Evolving Economic Systems and Competition 1 Chapter © 2004 by Nelson, a division of Thomson Canada Limited.

2 Learning Goals 1.What is an economic system and what economic systems are prevalent in the world today? 2.What is economics, and how are the three sectors of the economy linked? 3.How do economic growth, full employment, and price stability indicate a nation’s economic health? 4.What is inflation, how is it measured, and what causes it?

© 2004 by Nelson, a division of Thomson Canada Limited.3 Learning Goals (cont’d) 5. How does the Bank of Canada and the government use monetary policy and fiscal policy to achieve their macroeconomic goals? 6. What are the basic microeconomic concepts and of demand and supply, and how do they establish prices? 7.What are the four types of market structure? 8.Which trends are reshaping micro- and macroeconomic environments?

© 2004 by Nelson, a division of Thomson Canada Limited.4 Learning Goal 1 What is an economic system and what economic systems are prevalent in the world today?

© 2004 by Nelson, a division of Thomson Canada Limited.5 Economic System: the combination of policies, laws, and choices made by a nation’s government to establish the systems that determine what goods and services are produced and how they are allocated

© 2004 by Nelson, a division of Thomson Canada Limited.6 Types of Economic Systems 1.Market economy (capitalism) 2.Command economy (planned) 3.Socialism 4.Mixed economy

© 2004 by Nelson, a division of Thomson Canada Limited.7 Learning Goal 2 What is economics, and how are the three sectors of the economy linked?

© 2004 by Nelson, a division of Thomson Canada Limited.8 Economics: the study of how a society uses scarce resources to produce and distribute goods and services

© 2004 by Nelson, a division of Thomson Canada Limited.9 Areas in Economics There are two subareas in economics: 1.Macroeconomics –the focus on the economy as a whole 2.Microeconomics –the focus on individual parts of the economy

© 2004 by Nelson, a division of Thomson Canada Limited.10 Economics as a Circular Flow

© 2004 by Nelson, a division of Thomson Canada Limited.11 Learning Goal 3 How do economic growth, full employment, and price stability indicate a nation’s economic health?

© 2004 by Nelson, a division of Thomson Canada Limited.12 Macroeconomics Macroeconomics has three main goals: 1.Economic Growth 2.Full Employment 3.Price Stability

© 2004 by Nelson, a division of Thomson Canada Limited.13 Economic Growth An increase in a nation’s output of goods and services Growth is measured by GDP and GNP Changes in economic activity are called business cycles

© 2004 by Nelson, a division of Thomson Canada Limited.14 Full Employment: when the economy is producing to its maximum sustainable capacity, using labour, technology, land, capital, and other factors of production to their fullest potential

© 2004 by Nelson, a division of Thomson Canada Limited.15 Types of Unemployment Frictional unemployment –short-term not related to the business cycle Structural unemployment –mismatch of skills and available jobs Cyclical unemployment –downturn in the business cycle Seasonal unemployment –specific seasons of the year

© 2004 by Nelson, a division of Thomson Canada Limited.16 Price Stability: keeping prices for goods and services steady as measured by the rate of inflation

© 2004 by Nelson, a division of Thomson Canada Limited.17 Learning Goal 4 What is inflation, how is it measured, and what causes it?

© 2004 by Nelson, a division of Thomson Canada Limited.18 Inflation: Inflation is the rising of prices of goods and services

© 2004 by Nelson, a division of Thomson Canada Limited.19 Types of Inflation 1.Demand-pull inflation –demand for goods and services is greater than supply 2.Cost-push inflation –increase in production costs

© 2004 by Nelson, a division of Thomson Canada Limited.20 Measuring Inflation The rate of inflation is measured by the consumer price index (CPI) – a basket of goods and services measured monthly by Statistics Canada.

© 2004 by Nelson, a division of Thomson Canada Limited.21 Learning Goal 5 How does the Bank of Canada and the government use monetary policy and fiscal policy to achieve their macroeconomic goals?

© 2004 by Nelson, a division of Thomson Canada Limited.22 Achieving Macroeconomic Goals Monetary Policy –Bank of Canada controls the money supply and affecting interest rates Fiscal Policy –Use of government taxation and spending

© 2004 by Nelson, a division of Thomson Canada Limited.23 Learning Goal 6 What are the basic microeconomic concepts of demand and supply, and how do they establish prices?

© 2004 by Nelson, a division of Thomson Canada Limited.24 Microeconomics: microeconomics is concerned with how prices and quantities of goods and services behave in the marketplace

© 2004 by Nelson, a division of Thomson Canada Limited.25 Demand Curve: a graph showing the quantity of a good or service that can be sold at various prices Causes of Demand Change: change in customer demand changes in fashion or taste change in price of related products expectations about future prices change in number of buyers Demand

© 2004 by Nelson, a division of Thomson Canada Limited.26 Demand Curve for Jackets for Snowboarders

© 2004 by Nelson, a division of Thomson Canada Limited.27 Supply Curve: a graph showing the quantity of a good or service that a business will provide at various prices Causes of Supply Change: new technology change in price of resources change in price of related products change in number of producers change in taxes Supply

© 2004 by Nelson, a division of Thomson Canada Limited.28 Supply Curve for Jackets for Snowboarders

© 2004 by Nelson, a division of Thomson Canada Limited.29 Equilibrium: the point at which quantity demanded equals quantity supplied

© 2004 by Nelson, a division of Thomson Canada Limited.30 Equilibrium Price and Quantity

© 2004 by Nelson, a division of Thomson Canada Limited.31 Learning Goal 7 What are the four types of market structure?

© 2004 by Nelson, a division of Thomson Canada Limited.32 Market Structures 1.Perfect competition 2.Pure monopoly 3.Monopolistic competition 4.Oligopoly

© 2004 by Nelson, a division of Thomson Canada Limited.33 a large number of firms selling similar products, where buyers and sellers have good market information, and businesses can be easily opened or closed Perfect Competition

© 2004 by Nelson, a division of Thomson Canada Limited.34 a single seller in the marketplace Pure Monopoly

© 2004 by Nelson, a division of Thomson Canada Limited.35 many firms sell close substitutes in a market that is easy to enter Monopolistic Competition

© 2004 by Nelson, a division of Thomson Canada Limited.36 few firms produce most or all of the output, is difficult to enter, and what one firm does will influence others Oligopoly

© 2004 by Nelson, a division of Thomson Canada Limited.37 Learning Goal 8 Which trends are reshaping micro- and macroeconomic environments?

© 2004 by Nelson, a division of Thomson Canada Limited.38 Trends in Business Delivering value and quality Creating long-term relationships Creating a competitive workforce Entrepreneurial spirit developing in former command economies