By the end of the chapter, you should be able to:
1. Identify the factors of production.
2. Describe different types of global economic systems according to the means by which
they control the factors of production through input and output markets.
3. Show how demand and supply affect resource distribution in Canada.
4. Identify the elements of private enterprise and explain the various degrees of
competition in the Canadian economic system.
5. Define key indicators of economic stability and economic growth.
What is the economic environment of business?
The Idea of Business & Profit
- Business: an organization that produces or sells goods or services in an effort to make a
- Profit: remains after a business’s expenses have been subtracted form its revenue
- Non-profit: do not try to make a profit; rather, they use funds they generate (from
government grants or the sale of goods or services) to provide services to the public –
includes unions, government agencies, hospitals…
Factors of Production
Businesses make economic choices based on their needs for the five factors of production
1. Natural resources All physical resources
Land and raw materials
2. Labour Workers; mental and physical capabilities of
people – wide variety of skills
3. Capital Funds required to start a business and to keep it
operating and growing
Buildings, machinery, tools and equipment
4. Information resources Specialized Knowledge and expertise of
5. Entrepreneurs Individuals who start up businesses
How does Tim Horton’s utilize the five factors of production?
Factors of Examples at Tim Horton’s How used?
Production: Natural resources Land, Coffee beans, Sugar, to operate business
Milk to make coffee
to make donuts
to make other products
Labour Workers in franchise store manager, cashier, coffee maker,
Workers at corporate head donut maker, cleaner
executives, marketing managers,
office finance managers, other
Capital Buildings, Machines, Tools to run the fast food restaurant
cooking equipment: to cook donuts,
make coffee, etc
computers and calculators: to keep
track of revenues and expenses
Knowledge Specialized skills individuals who understand the
complexities of the coffee-bean trade,
growing coffee etc.
Entrepreneur Franchise Owner Tim Horton is the original founder,
but you can own and operate a
What is an economic system?
- Allocates a nations resources among its citizens
- Characterize the country in which they do business
Types of Economic Systems:
Two basic forms:
a. Communism (Karl Marx) exists when the government owns all the country’s resources
and makes economic decisions centrally.
b. Socialism an economic system whereby the government has large ownership or control
of its major industries essential to the country’s economy.
2) Market Economy
- market is mechanism for exchange between the buyers and sellers of a particular good or
- B2C and B2B exchange takes place w.o much government involvement
o Both buyers and sellers enjoy freedom of choice
- Input/output Markets: o Input Market: firms buy resources from households which then supply
resources: Labour, capital, entrepreneurs, natural resources
o Output Market: firms supply goods and services in response to demand on the
part of the households: goods, services
o Acidity of these two create a circuit flow
o Political basis for the free market is called capitalism: allows private ownership
of the factors of production and encourages entrepreneurship by offering profits
- Relies on private enterprise
3) Mixed Market Economies
- An economy that uses more than one economic system – most countries
- Trend in 1990s – privatization: converting government enterprises into privately owned
- Nationalization: converting private firms into government-owned firms
o Attempts to stabilize
o On the rise after 2008 recession
The Canadian Market Economy
The Laws of Supply and Demand
- In market economy, decisions about what to buy and sell are determined primarily by the
forces of demand and supply
Demand: is the result of the decisions from buyers on whether or not to purchase a good or
Supply: is the result of the decisions of sellers/producers whether to produce and offer a good or
service for sale.
The Laws of Supply and Demand: states that more of a good will be demanded (by society) as
the price drops, and more of a good will be supplied (by producers) as the price rises.
- To optimize profit – all businesses must constantly seek the right combination
Competition and the economy
- Private enterprise: market economies rely on – allows individuals to pursue their own
interests with minimal government restrictions
- Private enterprise typically has four elements:
o Private property – ownership of resources used to create wealth is in the hands of
o Freedom of choice – you can sell you labour to any employer you choose; choose
which to buy, and producers can usually choose whom to hire
o Profits – leads people to abandon the security of working for someone else
o Competition – profits motivate individuals to start businesses, and competition
motivates them to operate those businesses efficiently.
Occur when tow or more businesses vie for the same resources or
customers Types of Competition:
1) Perfect (or Pure) competition:
- Firms must be small in size but large in numbers - Large number of buyers and sellers
- Product or service is undifferentiated/almost the same
- The market (supply/demand) determines the price (a price taker)
- Firms individually do not have the power to influence the price of its product in the