Commerce Chapter 2 02/06/2014
Economics is the study of how society chooses to employ resources to produce goods and services and
distribute them for consumption among various competing groups and individuals.
Both Global and Canadian economy have an effect on Canadian business.
Two main branches of economics
Looks at the operation of a nations economy of a whole
Looks at the behavior of people and organizations in particular markets.
Some economists define economics as the allocation of scarce resources. Resource development is the
study of how to increase resources. Businesses can contribute to an economic system by inventing
products that greatly increase available resources such as discovering new energy sources.
Economist Thomas Malthus made this argument in the late 1700s and early 1800s, leading the writer
Thomas Carlyle to call economics “the dismissal science”. Followers of Malthus today still believe that there
are to many people in the world and that the solution to poverty is radical birth control , including forced
abortions and sterilization.
Some macroeconomics believe that a large population, especially an educated one, can be a valuable
resource. Business owners provide jobs and economic growth for their employees and communities as well
as for themselves.
Economic Theory of Wealth Creation – Adam Smith
Adam Smith envisioned creating more resources so that everyone can become wealthier. He believed
freedom would help this as well as rewards. Malthus believed this would only make everything worse. The Wealth of Nations in 1776 defined Capitalism as a system of rights and freedoms
Right to Make a Profit
Right to Private Property
Right to Buy or Sell
Freedom to Compete
Freedom from Government Interference
How Businesses Benefit the Community
The invisible hand is supposed to help the economy grow and prosper through the production of needed
goods, services and ideas. The invisible hand was a phrase coined by Adam Smith to describe the process
that turns self directed gain into social and economic benefits for all.
Smith assumed that as people became wealthier, they would naturally reach out to help the less fortunate
in the community.
Free Market Capitalism
Under capitalism, all or most the factors of production and distribution such as land, factories and railroads
and stores are owned by individuals and not the government. They decide whether to produce goods in
their own countries or have them made in other countries. This is called capitalism or free market
economies. The government will only get involved when determining minimum wages and subsidizing
certain sectors. Capitalism is the foundation for economies in Canada, Us, England and Australia.
The free markets is when decisions about what to produce and in what quantities are made by the market.
Buyers and sellers negotiate for the best prices for goods and services. In a free market, prices are
determined by buyers and sellers negotiating in the marketplace.
The Economic Concept of Supply
Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at
a specific time. The amount supplied will increase as the price increases because sellers can make more
money with a higher price. The Economic Concept of Demand
Demand refers to the quantity of products that people are willing to buy at different prices at a specific time.
Quantity demanded will increase as the price decreases.
The Equilibrium Point and the Market Price
Sellers prefer a high price, and buyers prefer a low price. The crossing point is known as the equilibrium
point or price. Market price is then determined by supply and demand. If surpluses develop (supply exceeds
demand), a signal is sent to sellers to lower their price. If shortages develop, meaning quantity supplied is
less than quantity demanded, a signal is sent to sellers to increase the price.
Competition Within Free Markets
Many sellers in a market and no seller is large enough to dictate the price of a product. Sellers all produce a
similar type of product such as agriculture.
This exists when a large number of sellers produce products that are very similar but are perceived as
different from the buyers like candy. Product differentiation is the key to success.
An oligopoly occurs when a few sellers dominate a market. Oligopolies exist in industries that produce gas
oil etc. Intense price competition would lower profits for all competitors since a price cut on the part of one
producer would most likely be matched by others.
A monopoly occur 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. Monopolies were common in areas such as water, electricity, and
Benefits and Limitations of Free Markets One benefit of the free market is that it allows open competition among companies. The free market with its
competition and incentives was a major factor in creating the wealth that industrialized countries now enjoy.
Free market capitalism provides opportunities for poor people to work their way out of poverty. Capitalism
also encourages businesses to be more efficient so they can successfully compete on price and quality.
Free markets have brought inequality also, because business owners and managers make more money
than the workers. Smith assumed that as people became wealthier, they would naturally reach out and help
the less fortunate in the community. One of the dangers of free markets is that some people let greed
dictate how hey act. Some business people have deceived the public about their products; others have
deceived share holders about the value of their stock. To overcome the limitations of capitalism, some
countries have adopted an economic system called 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 easily
distributed among the people. Socialists acknowledge the major benefit of capitalism – wealth creation but
believe that wealth should be more evenly distributed than occurs in free market capitalism.
Socialism is social equality. Workers in socialist countries usually get longer vacations, fewer hours per
week and have more employee benefits than those in countri