COMMERCE 1E03 Chapter Notes - Chapter 2: Monopolistic Competition, Perfect Competition, Invisible Hand

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28 Jul 2016
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Chapter 2- How Economic Issues Affect Business
In order to understand the situations and conditions in which Canadian business operates we must have
know three things:
1. Have some grasp of economics
2. He aware of the impact of the global environment
3. Understand the role of the federal and provincial governments in Canada
A major part of business success is due to an economic and social climate that allows businesses to
operate freely. Investing is risky enough without having to worry about unpredictable governments,
massive corruption, and weak laws. Therefore any changes in our economic or political system have a
major influence on our business.
For example, foreign investors like Canada because we have a stable economic and political
environment.
Economics- is the study of how society chooses to emply resources to produce goods and services and
distribute them for consumption among various competing groups and individuals. It could be also
defined as the "allocation" of scarce resources as many economist believe that resources are scarce and
that they need to be carefully divided among people, usually by the government.
Resources(a.k.a factors of production) -could be anything including land, labour capital goods,
entrepreneurship, and knowledge.
Businesses may contribute to an economic system by inventing products that greatly increase available
resources.
For example, business may discover new energy sources of growing food, and new ways of
creating needed goods and services. Ballard Inc. is a company that does this it is working with
manufacturers to develop the next generation of efficient and clean engines for busses ,
automobiles, and trucks.
There are branches of economics which include macroeconomics and microeconomics.
Macroeconomics-looks at the operation of a nation's economy as a whole
Include gross domestic product, unemployment rates , and price indexes
Microeconomics- looks at the behaviour of people and organization in particular markets.
Includes pricing and supply and demand
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Example: while macroeconomics looks at how many jobs exist in the whole economy,
microeconomics examines how many people will be hired in a particular industry or a particular
region of the country.
Resource development- is the study of how to increase resources(say by getting oil from shale and oil
sands) and to create the conditions that will make better use of them (like recycling and oil
conservation)
Communism - the government decides what will be produced and who will consume that production
Socialism - some free market and some government allocation
Capitalism - individuals seeking profits produce products and these products are sold in a free market to
those who can pay for them
The Wealth of Nations defined Capitalism as a system of rights (to make a profit, to
private property, and to buy or sell) and freedoms (to compete and from government
interference)
Businesses can contribute to an economic system by inventing products that greatly increase available
resources such as discovering new energy sources (e.g., hydrogen fuel for cars), new ways of growing
food (e.g., hydroponics) and new ways of creating needed goods and services (e.g. nanotechnology).
Green Box- recognizes one company for its eco-winery philosophy.
The challenge for macroeconomist is to determine what makes countries relatively wealthy and other
countries relatively poor, and then to implement policies and programs that lead to increased prosperity
for everyone in all countries. One way to begin understanding this challenge is to consider the theories
of Adam Smith.
Adam Smith
Adam Smith envisioned creating more resources so that everyone could become wealthier.
He believed that freedom was vital to the survival of the economy, especially the freedom to
own land or property and the freedom to keep profits from working the land or owning a
business.
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Yet as people try to improve their own situations in life, Smith said, their efforts serves as an
"invisible hand" that helps the economy grow and prosper through production of needed goods,
services, and ideas . Thus, the invisible hand turns self-directed gain into social and economic
benefit for all.
How is it that people working in their own self -interest produce goods, services, and wealth f or
others?
The only way f armers in a given area can become wealthy is to sell some of their crops to
others. To become even wealthier, f armers would have to hire workers to produce more f ood.
As a consequence, people in that area would have plenty of f ood available and some would
have jobs on the f arms.
So the f armers' self -centred ef f orts to become wealthy lead to jobs f or some and f ood f or
almost all.
Stop and think about that process f or a minute because it is critical to your understanding of
economic growth in Canada and other countries in the world.
The same principle applies to other products as well—everything f rom clothing to iPhone
Invisible Hand- In economics, the invisible hand of the market is a metaphor used by Adam Smith to
describe the self-regulating behavior of the marketplace. Individuals can make profit, and maximize it
without the need for government intervention
Numerous factors can hinder economic growth which include corruption. In many countries, a business
person must bribe government officials to get permission to own land, build on it, and conduct normal
business operations.
How Free Markets Work
The f ree market is one in which decisions about what to produce and in what quantities are made by
the market—that is, by buyers and sellers negotiating prices f or goods and services. Consumers (such as
you and me) send signals to tell producers what to make, how many, in what colours, and so on. We do
that by choosing to buy (or not to buy) certain goods and services. Note that just as no country is purely
capitalist, no market is truly f ree. “Free” markets work not just f rom the interaction of buyers and
sellers, but also f rom government signals (e.g., laws and regulations, taxes, warnings, advice, etc.).
How Prices Are Determined
In a f ree market, prices are not determined by sellers; they are determined by buyers and sellers
negotiating in the marketplace. A seller may want to receive $50 f or a T-shirt, but the quantity
demanded at that price may be quite low. If the seller lowers the price, the quantity demanded is likely
to increase. How is a price that is acceptable to both buyers and sellers determined? The answer is
f ound in the microeconomic concepts of supply and demand.
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