SESSION 2SESSION 2

ECONOMIC ECONOMIC CONTEXTCONTEXT

Reading: Karakowsky text, Ch.2 Reading: Karakowsky text, Ch.2

Learning Objectives:By the end of the chapter, you should be able to:

1. Identify the factors of production. 2. Describe different types of global economic systems

according to the means by which they control the factors of production through input and output markets.

3. Show how demand and supply affect resource distribution in Canada.

4. Identify the elements of private enterprise and explain the various degrees of competition in the Canadian

economic system. 5. Define key indicators of economic stability and economic

growth.

Opportunities and Challenges in the Mobile Phone Market

What is the economic environment of business?

The Idea of Business & Profit

What is:Business

Profit

Non-profit

Factors of ProductionBusinesses make economic choices based on

their needs for the five factors of production

1. Natural resources - land and raw materials2. Labour - workers3. Capital - buildings, machinery, tools

and equipment4. Information resources - knowledge workers with

specialized education, skills

and experience5. Entrepreneurs - individuals who start up

businesses

How does Tim Horton’s utilize the five factors of production?

Factors of Production:

Examples at Tim Horton’s How used?

Natural resources LandCoffee beansSugarMilk

to operate businessto make coffeeto make donutsto make other products

Labour Workers in franchiseWorkers at corporate head

office

store manager, cashier, coffee maker, donut maker, cleanerexecutives, marketing managers, finance managers, other administrative staff

Capital BuildingsMachines Tools

to run the fast food restaurant franchisescooking equipment: to cook donuts, make coffee, etccomputers and calculators: to keep track of revenues and expenses

Knowledge Specialized skills individuals who understand the complexities of the coffee-bean trade, growing coffee etc

Entrepreneur Franchise Owner Tim Horton is the original founder, but you can own and operate a franchise

Economic Systems

What is an economic system?

Types of Economic Systems:

1) Command/communism

2) Socialism

3) Market economy• Input and output markets

4) Mixed economy

1) CommunismCommunism exists when the

government owns all the country’s resources and makes economic decisions centrally.

2) SocialismSocialism is an economic system

whereby the government has large ownership or control of its major industries essential to the country’s economy.

3) Market Economy

Private enterprise typically has four elements:

• Private property• Freedom of choice• Profits • Competition

4) Mixed EconomyAn economy that uses more than

one economic system.Eg. Canada

The Laws of Supply and Demand

Demandis the result of the decisions from

buyers on whether or not to purchase a good or service.

Supplyis the result of the decisions of

sellers whether to produce and offer a good or service for sale.

The Laws of Supply and DemandThe law of supply and demand

states that more of a good will be demanded (by society) as the price drops, and more of a good will be supplied (by producers) as the price rises.

Competition and the economyTypes of Competition:

1) Perfect (or Pure) competition

2) Monopolistic competition

3) Oligopoly

4) Monopoly

Competition and the economyTypes of Competition:

1) Perfect (or Pure) competition

large number of buyers and sellers acting independently

product or service is undifferentiated

the market determines the price (a price taker)

low barriers to entry

Competition and the economyTypes of Competition:

2) Monopolistic competition

Fewer companies compared to pure competition compete with each other but still as many buyers

products and services are differentiated at least in a small way

market sets the price (a price taker)

Competition and the economyTypes of Competition:

3) Oligopoly

when only a few competitors dominate an industry

high barriers of entry a price setter

Competition and the economyTypes of Competition:

4) Monopoly

- a monopoly occurs when there is only one producer in a given market

- no substitute products exist

- the company is able to determine the selling price (a price setter)

- significant barriers to entry

Competition and the economyTypes of Competition:

Types of Competition

Barriers of

Entry

Number of Sellers Is the Firm a PriceSetter?

Product Differentiation

Size of

Firms

Perfect (or Pure)

None Many(Very competitive)

No None Small

Monopolistic Low Many (Very competitive)

No Small differentiation

Small

Oligopoly High Few (Somewhat

competitive)

Yes Some differentiation

Large

Monopoly No entry is

achievabl

e.

One (No competition)

Yes None Large

Economic Stability and Economic Growth:1) The Business Cycle2) Aggregate output, GDP, GNP3) Productivity4) The Balance of Trade & the National Debt5) Inflation/deflation6) Unemployment

ECONOMIC INDICATORS

1) The Business Cycle2) Aggregate output, GDP, GNP3) Productivity4) The Balance of Trade & the National

Debt5) Inflation/deflation6) Unemployment

THE ECONOMIC ENVIRONMENT

In broad terms, the economic environment refers to the conditions of the economic system in which an organization operations.

Let’s now look at the indicators of those “conditions”….

1. The Business Cycle

1. Expansionary

2. Peak

3. Contraction

4. Trough

5. Recovery

2. GDP, GNP & Purchasing Power Parity

Aggregate output & standard of living

Gross domestic product (GDP)

Gross national product (GNP)

3. Productivity

“A measure of economic growth that compares how much a system produces with the resources needed to produce it.”

4. Balance of Trade & National Debt

The balance of trade

The national debt

A budget deficit

5) Inflation/deflation

What is inflation?

How to measure inflation?Consumer Price Index (CPI)

What is deflation?

6) UnemploymentWhat is unemployment?

Types of unemployment:Frictional UnemploymentStructural UnemploymentCyclical UnemploymentSeasonal Unemployment

SUMMARY CHAPTER 2 ECONOMIC CONTEXTSUMMARY CHAPTER 2 ECONOMIC CONTEXT

1. Identify the factors of production.2. Describe different types of global economic

systems according to the means by which they control the factors of production through input and output markets.

3. Show how demand and supply affect resource distribution in Canada.

4. Identify the elements of private enterprise and explain the various degrees of competition in the Canadian economic system.

5. Define key indicators of economic stability and economic growth.