1. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Chapter 2
How Economic Issues Affect Business
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

2. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Learning Goals
Explain what capitalism is and how free markets work. As part of the discussion, define supply and demand and explain the relevance of the equilibrium point.
Define socialism and its benefits and negative consequences.
Describe communism and the challenges of such a system.
Describe the mixed economy of Canada.
Discuss Canada’s economic system, including the significance of key economic indicators, and the business cycle.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

3. Economic Links to Business
Economic concepts are the basis for most major business decisions.
Both global economy and Canadian economy have an effect on Canadian business.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

4. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
What is Economics?
Economics is “the study of how society chooses to employ resources to produce its goods and services and distribute them for consumption among various competing groups and individuals”.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

5. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Micro Vs Macro
Micro (little) Economics looks at the behaviour of people and organization in a particular market
Macro (big) Economics looks at the operation of a nation’s economy as a whole
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

6. Economic Theory of Wealth Creation: Adam Smith
The Wealth of Nations in defined Capitalism as a system of rights and freedoms:
Right to Make a Profit
Right to Private Property
Right to Buy or Sell
Freedom to Compete
Freedom from Government Interference
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

7. In Class Assignment Time to add to your notes:
Create a biography on Adam Smith for your notes.
You must hand in your biography at the end of class.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

8. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Adam Smith and Freedom
Adam Smith Believed that freedom was vital to the survival of any economy
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

9. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Adam Smith
As long as people saw economic rewards (profit or money for person/family) for their efforts, they would work long hours and work hard.
As a result the economy would prosper with enough to go around for everyone
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

10. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Invisible Hand?
That people do not set out to help others. That they work for their own growth.
Invisible Hand: describes the process that turns self-directed gain into social and economic benefits for all.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

11. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Theory in a nutshell
The theory of the Invisible Hand states that: if each consumer is allowed to choose freely what to buy and
each producer is allowed to choose freely what to sell and how to produce it,
the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

12. In Class Assignment 1) What are your thoughts on Adam Smith’s theory
2) Do you agree or disagree. Tell me why.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

13. Three Economic Systems
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

14. Three Economic Systems
Mixed
Socialism
Communism
Capitalism
(Highly Controlled by Government)
(Little Control by Government)
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

15. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Economic Systems
Capitalism - individuals seeking profits produce goods and services.
Goods and services are sold in a free market to those who can pay for them.
Communism - the government decides what will be produced and who will consume that production.
Socialism - some free market and some government allocation.
Most countries have a Mixed Economy
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

16. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Supply Curve
High
Price(P) S
High
Low
Quantity(S)
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

17. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Demand Curve
High
Price(P) D
Low
High
Quantity(D)
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

18. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Equilibrium Point
Surplus
High
Price
Market Equilibrium S D
Shortage
Low
Quantity
High
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

19. Free-Market Competition
Monopolistic
Competition
Oligopoly
One
Many
Monopoly
Perfect Competition
Sellers
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

20. Benefits and Limitations of Free-Markets
Inequality of wealth - causes national and world tension.
Greed may compromise ethics.
There is a potential for environmental damage.
Limitations push country towards Socialism = government regulation.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

21. Recent Economic Trends
Canada - we have a mixed economy, as the government has always played a major role in the economy.
Communist countries - they have moved to capitalist forms of economies to improve their standards of living.
Socialist countries - they have reduced government’s role in their economies.
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

22. Economics and Business
Strong Economy - Business prospers
Weak Economy - Business declines
Gross Domestic Product (GDP) - this is the total goods and services produced by an economy; a measurement of how well the economy is doing!
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

23. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Canadian Economy
Key Economic Indicators:
The gross domestic product (GDP) and the importance of productivity
The unemployment rate: frictional, structural cyclical and seasonal
The price indexes: inflation, disinflation, deflation, consumer price index (CPI), industrial product price index (IPPI), and raw materials price index (RMPI)
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson

24. Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson
Business Cycles
Recession
Depression
Recovery
Boom
Nickels 6e/Copyright © 2007 McGraw-Hill Ryerson