Chapter 1 Understanding the Canadian Business System
11/25/2013 11:41:00 AM
THE CONCEPT OF BUSINESS AND PROFIT
Business An organization that seeks to earn profits by providing goods and
Profit The money that remains (if any) after a business’s expenses are subtracted
from its revenues.
Expenses The money a business spends producing its goods and services and
generally running the business. Also referred to as “costs.”
Revenues The money a business earns selling its products and services. Also
referred to as “sales”.
Profits reward the owners of businesses for taking the risks involved in
investing their time and money.
Among the most profitable companies in 2005 were the Royal Bank of Canada(3.3
million), Manulife Financial and Imperial Oil Ltd.
In Canada’s economic system, businesses exist to earn profits for owners who
are free to set them up. But consumers also have freedom of choice.
Businesses must take into account what consumers want or need, otherwise they
won’t survive if there are no demand.
ECONOMIC SYSTEMS AROUND THE WORLD
A Canadian business is different in many ways from China, and both Canada and
China are different from businesses in Japan, France, or Peru.
Economic system The way in which a nation allocates its resources among its
Economic systems differ in terms of who owns and controls these resources, known
as the “factors of production”.
Factors of Production
Factors of production the resources used to produce goods and services: labour,
capital, entrepreneurs and natural resources.
Labour The mental and physical training and talents of people; sometimes called
human resources. E.g. Imperial oil Company. Managers to geologists to truck
drivers. Capital The funds needed to operate an enterprise. E.g. Inco needs millions of
dollar in cash and millions more in equipment and other assets to run its operate.
-For small businesses, owners personal investment is a major source of capital.
-Investments can come from individual entrepreneurs, from partners who start
business together, or from investors who buy stock.
-Once business has opened, revenue from the sale of products is a key and ongoing
source of capital.
Entrepreneurs An individual who organizes and manages labour, capital, and
natural resources to produce goods and services to earn a profit, but who also
runs the risk of failure.
Natural resources Items used in the production of goods and services in their
natural state, including land, water, mineral deposits, and trees. E.g. Imperial
Oil makes use of a wide variety of natural resources. Oil and land.
Types of Economic Systems
Different types of economic systems manage the factors of production in
Command Economies An economic system in which government controls all or most
factors of production and makes all or most production decisions.
- The two most basic forms of command economies are communism and socialism.
- Proposed by the 19 th century German economist Karl Marx.
- Communism A type of command economy in which government owns and operates all
industries. North Korea
- Socialism A kind of command economy in which the government owns and operates
the main industries, while individuals own and operate less crucial industries.
E.g. clothing store, restaurant could be operated by individuals. A large
portion of people work for government, management positions are mostly filled
based on political considerations rather than on ability. Vast public welfare
systems have also resulted high taxes. Cuba
Market A mechanism for exchange between the buyers and sellers of a particular good or service.
Capitalism A kind of market economy offering private ownership of the factors
of production and of profits from business activity. No examples.
Mixed Market Economies; Canada, USA, UK, France
Mixed market economy An economic system with elements of both a command economy
and a market economy; in practice, typical of most nations’ economies.
Privatization The transfer of activities from the government to the public
-E.g. the post office are mostly owned by government regardless of whether the
country has a command or market economy, the Netherlands recently began the
process of privatizing its TNT post Group N.V., already among the world’s most
efficient post office operations.
-e.g. Canada has recently privatized its air traffic control system.
Deregulation A reduction in the number of laws affecting business activity. In
most cases, deregulation frees companies to do what they want without government
intervention, thereby simplifying the task of management. i.e. airlines,
pipelines, banking, trucking, and communication.
INTERACTIONS BETWEEN BUSINESS AND GOVERNMENT
Government as Customer. Government buys thousand of different products and
services from business firms, such as office supplies, office buildings,
computers, battleships, helicopters, hwy…
Government as Competitor
Government as Regulator
Government as Taxation Agent
Government as Provider of Incentives
Government as Provider of Essential Services
THE CANADIAN MARKET ECONOMY
Demand and Supply in a Market Economy
The Laws of Demand and Supply
Demand The willingness and ability of buyers to purchase a product or service.
Supply The willingness and ability of producers to offer a good or service for
Law of demand The principle that buyers will purchase (demand) more of a product as price drops.
Law of supply The principle that producers will offer (supply) more of a product
as price rises.
The Demand and Supply Schedule
Demand curve Graph showing how many units of a product will be demanded (bought)
at different prices.
Supply curve Graph showing how many units of a product will be supplied (offered
for sale) at different prices.
Market price or Equilibrium Profit-maximizing price at which the quantity of
goods demanded and the quantity of goods supplied are equal.
Surpluses and Shortages
Surplus Situation in which quantity supplied exceeds quantity demanded.
Shortage Situation in which quantity demanded exceeds quantity supplied.
-Shortage could increase in criminal behavior. E.g. Price of stainless steel
rose during the past five years, thieves began stealing items such as railroad
tracks, light poles and guard rails along highways. These items were them sold
to scrap yards for cash.
Private Enterprise and Competition in a Market Economy
Private enterprise An economic system characterized by private property rights,
freedom of choice, profits and competition.
Competition The vying 竞争的 among businesses in a particular market or industry
to best satisfy consumer demands and earn profits.
Degrees of Competition
-Lots and lots of suppliers
-All firms are small
-Products are same
-Must sell at the same price
-Easy to enter or leave
Example: carton of milk Monopolistic Competition
-Lots and lots of suppliers
-Most are small
-Most products are same, try to make differences.
-Some are big, can differentiate themselves
-Most sell at the same price
-Big suppliers can charge extra
-Easy to enter or leave
Example: coffee shops vs. Starbucks
-Small number of suppliers (e.g. 4 or 5)
-All are “large”
-Each tries to differentiate themselves
-Industry hard to enter, hard to exit
-They watch/ follow each other closely
Example: Canadian banking industry
-Only one supplier
-(By definition) 100% market share
-Can set whatever price it likes
Example: LCBO Understanding the Environments of Business 11/25/2013 11:41:00 AM
THE ECONOMIC ENVIRONMENT
External environment Everything outside an organization’s boundaries that might
Economic environment Conditions of the economic system in which an organization
The Business Cycle
Business cycle Pattern of short-term ups and downs (expansions and contractions)
in an economy. It has four recognizable phases: peak, recession, trough, and
Recession Period during which aggregate output, as measured by real GDP,
During recessions, when demand falls, some prices fall. (houses)
Depression Particularly severe and long-lasting recession. Can vary from
several months to several years.
-During later half of the 1990s, the Canadian economy was continuously expanding,
leading some people to believe that the business cycle was a thing of the past.
This belief was particularly evident among people who invested in high-tech
stocks. They learned a hard lesson when tech stocks crashed in 2000.
Aggregate Output and the Standard of Living
Aggregate output Total quantity of goods and services produced by an economic
system during a given period.
-When output grows more quickly than the population, 2 things usually follow:
Output per capita- the quantity of goods and services per person- goes up and
the system provides relatively more of the goods and services that people want.
-When these two things occur, people living in an economic system benefit from
a higher standard of living.
Standard of living Total quantity and quality of goods and services that a
country’s citizens can purchase with the currency used in their economic system.
Gross Domestic Product
GDP Total value of all goods and services produced in a country in one year,
-Growing GDP: more workers, making more stuff. GDP going up, the nation is
experiencing economic growth.
-Falling GDP: fewer people making less stuff. Falling GDP called recession. USA 15684bl, China 8227bn, Japan5959bn, 11 thCanada 1821bn
Poor countries have the greatest capacity for growth. They start from a low base.
Gross national product (GNP) Total value of all goods and services produced by
a national economy within a given period regardless of where the factors of
production are located.
E.g. A Canadian-owned manufacturing plant in Brazil. The profits earned by the
factory are included in Canadian GNP, not GDP. Those profits are included in
Real Growth Rates
The real growth rate of GDP- the growth rate of GDP adjusted for inflation and
changes in the value of the country’s currency- is what counts. Remember that
growth depends on output increasing at a faster rate than population.
GDP per Capita
GDP per person.
A measure of relative wealth of “average citizen”.
st nd rd
1 Luxembourg $108,921. 2 Norway $84,840 3 Switzerland
Real GDP GDP calculated to account for changes in currency values and price
E.g. Assume that pizza is the only product in an economy. Assume that in 2005,
a pizza cost $10, and in 2006 it cost $11. In both years, exactly 1000 pizzas
were produced. In 2005, the GDP was $10000; in 2006 the GDP was $11000. The
economy has not grown, since 1000 pizzas were produced in both years, aggregate
output remained the same.
GDP for 2006 is nominal GDP GDP measured in current dollars or with all components
valued at current prices.
Purchasing Power Parity
Some countries are richer than others, because the productivity.
Productivity Measure of economic growth that compares how much a system produces
with the resources needed to produce it. Output(products or services)/ inputs
(people or $$$)
Real growth in GDP reflects growth in productivity, increases in productivity
improves standard of living. High productivity is produced by: better educated, better trained labour. More
$$$ and better technology. More and cheaper natural resources.
Factors that can help or hinder the growth of an economic system: balance of
trade and national debt.
Balance of Trade
Balance of trade The total of a country’s exports minus its imports.
A positive balance of trade results when a country exports more than it imports,
which helps economic growth,
A negative balance of trade results when a country imports more than it exports,
which inhibits economic growth. Commonly called trade deficit.
Canada usually has a positive balance of trade, it is therefore a creditor nation.
USA usually has negative balance of trade, it is therefore a debtor nation.
A trade deficit negatively affects economic growth because the money that flows
out of a country can’t be used to invest in productive enterprises, either at
home or overseas.
National debt The total amount of money that the government owes its creditors.
The government takes in revenues (form of taxes) and has expenses (military
spending, social programs…).
Budget deficit The result of the government spending more in one year than it
takes in during that year.
Canada is the only highly industrialized country in the world that continues
to have a budget surplus.
Stability Condition in an economic system in which the amount of money available
and the quantity of goods and services produced are growing at about the same
Factors that threaten stability: inflation, deflation, and unemployment.
Inflation Prices for goods going up. Money slowly loses its value.
People can afford to buy less.
Hurts people on fixed incomes. (pensioners)
How it happens: government prints too much money.
Suggests: Shortage of things people want.
The comparison of your increased income to the increased price of a hamburger- is all that counts if you want to consider inflation when you’re making a buying
Inflation can be harmful to you as a consumer because inflation decreases the
purchasing power of your money.
Hyper inflation Money quickly loses its value. Money has no real value,
Measuring Inflation: The CPI
Consumer price index (CPI) Measure of the prices of typical products purchased
by consumers living in urban areas.
Statistics Canada measures price of 600+ goods and services bought by 1000s of
“average” household. (food, clothing, housing, transport, furniture, recreation,
CPI slow and steady price rises.
Deflation A period of generally falling prices.
Prices may fall because industrial productivity is increasing and cost savings
can be passed on to consumers. (THIS IS GOOD)
Or because consumers have high levels of debt and are therefore unwilling to
buy very much (THIS IS BAD).
Unemployment % of people who are actively looking for work, but can’t find any.
Labour is under-used.
Historically- Canada’s unemployment rate higher than rate in USA
Large % of work force not working
This is one cause to our lower wealth
Recently (since 2008): US rate higher
st nd rd
1 South Africa 23.9% 2 Spain 22.9% 3 Greece 20.7%
There are 4 types of unemployment:
Frictional unemployment people are out of work temporarily while looking for
a new job
Seasonal unemployment people are out of work because of the seasonal nature of
Cyclical unemployment people are out of work because of a downturn in the
Structural unemployment people are unemployed because they lack the skills
needed to perform available jobs.
When unemployment is low, there is a shortage of labour available for businesses.
As these businesses compete with one another for the available supply of labour,
they raise the wages that they are willing to pay. Then, because higher labour costs eat into profit margins, businesses raise the prices of their products.
Thus, although consumers have more money to inject into the economy, this
increase is soon erased by higher prices. Purchasing power declines.
If wage rates get too high, businesses will respond by hiring fewer workers and
unemployment will go up. If this happened, demand may decline because unemployed
workers don’t purchase as much. Because reduced sales, companies may further
cut back on hiring and unemployment will go even higher.
Managing the Canadian Economy
Fiscal policies Policies by means of which governments collect and spend
Monetary policies Policies by means of which the government controls the size
of the nation’s money supply.
Stabilization policy Government policy, embracing both fiscal and monetary
policies, whose goal is to smooth out fluctuations in output and unemployment
and to stabilize prices.
Starting Up a Small Business
Buying an Existing Business
Taking over a Family Business
Buying a Franchise
SUCCESS AND FAILURE IN SMALL BUSINESS
Reasons for Success
Hard work, drive and dedication.
Market demand for the product or service.
Reasons for Failure
Managerial incompetence or inexperience,
Weak control systems
Insufficient capital. Understanding Entrepreneurship, Small Business, and
New Venture Creation 11/25/2013 11:41:00 AM
THE LINKS AMONG SMALL BUSINESS, NEW VENTURE CREATION, AND
Canada is market economy, anyone may start a business. No fees, No government
To be incorporated in the registry a business must have:
-at least 1 employee
-annual sales revenues of at least $30,000 or more.
A goods-producing business considered small if it has fewer than 100 employees.
A service-producing business is considered small if it has fewer than 50
The majority of businesses are small businesses in Canada.
Annual contribution has been scaled at 25%.
Approximately 2.4 million small businesses in Canada
It’s easy to start a small business. It’s easy for a small business to fail.
The New Venture /Firm
New venture/firm A recently formed commercial organization that provides goods
and/or services for sale.
Entrepreneurship The process of identifying an opportunity in the marketplace
and accessing the resources needed to capitalize on it.
Entrepreneurs People who recognize and seize opportunities. Are Internals.
Entrepreneurs recognize opportunities, assemble and mobilize resources, are
self confident, and risk tolerance.
Risk intolerance: New or previously unknown situations seen as threatening
Risk tolerance: People see new or previously unknown situations as desirable
High “Need for Achievement”
“Needs Motivation” Theory (Three Basic Human Motivations)
1.Need for power (N-Pow)- People who are ‘authority motivated’. They need
to be influential. N-Pow produces a need to lead. These people need personal
status and prestige.
2.Need for affiliation (N-Aff)-People who need friendly relationships, motivated by interactions with others, N-Aff produces need to be liked and held
in high regard. Team players.
3.Need for Achievement (N-Ach)-People who seek achievement, want to
attain challenging goals. N-Ach produces people who need accomplishment.
Locus of Control A persons belief about what causes good or bad results in their
Internal Locus of Control (Leaders): people belief that events result from their
own behavior and actions. Internal try to influence others.
External Locus of Control (Not likely to be LEADERS): People who believe that
powerful others, fate, or chance determine events. Less likely to be leaders,
take risks or start their own business.
Psychological Characteristics They seek challenges, set goals, take risks, have
a very high need for achievement.
Kids of Entrepreneurs
80% of entrepreneurs have heritage of family business
Importance of Role Models (“Nurture”)
Genetic Predispositions( “Nature” )
Entrepreneurs Older Than Employees Typical Canadian employee is 34, typical
Canadian entrepreneur is 42. Because it takes experience, confidence, contacts,
and $$$ to start a business.
Women are more successful. Women start business with fewer $$$.
THE ROLE OF SMALL AND NEW BUSINESSES IN THE CANADIAN ECONOMY
Small and new businesses play a key role in the Canadian economy.
Close to 98% of all businesses in Canada are small. Understanding Legal Forms of Business Organization 11/25/2013 11:41:00 AM
ORGANIZING OPTIONS (FORMS OF BUSINESS OWNERSHIP)
The Sole Proprietorship A business owned and operated by one person. Most common
form of ownership. Easiest way to form a business.
Sole proprietor: Supplies all the capital, makes all decisions, keeps all
profits, and responsible for all debts.
Sole proprietor can have employees (can have many employees) But only one boss!
Advantages of a Sole Proprietorship: Freedom(don’t need to ask anyone, make all
decisions), easy to form (no regulatory requirements, no mandatory accounting
needs.) Cheap to form ($60-$70 if registered/ $0 if not. Doesn’t need to be
registered. Management/ ownership clear.), tax benefits.
Disadvantages of a Sole Proprietorship Limits to owner’s skills, limits to
owner’s resources, hard to get finance (bank loans), personal liability,
unlimited liability (major drawback.).
Unlimited liability Personal liability for all debts of the business. How much
you might have to pay is unlimited. Your financial responsibility: Not limited
to value of the job. Not limited to value of assets used on job. If things go
wrong, you can be sued for $$$ you could lose your house, car, life savings.
Personal Liability You are personally responsible to pay any bills, settle and
lawsuits, and pick up all the pieces if things go wrong.
The Partnership A form of organization established when two or more persons agree
to combine their financial, managerial, and technical abilities for the purpose
of operating a business for profit.
Two basic types of partnerships:
General partnerships: A type of partnership in which all partners are jointly
liable for the obligations of the business.
-Simplest form of partnership
-All partners share in ownership
-All partners share in management
-All partners: unlimited liability for debts
-All partners: personal liability for debts
Limited partnerships A type of partnership with at least one general partner
(who has unlimited liability) and one or more limited partners. The limited
partners cannot participate in the day-to-day management of the business or they
risk the loss of their limited liability status. -partnership with: partners who take no part in management of business
-Limited partners supply $$$ only
-Limited partners have limited liability
(Can lose only their investment)
General partners Partners who are actively involved in managing the firm and
have unlimited liability
Limited partners Partners who don’t participate actively in the business and
whose liability is limited to the amount they invested in the partnership.
Advantages of a Partnership
-Two (or 3) heads better than one
-More resources (human and financial)
-More credibility (more than 1 owner)
-More contacts (potential customers)
Disadvantages of Partnership
-Conflict (more than 1 owner)
-Joint and several liability. Each partner responsible for debts of partnership,
even when incurred by another partner.
Partnership Agreements Agreement between partners
Normally includes: How much money each partner contributed. What each partner
must do. How the partners paid. How profits distributed.
Between partners only. Not binding on others.
-Most sophisticated way to organize
-Appropriate for businesses that want: larger number of owners, split between
owners/ manager, limited liability for owners.
-A legal entity, authorized to operate a business.
-Responsible for its own debts.
-Owned by shareholders with limited liability.
Types of Corporations
There are two types of private sector corporations
Public corporation A business whose shares are widely held and available for sale to the general public. E.g. Air Canada, Canadian Pacific.
Private corporation A business whose shares are held by a small group of
individuals and is not usually available for sale to the general public. E.g.
owned by nine members of one family.
-Most new corporations start out as private corporations, because few investors
will buy an unknown stock.
As the corporation grows and develops a record of success, it may issue shares
to the public as a way of raising additional money. This is called its initial
public offering (IPO).
Initial Public Offering (IPO) Sale of shares in a company for the first time
to the general investing public.
Formation of the Corporation
-Does require paperwork and fees. Founders of business must complete all
necessary legal documents.
-Right to create corporation granted by the legal authority e.g. prov of Ontario
“Articles of Incorporation” outlines name, address, purpose of Corporation.
-Province issues a “certificate of Incorporation”
“Certificate” creates legal entity called the “corporation”
-Names of corporations must include one of the following: limited, ltd,
Shares: Worth What You Pay
A share has no fixed or inherent value
A share is worth what you pay for it
People will pay more if they think the business is well-managed and growing.
The value of a share goes up and down every day, with changing news, and market
Advantages of Incorporation
-Limited Liability The liability of investors is limited to their personal
investments in the corporation. In event of failure, the courts may seize a
corporation’s assets and sell them to pay debts, but the courts cannot touch
the investors’ personal possessions.
Continuity. Because it has a legal life independent of its founder and owners,
a corporation can, in theory continue forever.
Raising money by selling shares, they expand the number of investors and the
amount of available funds. Disadvantages of Incorporation
Cost. Approximately $2500
Corporations also need legal help in meeting government regulations because they
are far more heavily regulated than are proprietorships or partnerships.
Corporation-Attributes (Many of the same rights as people):
-The right to own property
-Right to enter into contracts
-Right to hire/fire employees
-The right to sue and be sued
-The obligation to pay taxes
How they are managed
-Shareholders own the corporation
-A share is a piece of paper, evidence ownership (investors pay $ for ownership)
(1 share= 1 vote)
-Owners (“shareholder”) elect directors
-Directors run corporation for owners
-Directors hire officers and employees for corporation
Role of directors
-Directors run a corporation for its owners
-Directors are like MPs: Too many Canadians to run the country. So, we vote for
people who we hope (believe) are qualified, to represent us.
-Directors stand for election, for fixed terms (e.g. 2-3 years)
-Directors hire the CEO, who reports to them,
-Directors might hire other Senior Officers (Chief Financial Officer, Chief
-Many CEOs sit on the Board of Directors. Make sense: CEO knows the business
best. Doesn’t make sense: CEO is his/her own “boss”. Understanding International Business 11/25/2013 11:41:00 AM
THE RISE OF INTERNATIONAL BUSINESS
Globalization The integration of markets globally.
Imports Products that are made or grown abroad and sold in Canada.
Exports Products made or grown in Canada that are sold abroad.
The Contemporary Global Economy
International trade can be traced back as afar as 2000 BCE, when North African
tribes took dates and clothing to Assyria and Babylonia in the Middle East and
traded them for olive oil and spice.
The Silk Route 700 years ago. China, India, Persia, Arabia, Europe…
The first Europeans who came to Canada came for fish, lumber, and fur. 500 years
Canada is an “Open Economy”: open to trad