Economic Challenges Facing Contemporary Business 3 Chapter 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. Start this chapter off with a discussion of current national and local economic data, including the unemployment rate, GDP growth, inflation, and personal income growth at an introductory level.

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 How the economy works has an impact on individuals and businesses. Government decisions about the operation of the country’s economy affect individuals and businesses. In a global economy, individual and business decisions may actually have international effects.

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 Both microeconomics and macroeconomics provide a different view of the economy. Microeconomics is focused on a smaller scale – individuals, families, and businesses. Lecture Enhancer: How do microeconomic issues impact macroeconomics?

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 and supply are at the heart of economic decisions. Economics is a balance between what we want and what we can pay. Demand is driven by factors that affect how people decide to spend their money. Class Activity: Lead a class discussion to obtain student examples of products that have experienced recent sharp increases or decreases in demand and consider why these changes may have occurred.

Demand Curve A graph of the amount of a product that buyers will purchase at different prices In general, when the price of a good or service goes up, people buy smaller amounts. In other words, as price rises, the quantity demanded declines. At lower prices, consumers are generally willing to buy more of a good. It is important to note the difference between changes in the quantity demanded at various levels and a change in overall demand. A change in overall demand shifts the curve. Demand is affected by customer preferences and incomes, the prices of substitute and complementary items, the number of buyers in a market, and the strength of the buyers’ outlook for the future, and changes in household income. Lecture Enhancer: Which one of these factors has the most significant effect on a demand curve?

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. As price rises, the quantity that sellers are willing to supply also rises. At lower and lower prices, the quantity supplied decreases. Many of the factors of production and other factors can shift the supply curve (e.g., natural resources, capital, human resources, and entrepreneurship) and will have an impact on the degree of products and services a firm will supply. (See Chapter 1 for further detail about factors of production.)

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 Movements along the supply curve are the opposite of movements along the demand curve. While consumers must decide how to spend their money, businesses must decide what products to sell and how. Sellers want to be able to make a profit from what they sell, but they must respond to the demand at different price levels.

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. Shifts and the supply and demand curves are affected by several factors. The factors often change at the same time and keep changing. Multiple factors can force pressure on price and quantities. Students need to understand that the equilibrium price is the current market price for an item. Class Activity: Discuss with students how weather might affect the equilibrium price to buy or “scalp” tickets to see a popular outdoor concert or sports event outside the venue the day of the event.

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) How a country uses its factors of production creates a country’s economic system. Every country’s economic system is different, shaped by policies and choices. There are three categories of economies. It is important to understand these economic systems as business becomes more global. Lecture Enhancer: How might a nation’s cultural practices influence its economic system?

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 The type of competition in an industry is important to note. It dictates the ease of doing business in that industry. Though the Canadian economy is based on capitalism, there are some forms of government intervention in the free market, such as the regulation of monopolies. Lecture Enhancer: How is a business rewarded in the private enterprise system?

Types of Competition The type of competition in an industry and for a company provides important information about prices and how companies compete. The characteristics that are analyzed are the number of competitors, ease of entry into an industry, similarity of goods/services offered by competing firms, and price control. Lecture Enhancer: Share a specific example of each type of competition.

Test Your Knowledge The market structure that is most likely to be regulated is a. pure competition. b. monopolistic competition. c. oligopoly. d. monopoly.

Test Your Knowledge The market structure that is most likely to be regulated is a. pure competition. b. monopolistic competition. c. oligopoly. d. 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 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 Communism 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 government-owned monopolies often suffered from inefficiency The writings of Karl Marx in the mid-1800s formed the basis of communist theory. Many countries adopted communist-like economies but found them problematic (people had less choice in jobs and purchases; governments did not divide resources evenly). Today, communist-like systems only exist in a few countries like North Korea. Lecture Enhancer: What might be a likely downside to contributing and distributing resources according to each person’s needs and abilities?

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 government-owned and -operated companies to privately-held businesses In Canada, health care, education, and electricity generation are run by the government. France has a blend of socialist and free-enterprise policies that has worked for more than 100 years. Discuss the various aspects (market-oriented economy, development of private enterprise, export of goods, influence of Western goods) of the Chinese economy as an example of a mixed economy, and how the former Soviet Union has changed following the collapse of communism. Lecture Enhancer: What are the key societal benefits of a mixed market economy?

Comparison of Alternative Economic Systems The key difference in comparing economic systems is the ownership and management of enterprises and who has the “right to profits.” Also, the rights of employees and worker incentives differentiate the various economic systems and affect individuals’ economic lives.

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 Economic systems should benefit citizens through a stable business environment and sustained growth. There are four defined stages of the business cycle. Discuss the current state of the Canadian economy. Lecture Enhancer: How do we know which phase of the business cycle an economy is in? Class Activity: Survey the class to see how many have purchased more store-brand items at grocery stores or drugstores because of the economic slowdown.

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 Measures of the economy are constantly reported. GDP is a measure of national economic strength and its standard of living. The GDP of the United States remains the highest in the world. Click the link to Statistics Canada to view the Canadian GDP and economic details.

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 More than one factor causes inflation. Inflation is not desired and can prove problematic to an economy, especially for those whose earnings do not keep up with inflation, those who live on fixed incomes, and those who have investments that pay a fixed rate of interest. The core inflation rate does not tell the entire story as it does not include energy and food prices. Although deflation provides consumers with low prices, it also dictates a weak economy. Lecture Enhancer: How does inflation benefit wealthier individuals?

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. The Consumer Price Index provides a running measurement of changes in consumer prices. Click the link to show students the current CPI along with a variety of other economic measures. Class Activity: Ask students which products or services they think have risen and declined the most in the last few years.

Contents of the CPI Market Basket Note the goods that are included in the CPI market basket. Discuss how each individual’s inflation rate could be different due to the needs of their specific 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 Employment dictates the amount of money people have to spend in the economy. People need money to buy goods and services, and need employment to make money. Unemployment is an important measure of economic health. Click on the link to discuss the recent national and provincial employment statistics. Lecture Enhancer: Think of an example of each type of unemployment.

Government uses monetary and fiscal policy to fight unemployment, 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, The Bank of Canada manages Canadian monetary policy. It may use both expansionary or restrictive monetary policies. The Bank uses these policies to respond to economic measures like unemployment and business cycles. Discuss what the Bank of Canada is currently doing to manage the economy. Lecture Enhancer: Why do government spending policies need to be flexible and modifiable?

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. The federal budget is the government’s expenses and revenue for the coming year. It will dictate fiscal policy regarding the spending and taxing efforts by the government to influence the economy. Unlike individuals, the government can spend more money than is available, which drives the national debt through budget deficits. Discuss the issues that Canada has with debt and budget deficits and the debt problems of other countries. Government uses both monetary and fiscal policy to fight unemployment, increase spending, and reduce the duration and severity of economic recession. Lecture Enhancer: Provide an example of a government spending decision that aims to encourage economic growth.

Global Economic Challenges These challenges are growing in importance as economies become more global and countries are more interconnected. No country is an economic island in today’s global economy. Lecture Enhancer: What are some downsides to this type of worldwide economic interdependency?