chapter 1 copyright © 2011 by nelson education ltd. 1 understanding evolving economic systems and...
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Copyright © 2011 by Nelson Education Ltd.1
Understanding Evolving Economic Systems and Competition
Understanding Evolving Economic Systems and Competition
Prepared byNorm Althouse
University of Calgary
Prepared byNorm Althouse
University of Calgary
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LEARNING OUTCOMES
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1 Understand the primary features of the world’s economic systems.
2 Explain what economics is and how the three sectors of the economy are linked.
3 Show how economic growth, full employment, and price stability indicate a nation’s economic health.
4 Define inflation, and discuss how is it measured and what causes it.
5 Describe how the Bank of Canada uses monetary policy, and how governments use fiscal policy to achieve their macroeconomic goals.
6 Discuss the basic microeconomic concepts of demand and supply, and how they establish prices.
7 Explain the four types of market structure.
8 List some of the trends that are reshaping micro- and macroeconomic environments.
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Economics
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An economic system is 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.
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Factors of Production
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knowledgeknowledge
entrepreneurshipentrepreneurship
capitalcapital
labourlabour
natural resourcesnatural resources
Resources usedResources usedto create goods to create goods
and servicesand services
Resources usedResources usedto create goods to create goods
and servicesand services
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Economic Systems
5Copyright © 2011 by Nelson Education Ltd.
PrimaryEconomicSystems
PrimaryEconomicSystems
Market EconomiesMarket Economies
Command EconomiesCommand Economies
SocialismSocialism
Mixed EconomiesMixed Economies
Primary difference is how they manage the factors of production
Primary difference is how they manage the factors of production
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HOW BUSINESS AND ECONOMIES WORK
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Macroeconomics is the study of the economy
as a whole.
Macroeconomics is the study of the economy
as a whole.
Microeconomics focuseson individual parts of
the economy.
Microeconomics focuseson individual parts of
the economy.
Microscope= small, magnified view
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Economics as a circular flow
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MACROECONOMICS: THE BIG PICTURE
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Price StabilityPrice Stability
Full EmploymentFull Employment
Economic GrowthEconomic Growth
MacroeconomicsHas 3 Main
Goals
MacroeconomicsHas 3 Main
Goals
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An increase in a nation’s output of goods and services is economic growth. The more a nation produces, the higher its standard of living.
Drawbacks of Economic Growth
PollutionStrain on public facilities
Drawbacks of Economic Growth
PollutionStrain on public facilities
GDP: The total market value of final goods and services produced within a nation’s border.
GNP: Measures what is produced by a nation regardless of where the factors of production are.
= Fort McMurray!
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Business Cycles
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OutputOutput
IncomeIncome
EmploymentEmployment
PricesPrices
Recession: Recession: A decline in GDP over A decline in GDP over two consecutive two consecutive quarters quarters
An increase in An increase in business activitybusiness activityresults in a rise in:results in a rise in:
Eventually theseall peak and decline
Eventually theseall peak and decline
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Boom and bust economic cycles
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Time
GDPgrowthrate
recession
boom
bust
+ve
-ve
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Not always a smooth ride
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2008-9 Recession in Canada
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Keeping People on the Job
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Types of Types of UnemploymentUnemploymentTypes of Types of UnemploymentUnemployment
FrictionalFrictional
StructuralStructural
CyclicalCyclical
SeasonalSeasonal
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Keeping Prices Steady
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Demand for goods and services is greater
than the supply
Demand for goods and services is greater
than the supply
Demand-Pull Inflation
Demand-Pull Inflation
Increases in production costs push up prices
Increases in production costs push up prices
Cost-PushInflation
Cost-PushInflation
The average of all prices of goods and services
is rising
The average of all prices of goods and services
is risingInflationInflation
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How Inflation is Measured
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Index of prices of a “market basket” of
goods/services purchased by consumers
Index of prices of a “market basket” of
goods/services purchased by consumers
Consumer Price Index (CPI)
Consumer Price Index (CPI)
Prices paid by producersfor raw materials,
partially finished goods, and finished products
Prices paid by producersfor raw materials,
partially finished goods, and finished products
Producer Price Index (PPI)
Producer Price Index (PPI)
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ACHIEVING MACROECONOMIC GOALS
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ContractionaryContractionaryPolicyPolicy
ContractionaryContractionaryPolicyPolicy
Expansionary Expansionary PolicyPolicy
Expansionary Expansionary PolicyPolicy
Monetary PolicyMonetary PolicyMonetary PolicyMonetary Policy
SpendingSpendingSpendingSpending
TaxationTaxationTaxationTaxationFiscal PolicyFiscal PolicyFiscal PolicyFiscal Policy
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Governments’ other roles
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Governments’Governments’other roles other roles
in the economyin the economy
Governments’Governments’other roles other roles
in the economyin the economy Provider of Essential ServicesProvider of Essential Services
Taxation AgentTaxation Agent
Provider of IncentivesProvider of Incentives
CompetitorCompetitor
CustomerCustomer
RegulatorRegulator
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Microeconomics
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microeconomics is concerned with how prices and quantities of goods and services behave in the marketplace – the study of the economic activities of individuals, households, businesses and industries.
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Demand curve
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Demand Curve: a graph showing the quantity of a good or
service that can be sold at various prices
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The Demand Curve can Shift
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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
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The demand curve can move in either direction
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Supply Curve
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Supply Curve:a graph showing the quantity of a good or service that a business will provide at various prices
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The Supply Curve can Shift
Causes of Supply Change:new technologychange in price of resourceschange in price of related productschange in number of producerschange in taxes
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EquilibriumThe quantity of a good or service demanded equals the quantity supplied
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Elastic vs inelastic demand
Price
Quantity the market demands
Elastic demand curve – demand increases/decreases quickly as price drops/increases
Inelastic demand curve – demand does not change much when price changes
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Elastic vs inelastic supply
Price
Quantity the market supplies
Elastic supply curve – supply increases/decreases quickly as price increases/drops
Inelastic supply curve – supply does not change much when price changes
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Implosive and explosive cobwebs
Price
Quantity
Supply curve for hogs
Demand curve for pork
An imploding cobweb!
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Implosive and explosive cobwebs
Price
Quantity
Supply curve for hogs
Demand curve for pork
An exploding cobweb!
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Forecasting demand – consumer durables
Consumer durables aka “white goods” = fridges and stoves
Some cyclical demand – each new house = one new fridge
But core demand = lifetime of a fridge13 year life = 1/13th replaced each yearPenetration rate - % of households with a
fridge. Also, # of fridges per householdHard to postpone replacement = no
recession will last forever
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Goods that we tend to buy more than one of a year
Band-aids; washing-up liquid; beer; Mars bars; sun-screen
Demand = # of consumers x consumption per consumer per year
What is the maximum # of Mars bars you can eat in a year?
Forecasting demand – consumables
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Competing in a Free Market
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Four Types Four Types ofof
Market Market StructuresStructures
Four Types Four Types ofof
Market Market StructuresStructures OligopolyOligopolyOligopolyOligopoly
PerfectPerfectCompetitionCompetition
PerfectPerfectCompetitionCompetition
Monopolistic Monopolistic CompetitionCompetition
Monopolistic Monopolistic CompetitionCompetition
Pure Monopoly Pure Monopoly Pure Monopoly Pure Monopoly
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Types of market structures
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Meeting Competitive ChallengesMeeting Competitive Challenges
Competitive WorkforcesCompetitive Workforces
Entrepreneurial Spirit SpreadsEntrepreneurial Spirit Spreads
MacroeconomicAnd
MicroeconomicTrends
MacroeconomicAnd
MicroeconomicTrends
Demographic DistortionsDemographic Distortions
The size of the last recessionThe size of the last recession