Chapter 2: ECONOMICS The Framework for Business Prepared by Valerie Miceli, Seneca College

Chapter 2: ECONOMICS

The Framework for Business

Prepared by Valerie Miceli, Seneca College

Copyright © 2011 by Nelson Education Limited 2

LOOKING AHEAD

LO1 Define economics and discuss the impact of economics on business

LO2 Explain and evaluate the free market system and supply and demand

LO3 Explain and evaluate planned market systems


LOOKING AHEAD

LO4 Describe the trend toward mixed market systems

LO5 Discuss key terms and tools to evaluate economic performance

LO6 Analyze the impact of fiscal and monetary policy on the economy


LO1 Why Economics Matters

• Economics represent the flow of resources

• Economics are forces that impact your business and personal life– Better decisions– More money

• The economy is financial and social

• Economics is about choices


MACROECONOMICS VERSUS MICROECONOMICS: SAME SCENE,

DIFFERENT TAKES

• Macroeconomics– Country’s overall

economy• Microeconomics

– Consumers– Families– Businesses


Free Market

Mixed Economies

Capitalism Socialism Communism

Planned Economies

Economic Systems: Different Ways to Allocate Resources


LO2 Capitalism: The Free Market System

• The Free Market:– Private ownership– Economic freedom– Fair competition– Innovation and hard work

• Businesses offer value to:– Customers– Employees– Suppliers


THE FUNDEMENTAL RIGHTS OF CAPITALISM

• The right to own a business and keep after-tax profits

• The right to private property

• The right to free choice

• The right to fair competition


FOUR DEGREES OF COMPETITION

• Pure Competition

• Monopolistic Competition

• Oligopoly

• Monopoly


SUPPLY AND DEMAND: FUNDAMENTALS OF A FREE

MARKET SYSTEM• The foundations of a free market

– How much can we make/sell?– How much will consumers buy?– At what price will consumers buy?

• Interaction of buyers and sellers– Impacts prices– Allows for the entrance of competition


SUPPLY: HOW MUCH TO PRODUCE? CHARGE?

• Supply: the relationship between the price of a good and the quantity sellers are willing and able to offer for sale– Sellers tend to supply a greater

quantity as the price rises• Supply curve: a graph of the

supply relationship– The supply curve slopes upward

to the right showing that quantity supplied increases as price rises


DEMAND: HOW MUCH WILL BUYERS PURCHASE?

• Demand: the relationship between the price of a good and the quantity buyers are willing and can afford to buy– When price falls, consumers

tend to buy more • Demand curve: a graph of

the demand relationship– The demand curve slopes

downward showing that quantity demanded increases as price falls


EQUILIBRIUM PRICE

• Forces of supply and demand drive equilibrium price

• The point where supply and demand intersect

• Equilibrium price is the market price


COST OF AN ICE COLD COKE

• Coke took supply and demand too far....

• …installed thermometers in their vending machines

• Consumers balked at paying more for a cold Coke on a hot day.

• The program was cancelled almost immediately!


LO3 Planned Economies: Socialism and Communism

• Socialism– Government controls key enterprises that

directly affects public welfare: utilities, telecommunications, health care

– Higher taxes are designed to distribute wealth more evenly through society

• Communism– Public ownership of all enterprise– Controlled by a strong central government


LO4 Mixed Economies: The Story of the Future

• Market and planned economies don’t meet all of society’s needs– Under pure market economies, the old, young,

sick and the environment could suffer– Planned economies will not create enough value

• As a market dominant economy, the Canadian government still owns/supports enterprises such as:– Postal service, universities, parks, libraries,

health care, education, defence


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MIXED ECONOMIES

When buying and selling are controlled by

legislation, the first things to be bought and sold are

legislators.

P.J. O’Rourke, political satirist, journalist, writer

As mixed economies become the story of the

future, how much government intervention is

too much?

What industries should be regulated? Why?


Employment LevelEmployment Level

The Business CycleThe Business Cycle

Price LevelsPrice Levels

Gross Domestic ProductGross Domestic Product

ProductivityProductivity

LO5 Evaluating Economic Performance: What’s Working?

http://www.statcan.gc.ca/


THE BUSINESS CYCLE


LO6 Managing the Economy Through Fiscal and

Monetary Policy

The goal is controlled, sustained growth

through both fiscal and monetary policy


MANAGING THE ECONOMY

• Fiscal Policy– Taxation and spending decisions influence the

economy– These decisions are designed to encourage

growth, boost employment and curb inflation

• Monetary Policy– Actions that shape the economy by influencing

interest rates and the supply of money– Controlled by the Bank of Canada

http://www.debtclock.ca/


FEDERAL GOVERNMENT REVENUE AND EXPENSES 2007-8


MONEY SUPPLY: M1 AND M2

M1 Money Supply - allcurrency—paper bills and metalcoins—plus checking accountsand traveler’s checks

M2 Money Supply - allM1 plus most savings accounts,money market accounts, andcertificates of deposit (lowrisk savings vehicles with afixed term)


You deposit $5,000

BANKS MULTIPLYING MONEY

The bank loans Ayesha $4,900

Ayesha buys a car from Mohamed for $4,900

Mohamed deposits the $4,900

Although you still have $5,000, the money supply has increased to $9,900.

The bank must hold 2% of your deposit based on

requirements by the Bank of Canada.


• In addition to managing Canada’s monetary policy, the Bank of Canada:– Provides banking services for other banks and the

government– Coordinates the check clearing process– Maintains the federal government’s chequing account – Keeps the currency supply in good condition

THE BANK OF CANADA


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GOVERNMENT’S ROLE?

For a free market to function humanely, it must find a way to

provide a decent standard of living for everyone, including the desperately poor, the very young, the very old,

and the sick.


• How does the economy impact business?

• What is the free market system and what drives it?

• What are planned economic systems?

• What are mixed economic systems?

• How is the economy measured?

• How does fiscal and monetary policy impact the economy?

LOOKING BACK

Documents

Chapter 2: ECONOMICS The Framework for Business Prepared by Valerie Miceli, Seneca College