Download Planned economy

Chapter
3
Economic Challenges Facing
Contemporary Business
Learning Objectives
LO 3.1 Distinguish between
microeconomics and macroeconomics.
Explain the factors that drive demand and
supply.
LO 3.2 Describe the four types of market
structures in a private enterprise system,
and compare the three major types of
economic systems.
LO 3.3 Identify and describe the four
stages of the business cycle. Explain how
productivity, price level changes, and
employment levels affect the stability of a
nation’s economy.
LO 3.4 Discuss how monetary policy
and fiscal policy are used to manage
an economy’s performance.
LO 3.5 Describe the major global
economic challenges of the 21st
century.
Economics
The social science that studies the choices people and
governments make when dividing up their scarce
resources
Demand: The willingness and ability of buyers to
purchase goods and services
Supply: The willingness and ability of sellers to
provide goods and services
Test Your Knowledge
Economics is the study of
a. the choices people and governments make
when allocating scarce resources.
b. profit and loss at companies.
c. tax and interest policies.
d. demand and supply.
Test Your Knowledge
Economics is the study of
a. the choices people and governments make
when allocating scarce resources.
b. profit and loss at companies.
c. tax and interest policies.
d. supply and demand.
Answer: A
Microeconomics
The Forces of Demand and Supply
The study of small economic units, such as individual
consumers, families, and businesses
Factors Driving Demand
Demand curve: A graph of the amount of a product that buyers will
purchase at different prices
Driven by variety of factors such as competition, price, larger
economic events, and consumer preferences
Demand Curve
A graph of the amount of a product that buyers will
purchase at different prices
Factors Driving Supply
Factors of production play a central role in the overall
supply of goods and services
A change in the cost or availability of any of these inputs
can shift the entire supply curves and services.
Supply Curve
A graph that shows the relationship between different
prices and the amount of goods that sellers will offer for
sale, regardless of demand
How Demand and Supply Interact
Supply and demand curves meet at the equilibrium price.
Buyers and sellers make choices that restore the
equilibrium price.
Changes affect both demand and supply.
Macroeconomics
Issues for the Entire Society
Political, social, and legal conditions differ in
every country.
Economies generally classified in one of three
categories:
Private enterprise system (capitalism or market
economy)
Planned economies: socialism, communism
Mixed market economies (combinations of the two)
Capitalism
The Private Enterprise System and
Competition
Businesses meet needs and demands of
consumers and are rewarded through profit.
Government favours a hands-off approach.
Marketplace competition regulates economic life.
Four degrees of competition:
Pure competition
Monopolistic competition
Oligopoly
Monopoly
Types of Competition
Test Your Knowledge
The market structure that is most likely to be
regulated is
a.
b.
c.
d.
pure competition.
monopolistic competition.
oligopoly.
monopoly.
Test Your Knowledge
The market structure that is most likely to be
regulated is
a.
b.
c.
d.
pure competition.
monopolistic competition.
oligopoly.
monopoly.
Answer: D
Planned Economies
Planned economy: An economic system where business ownership, profits,
and resource allocation are shaped by a plan to meet government goals
Socialism
Communism
An economic system where the
government owns and operates
the major industries, such as
communications
Some private ownership of
industry allowed, such as retail
and some manufacturing
An economic system where all
property is shared equally by the
people in a community under the
direction of a strong central
government
Adopted in early 20th century by
many nations, but governmentowned monopolies often suffered
from inefficiency
Mixed Market Economies
Mixed market economy: an economic system
that draws from both private enterprise economies
and planned economies, to different degrees
The mixture of public and private enterprise can
vary widely from country to country.
Privatization: The conversion of governmentowned and -operated companies to privately-held
businesses
Comparison of Alternative
Economic Systems
Evaluating Economic
Performance
An economic system should provide a stable business
environment and sustained growth as benefits for its
citizens.
Business decisions and consumer behaviour differ
at various stages of the business cycle:
Prosperity—Unemployment low, consumer
confidence/purchasing high, businesses expanding
Recession—A cycle of economic contraction that lasts
for six months or longer; consumers careful about
purchases, businesses slow production/expansion
Depression—Extended recession
Recovery—Declining unemployment, increasing
business activity, renewed consumer confidence
Productivity and the Nation’s
Gross Domestic Product
Productivity: The relationship between the number of
units produced and the number of human and other
production inputs needed to produce them
Gross domestic product (GDP): The sum of all
goods and services produced within a country during a
specific time period, such as a year
The Canadian GDP is tracked by Statistics Canada
Test Your Knowledge
If labour hours increase, the use of natural
resources remains the same, and output
remains the same, productivity
a. will increase.
b. will remain the same.
c. will decrease.
d. cannot be determined.
Test Your Knowledge
If labour hours increase, the use of natural
resources remains the same, and output
remains the same, productivity
a. will increase.
b. will remain the same.
c. will decrease.
d. cannot be determined.
Answer: C
Price-Level Changes
Inflation: Rising prices caused by a combination of excessive
consumer demand and higher costs of raw materials, component
parts, human resources, and other factors of production
Core inflation rate: The inflation rate after energy prices and
food prices are removed
Demand-pull inflation: Excessive consumer demand
Cost-push inflation: Increases in costs of the factors of
production
Hyperinflation: An economic situation marked by soaring
prices
Inflation devalues money. People can purchase less with what
they have (decreased purchasing power).
Deflation: The opposite of inflation, occurs when prices continue
to fall
Can cause a weakened economy
Measuring Price-Level Changes
Changing prices are tracked by the Consumer
Price Index (CPI).
A measurement of the monthly average change in
prices of goods and services
Commonly purchased goods and services are
priced to compile the data included in the CPI
“market basket”
See the Bank of Canada site for the CPI from
2000 to present.
Contents of the CPI
Market Basket
Employment Levels


Unemployment rate: The percentage of total
workforce actively seeking work but currently
unemployed
Four types of unemployment:
Statistics Canada Labour
Force Survey
Managing the Economy’s
Performance
Monetary policy: A government plan to increase or
decrease the money supply and to change banking
requirements and interest rates to affect bankers’
willingness to make loans
Expansionary monetary policy: A plan to increase the
money supply to try to decrease the costs of borrowing
Lower interest rates encourage new investments and
increases employment and economic growth.
Restrictive monetary policy: A plan to decrease the money
supply to control rising prices, overexpansion, and concerns
about overly rapid economic growth
The Bank of Canada formulates and implements
monetary policy.
Government uses monetary and fiscal policy to fight unemployment,
Fiscal Policy
Fiscal policy: A plan of government spending and taxation
decisions designed to control inflation, reduce unemployment,
improve the general welfare of citizens, and encourage
economic growth
The federal budget is an annual plan for how the government
will raise and spend money in the coming year. The primary
sources of government funds are taxes, fees, and borrowing.
When the government spends more than the amount of
money it raised, there is a budget deficit. When we borrow
money to cover the deficit, the national debt is increased.
If the government has more money than it spends, there is a
budget surplus.
Global Economic Challenges