Wealth Creation: Adam Smith
The Wealth of Nations in 1776 defined Capitalism as a system of rights and freedoms:– Right to Make a Profit– Right to Private Property– Right to Buy or Sell– Freedom to Compete– Freedom from Government Interference
Three Economic Systems
CommunismCommunism
SocialismSocialism
CapitalismCapitalism
(Highly Controlled (Highly Controlled by Governmentby Government))
(Little Control by Government)
MixedMixed
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 that production.
Socialism - some free market and some government allocation.
Most countries have a Mixed Economy
The Foundations of Capitalism
How a free market works - many buyers and sellers trading freely determine 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
Benefits and Limitations of Free-Markets
Inequality of wealth - causes national and world tension.
Greed may compromise ethics. There is a potential for
environmental damage. Limitations push country towards
Socialism = government regulation.
Free-Market Competition
Monopolistic Monopolistic
CompetitionCompetition
OligopolyOligopoly
OneOne
SellersSellers
ManyMany
MonopolyMonopoly Perfect CompetitionPerfect Competition
COMMUNISM
All citizens are supposed to be equal Government controls all business practices
and decides how money is distributed Karl Marx was the father of communism. He
wrote the famous book “The Communist Manifesto”
Supply Curve
Quantity(S)Quantity(S)
HighHigh
HighHighLowLow
Price(P)Price(P)
SS
Demand Curve
Price(P)Price(P)
Quantity(D)Quantity(D)
HighHigh
HighHighLowLow
DD
QuantityQuantity
HighHigh
HighHighLowLow
PricePrice
Equilibrium Point
Market EquilibriumMarket Equilibrium
SS DD
SurplusSurplus
ShortageShortage
Progress Assessment
How do business people know what to produce and in what quantity?
How are prices determined? Describe the four degrees of competition.
What are some of the limitations of free markets?
What are some limitations of free markets?
Recent Economic Trends
Canada - we have a mixed economy, as the government has always played a major role in the economy
Communist countries - they have moved to capitalist forms of economies to improve their standards of living
Socialist countries - they have reduced government’s role in their economies
Canadian Economy
Key Economic Indicators:1. The gross domestic product (GDP) and
the importance of productivity2. The unemployment rate: frictional,
structural cyclical and seasonal3. The price indexes: inflation, disinflation,
deflation, consumer price index (CPI), industrial product price index (IPPI), and raw materials price index (RMPI)
Economics and Business
Strong Economy - Business prospers
Weak Economy - Business declines
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!
Distribution of GDP
Employees get their share of GDP via wages
Employers get their share of GDP via profits
Governments get their share of GDP via taxes
What is a fair “share of the pie” is a source for constant debate - it depends on one’s perspective
Inflation & the Components of the CPIConsumer 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%
Government Intervention
In 1929 the stock market crashed The crash led to a severe, prolonged
Depression The hardship forced governments to
abandon Adam Smith’s “laissez faire” approach to economics
Governments looked for ways to intervene in the economy to alleviate the suffering
The National DebtThe National Debt
Governments adopted Keynesian economics and deficit spending
Governments forgot the second part of Keynesian economics -- they did not pay down the debt in good times
By the 1990s many governments had accumulated large national debts
Canada is currently $600 billion in debt (pop. 37 million = citizen share of debt
is approx. $16 000) The US is currently $9.6 trillion in debt
(pop. 300 million = citizen share of debt is between $31 000-$32 000)
France
Germany
Italy
Canada
Britain
Japan
U.S.
Who Pays the Least Taxes?
0 25 30 35 40 45 50
Total Receipts Alllevels of government
Business Cycles
oRecession
oDepression
oRecovery
oBoom