Chapter 1 Copyright © 2011 by Nelson Education Ltd. 1 Understanding Evolving Economic Systems and...

Ch

apte

r 1

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

Ch

apte

r 1

LEARNING OUTCOMES


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.

Ch

apte

r 1

Economics


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.

Ch

apte

r 1

Factors of Production


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

Ch

apte

r 1

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

Ch

apte

r 1

HOW BUSINESS AND ECONOMIES WORK


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

Ch

apte

r 1

Economics as a circular flow

Copyright © 2011 by Nelson Education Ltd. 7

Ch

apte

r 1

MACROECONOMICS: THE BIG PICTURE


Price StabilityPrice Stability

Full EmploymentFull Employment

Economic GrowthEconomic Growth

MacroeconomicsHas 3 Main

Goals

MacroeconomicsHas 3 Main

Goals

Ch

apte

r 1Economic Growth


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!

Ch

apte

r 1

Business Cycles


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

Ch

apte

r 1

Boom and bust economic cycles


Time

GDPgrowthrate

recession

boom

bust

+ve

-ve

Ch

apte

r 1

Not always a smooth ride


Ch

apte

r 1

2008-9 Recession in Canada


Ch

apte

r 1

Keeping People on the Job


Types of Types of UnemploymentUnemploymentTypes of Types of UnemploymentUnemployment

FrictionalFrictional

StructuralStructural

CyclicalCyclical

SeasonalSeasonal

Ch

apte

r 1

Keeping Prices Steady


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

Ch

apte

r 1

How Inflation is Measured


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)

Ch

apte

r 1

ACHIEVING MACROECONOMIC GOALS


ContractionaryContractionaryPolicyPolicy

ContractionaryContractionaryPolicyPolicy

Expansionary Expansionary PolicyPolicy

Expansionary Expansionary PolicyPolicy

Monetary PolicyMonetary PolicyMonetary PolicyMonetary Policy

SpendingSpendingSpendingSpending

TaxationTaxationTaxationTaxationFiscal PolicyFiscal PolicyFiscal PolicyFiscal Policy

Ch

apte

r 1

Governments’ other roles


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

Ch

apte

r 1

Microeconomics


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.

Ch

apte

r 1

Demand curve


Demand Curve: a graph showing the quantity of a good or

service that can be sold at various prices

Ch

apte

r 1

The Demand Curve can Shift


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

Ch

apte

r 1

The demand curve can move in either direction


Ch

apte

r 1

Supply Curve


Supply Curve:a graph showing the quantity of a good or service that a business will provide at various prices

Ch

apte

r 1


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

Ch

apte

r 1


EquilibriumThe quantity of a good or service demanded equals the quantity supplied

Ch

apte

r 1


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

Ch

apte

r 1


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

Ch

apte

r 1


Implosive and explosive cobwebs

Price

Quantity

Supply curve for hogs

Demand curve for pork

An imploding cobweb!

Ch

apte

r 1


Implosive and explosive cobwebs

Price

Quantity

Supply curve for hogs

Demand curve for pork

An exploding cobweb!

Ch

apte

r 1


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

Ch

apte

r 1


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

Ch

apte

r 1

Competing in a Free Market


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

Ch

apte

r 1

Types of market structures


Ch

apte

r 1


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

Chapter 1 Copyright © 2011 by Nelson Education Ltd. 1 Understanding Evolving Economic Systems and...

Documents

Transcript of Chapter 1 Copyright © 2011 by Nelson Education Ltd. 1 Understanding Evolving Economic Systems and...