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CHAPTER 1
Understanding the
Canadian Business
System
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
Learning Objectives
Define the nature of Canadian business and identify its main
goals
Describe different types of global economic systems
Show how demand and supply affect resource distribution in
Canada
Identify the elements of private enterprise and explain the
various degrees of competition in the Canadian system
Explain the criteria for evaluating the success of an economic
system
Show how the federal government attempts to manage the
Canadian economy
Discuss the current economic picture in Canada
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-2
The Nature of Canadian Business
Businesses produce or sell products
in order to make a profit
Profit
the money left over from revenues after a
firm pays its expenses
motivates individuals to engage in business
activities
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-3
Factors of Production
Capital
Factors of Production
Natural
Resources
-resources used by firms
to create goods & services
Human
Resources
Entrepreneurs
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-4
Types of Economic Systems
Command economies
Communist
Socialist
Market economies
Mixed economies
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-5
The Communist Model
The government
owns the factors of
production and
makes all decisions
regarding
distribution of
resources
Government owns all
industries, including
essential services
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-6
The Socialist Model
The government
owns and operates
all critical
industries such as
utilities & major
institutions
Individuals own
non-critical
businesses
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-7
Market Economy
Distribution of
resources is based on
supply & demand
Ownership of the factors
of production is open to
all who have the ability
and the interest
Buyers and sellers have
freedom of choice
The market is the
mechanism for the
exchange of goods and
services
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-8
Input and Output Markets
Input market
firms buy resources from households
Output market
households buy goods and services from
firms
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-9
Circular Flow in a Market Economy
FIRMS
•Supply products in
output markets
OUTPUT MARKETS
•Goods and Services
•Demand resources
in input markets
INPUT MARKETS:
•Labour
HOUSEHOLDS:
•Demand products in output markets
•Supply products in input markets
•Capital
•Entrepreneurs
•Physical resources
•Information resources
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-10
The Mixed Economy
Mixed economy
a combination of both freedom & government intervention
No country has a pure communist, socialist, or
capitalist system
Eastern European countries are adopting a mixed
economy by privatizing many of their state run
enterprises
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-11
The Many Roles of Government
Competitor
Provider of
Incentives
Regulator
Customer
Taxation Agent
Provider of Essential Services
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-12
Economic Administration
and Regulation
The government manages and
Canadian
regulates business …
Canada Water Act
Textile Labelling Act
Environmental Contaminants Act
Competition Policy
Radio -television
and
Telecommunications
Commission
Tobacco Act
Provincial Boards
Food and Drug Act
Hazardous Products Act
National Energy Board
Canadian Transport Commission
Weights and
Measures
Act
Fisheries Act
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-13
Government as Tax Agent
Revenue taxes
designed to generate cash, including income taxes
Income tax
is paid by individuals and businesses and represents
monies received during a single year
Restrictive taxes
designed to lessen the consumption of “unhealthy”
products, including liquor &d tobacco
They also raise revenue through import duties and
gasoline taxes
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-14
Government Incentives
Government provides aid and assistance to small
businesses and non-profit organizations
Incentives stimulate growth in revenues and
employment
Help
Loans
Training
jobs
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-15
Government Provider of Essential Services
All three levels of
government provide
various services
Highways
Postal service
Money
Military
Information
Sewer & sanitation
Emergency services
Health services
Education
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-16
How Business Influences Government
Business
Lobbyists
Trade
Associations
Advertising
Government
Lobbyists must register to be in accordance
with the Lobbyists Registration Act
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-17
Supply and Demand
Supply and Demand Analysis for Pizzas
$20
18
16
14
Price 12
10
8
6
4
2
Demand Curve
Equilibrium
Price
Supply Curve
and
Quantity
100
500
1000
1500
2000
Quantity
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-18
Dealing with a Shortage
A shortage
drives
prices
up.
Effects of a Shortage on Price
$20
18
16
14 Equilibrium
Price 12 Price B
10
8
6
4
2
100
500
Supply Curve B
Supply Curve A
Equilibrium Price A
Demand Curve
1000
1500
2000
Quantity
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-19
Dealing with a Surplus
A surplus
drives
prices
down
Effects of a Surplus on Price
$20
18
Demand Curve
16
14 Equilibrium
Supply Curve A
Price 12 Price A
10
Supply Curve B
8
6
Equilibrium
4
Price B
2
100
500 1000 1500 2000
Quantity
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-20
Private Enterprise
Private enterprise occurs in a market economy
Under this system individuals
Can own property
Have freedom of choice
Have the freedom to earn profits
Have freedom to compete
Government interference is minimal
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-21
Adam Smith
Argued that the “invisible hand”
would guide the economy to
produce high quality products for
the lowest possible prices
Resources would be distributed to
the benefit of all citizens
Government involvement should
be discouraged
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-22
Freedom of Choice
Freedom to buy products of your own choice
Freedom to “sell” your ability as labour to the
employer of your own choice
Freedom of sellers to choose what to produce
Freedom of employers to hire someone of their
own choosing
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-23
Degrees of Competition
Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-24
Pure Competition
Has many sellers
The product is basically identical
Individual firms have no control over price
The buyer will purchase from the lowest price source
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-25
Monopolistic Competition
Has few to many sellers
The product is seen as unique by
some buyers, but not necessarily all
A differentiated brand provides the
firm with some limited control
over pricing
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-26
Oligopoly
A few large suppliers dominate the market
High barriers to entry
The products are seen as similar; no supplier has
an edge
Each supplier knows what the others are charging
Prices gravitate towards a common “market
price”
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-27
Monopoly
One producer and source
of supply
(electric utility)
Unique Product
The producer has
complete control over
price because there are
no competitors
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-28
Natural Monopoly
A market or industry in which
having only one producer can
sufficiently meet demand
It is the most efficient approach
Electric power utility
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-29
Brief History of Business in Canada
The Early Years
The Factory System and the Industrial
Revolution
The Entrepreneurial Era
The Production Era
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-30
Brief History of Business in Canada
The Sales and Marketing Eras
The Finance Era
The Global Era
The Internet Era
Business Fifth Canadian edition, Griffin, Ebert & Starke
© 2005 Pearson Education Canada Inc.
1-31