How

CHAPTER 2

Economic
Issues
Effect
Business

Prepared by Dr. C. McLarney, Dalhousie University

© 2022 McGraw Hill Limited

 Learning Objectives
1. Describe basic economics
2. Explain what capitalism is and how free markets work.
3. Explain the benefits and negative consequences of socialism
and communism.
4. Describe the mixed economy of Canada.
5. Illustrate the significance of key economic indicators and the
business cycle.

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How Economic Conditions Affect
Business
If you want to understand the underlying situation and
conditions in which Canadian businesses operate, it is
essential that you:
• have some grasp of economics,
• be aware of the impact of the global environment, and
• understand the role of the federal and provincial
governments in Canada.

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 Economics
There are two major branches of economics:
• Macroeconomics looks at the operation of a nation’s
economy as a whole.
• Microeconomics looks at the behaviour of people and
organizations in particular markets.

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Economics, pt. 2
Macroeconomics
looks at the
operation of a
nation’s economy
as a whole, and
microeconomics
looks at the
behaviour of
people and
organizations in
particular markets.

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 Resource Development
The study of how to increase resources and the creation of the
conditions that will make better use of those resources.

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Growth Economics and Adam
Smith
• The Wealth of Nations in 1776 defined capitalism as a system of rights
and freedoms:
– He believed that people will work hard if they have incentives for
doing so—that is, if they know that they will be rewarded.

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 Understanding Free-Market
Capitalism
The economic system that has led to wealth creation in much of the world
is known as capitalism.
Under capitalism, all or most of the factors of production and distribution
—such as land, factories, railroads, and stores—are owned by individuals
(i.e., not owned by the government).

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 Different 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 the results of that
production.
• Socialism: some free market and some government
allocation.
• Most countries have a mixed economy.

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 Capitalism Defined
• An economic system in which all or most of the factors
of production and distribution (e.g., land, factories,
railroads, stores) are privately owned (not owned by
the government) and are operated for profit.
• Capitalism is the popular term used to describe free-
market economies.

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 Capitalism: Free-Market
Economies
The free market is one in which decisions about what to produce and in
what quantities are made by the market.
– that is, by buyers and sellers negotiating prices for goods and services.
No country is purely capitalist; no market is truly free.

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 The Foundations of
Capitalism
• How a free market works
– Many buyers and sellers trading freely determine the prices at
which they will exchange goods and services.
• How prices are determined
– The constant interplay between supply and demand determines an
equilibrium price at which a transaction will occur.

© Nelson Antoine/Shutterstock

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 Equilibrium Point
… place where quantity demanded and supplied meet is called the
equilibrium point. This is the price at which a transaction will occur –
means world famous Nathan’s Hotdogs on Coney Island, New York
must sell at a price which is roughly what people are willing to pay, if
they charge too much, they’ll lose customers

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The Economic Concept of Supply
and Demand
Supply refers to the quantity of
products that manufacturers or
owners are willing to sell at
different prices at a specific time.
Generally speaking, the amount
supplied will increase as the price
increases because sellers can
make more money with a higher
price.

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The Economic Concept of Supply
and Demand, pt. 2
• Demand refers to the quantity of
products that people are willing
to buy at different prices at a
specific time.
• Generally speaking, the quantity
demanded will increase as the
price decreases.

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 The Economic Concept of
Supply and Demand: The
Equilibrium Point

The place where quantity

demanded and supplied
meet is called the
equilibrium point.

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 The Economic Concept of
Supply and Demand, pt. 3
In the long run, that price
would become the market
price.

Market price, then, is

determined by supply and
demand.

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 Competition Within Free
Markets
Four different degrees of competition exist:
(1) perfect competition
(2) monopolistic competition
(3) oligopoly
(4) monopoly

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Competition Within Free Markets, pt. 2

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 Competition Within Free Markets:
Perfect Competition

Perfect competition exists when there are many

sellers in a market and no seller is large enough to
dictate the price of a product.

Perfect competition is what would exist at a flea

market, or an ethnic community where everybody is a
small player and nobody dominates

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Competition Within Free Markets: Oligopoly

An oligopoly occurs when a few sellers dominate a market.

• Oligopolies exist in industries that produce products in the
areas of oil and gas, tobacco, automobiles, aluminum, and
aircraft.

Oligopolies in Canada also exist in the banking sector where

we have a few big players, and no small banks.
• One reason some industries remain in the hands of a few
sellers is that the initial investment required to enter the
business is tremendous – like the airline industry.

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Competition Within Free Markets: Monopoly

A monopoly occurs when there is only one seller for a

good or service, and that one seller controls the total
supply of a product and the price.
• Traditionally, monopolies were common in areas
such as water, electricity, and telephone services
that were considered essential services.

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 Understanding Free-Market
Capitalism
Under capitalism, all or most of the factors of
production and distribution—such as land, factories,
railroads, and stores—are owned by individuals (i.e.,
not owned by the government).
They are operated for profit, and business people, not
government officials, decide what to produce and how
much, what to charge, and how much to pay workers.

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 Understanding
Communism
Communism is an economic and political system in
which the state (the government) makes almost all
economic decisions and owns almost all of the major
factors of production.
Communists once held power in many nations around
the world, is slowly disappearing as an economic form
with North Korea and Cuba as one of the few countries
still communist.

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 Understanding Socialism
Socialism is an economic
system based on the
premise that some, if not
most, basic businesses—
such as steel mills, coal
mines, and utilities—
should be owned by the
government so that profits
can be evenly distributed
among the people

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 Canada’s Mixed Economy
Like most other nations of the world, Canada has a mixed economy. The
degree of government involvement in the economy today—in areas such
as health care, education, and business regulation, just to name a few—is
a matter of some debate.

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 The Canadian Economy
Key Economic Indicators
• GDP: gross domestic product
• Unemployment rate
• Housing starts
• Commodity prices
• Stock markets
• Price indexes: Consumer Price Index (CPI), Producer Price Index (PPI)
• Another important statistic is
the increase or decrease in productivity.

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 Economics and Business
Gross Domestic Product (GDP): the total goods and
services produced by the economy.
This is how we measure how well the economy is
doing!
• A major influence on the growth of GDP is how
productive the workforce is —that is, how much
output workers create with a given amount of input.

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 The Canadian Economy, pt. 2
Standard of living
• refers to the amount of goods and services people can
buy with the money they have.
Quality of life
• refers to the general well-being of a society in terms of
political freedom, a clean natural environment,
education, health care, safety, free time, and
everything else that leads to satisfaction and joy.

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 Productivity in Canada

• Productivity is measured by dividing the total output

of goods and services of a given period by the total
hours of labour required to produce them.
• An increase in productivity means that a worker can
produce more goods and services in the same period
of time than before, usually through the use of
machinery or other equipment.

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 Productivity in Canada, pt. 2
• Productivity and technology
• Productivity has gone up in recent years because
computers and other technology have made the
process of production faster and easier for many
workers.
• The higher productivity is, the lower costs are in
producing products, and the lower prices can be.
• Since Canada is a service economy, productivity is an
issue because firms are so labour-intensive.

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 Unemployment
Frictional unemployment
Frictional unemployment refers to those people who have quit work because they didn't like the job,
the boss, or the working conditions and who haven't yet found a new job. It also refers to those
people who are entering the labour force for the first time (e.g., new graduates) or are returning to
the labour force after significant time away (e.g., parents who reared children). There will always be
some frictional unemployment because it takes some time to find a first job or a new job.
Structural unemployment
Structural unemployment refers to unemployment caused by the restructuring of firms or by a
mismatch between the skills (or location) of job seekers and the requirements (or location) of
available jobs (e.g., coal miners in an area where mines have been closed).
Cyclical unemployment
Cyclical unemployment occurs because of a recession or a similar downturn in the business cycle (the
ups and downs of business growth and decline over time). This type of unemployment is the most
serious.
Seasonal unemployment
Seasonal unemployment occurs where demand for labour varies over the year, as with the harvesting
of crops.

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 Unemployment, pt. 2
THE UNEMPLOYMENT RATE IN CANADA 1989-2019

Source: Data from Statistics Canada, “Labour Force Characteristics by Sex and Detailed Age Group, Annual,” Table 14-10-0327-01. doi:
10.25318/1410032701-eng © 2022 McGraw Hill Limited 33
 Unemployment, pt. 3
Types of unemployment

Frictional unemployment
refers to those people who have quit work because
they didn’t like the job, the boss, or the working
conditions, and who haven’t yet found a new job.

Structural unemployment
refers to unemployment caused by the
restructuring of firms.
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 Unemployment, pt. 4
Types of unemployment

Cyclical unemployment
occurs because of a recession or a similar downturn
in the business cycle.

Seasonal unemployment
occurs when demand varies during the year.

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 Inflation and the CPI
• Consumer Price Index (CPI) is the index economists use
to measure the effects of inflation.
• Inflation refers to a general rise in the prices of goods
and services over time.
• Disinflation describes a condition where price increases
are slowing (i.e., the inflation rate is declining).
• Deflation means that prices are actually declining.

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 The Business Cycle
Business cycles (also known as economic cycles) are the
periodic rises and falls that occur in economies over
time.
An economic boom is just what it sounds like—business
is booming.
Recession is two or more consecutive quarters of decline
in the GDP.
A depression is a severe recession usually accompanied
by deflation.

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The Business Cycle, pt. 2

© 2021 McGraw Hill Limited

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 Chapter Summary
1. Economics
– the study of how society chooses to employ resources to
produce goods and services and distribute them for
consumption
– two major branches:
– macroeconomics studies the operation of a nation’s
economy as a whole
– microeconomics studies the behaviour of people and
organizations in particular markets

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 Chapter Summary, pt. 2
2. Capitalism and free markets
– Capitalism is an economic system in which all or most of
the means of production and distribution are privately
owned and operated for profit.
– The free market is one in which decisions about what to
produce and in what quantities are made by the market

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 Chapter Summary, pt. 3
3. Socialism and communism
– socialism based on the premise that some businesses
should be owned by the government.
– communism, the government owns almost all major
production facilities and dictates what gets produced and
by whom.
4. Canada’s “mixed” economic system
– part capitalist and part socialist, some businesses are
privately owned, but taxes tend to be high to distribute
income more evenly among the population

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 Chapter Summary, pt. 4
5. Economic indicators and the business cycle
– GDP, unemployment, inflation, productivity
– business cycle: boom, recession, depression, recovery

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