Download Economics: The Framework for Business

Chapter 2:
ECONOMICS
The Framework for Business
Prepared by Valerie Miceli, Seneca College
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
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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
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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
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MACROECONOMICS VERSUS
MICROECONOMICS: SAME SCENE,
DIFFERENT TAKES
• Macroeconomics
– Country’s overall
economy
• Microeconomics
– Consumers
– Families
– Businesses
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Economic Systems: Different
Ways to Allocate Resources
Free Market
Planned Economies
Capitalism
Socialism
Communism
Mixed Economies
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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
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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
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FOUR DEGREES
OF COMPETITION
• Pure Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
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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
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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
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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
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EQUILIBRIUM PRICE
• Forces of supply and
demand drive equilibrium
price
• The point where supply and
demand intersect
• Equilibrium price is the
market price
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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!
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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
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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
“
As mixed economies
become the story of the
future, how much
government intervention is
too much?
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
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“
What industries should
be regulated? Why?
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LO5 Evaluating Economic
Performance: What’s Working?
Gross Domestic Product
Employment Level
The Business Cycle
Price Levels
Productivity
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THE BUSINESS CYCLE
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LO6 Managing the Economy Through
Fiscal and
Monetary Policy
The goal is controlled,
sustained growth
through both fiscal and
monetary policy
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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
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FEDERAL GOVERNMENT REVENUE
AND EXPENSES 2007-8
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MONEY SUPPLY: M1 AND M2
M1 Money Supply - all
currency—paper bills and metal
coins—plus checking accounts
and traveler’s checks
M2 Money Supply - all
M1 plus most savings accounts,
money market accounts, and
certificates of deposit (low
risk savings vehicles with a
fixed term)
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BANKS MULTIPLYING
MONEY
The bank must hold 2% of
your deposit based on
You deposit $5,000
requirements by the Bank of
Canada.
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.
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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
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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.
“
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LOOKING BACK
• 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?
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