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RSM100Y1 (431)
Chapter 3

RSM100Y1 Chapter 3 Notes

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Rotman Commerce
Michael Khan

RSM100Y1 Textbook Notes Chapter 3  Economics: the social science that studies the choices people and governments make when dividing up their scarce resources.  It is important to understand: o How the activities of one industry affect the activities of other industries. o How these activities fit into the overall picture of the country.  Microeconomics: the study of small economic units (i.e. individual consumers, families, businesses etc.)  Macroeconomics: the study of a nation’s overall economic issues, such as how an economy maintains and divides up resources and how government policies affect its citizens’ standard of living, and also the effect on the overall world economy with these policies.  The choices about where to spend money also help to set the prices of goods and amounts sold.  Demand: the willingness and ability of buyers to purchase goods and services.  Supply: the willingness and ability of sellers to provide goods and services.  Demand is affected by: o Customer preferences and incomes. o Prices of substitute and complementary items. o Number of buyers in the market. o Strength of the buyers’ outlook for the future.  Demand Curve: a graph of the amount of a product that buyers will purchase at different prices.  Demand curve can shift (keeps the same shape): o Right: increase in demand at all prices. o Left: decrease in demand at all prices.  Supply Curve: a graph that shows the relationship between different prices and the amount of goods that sellers will offer for sale, regardless of demand.  Supply curve can shift (keeps the same shape): o Right: increase in products to buy at lower prices. o Left: decrease in products to buy at lower prices.  Law of supply/demand states that prices are set by the intersection of the supply/demand curves.  Equilibrium Price: the current market price for an item.  Economic systems can be divided into three categories: o Private enterprise systems. o Planned economies o Mixed economies.  There are four market structures in the private enterprise system: o Pure Competition (i.e. fishing market)  A large number of buyers and sellers exchange similar products.  No single participant has a large influence on price (set by supply/demand).  Firms can easily enter/leave the market. o Monopolistic Competition (i.e. pet food market)  A large number of buyers and sellers exchange distinct and differentiated products.  Each participant has some control over price.  A firm can begin or stop selling a good/service relatively easily. o Oligopoly (i.e. paper/steel industries)  A few number of buyers and sellers exchange similar or dissimilar products.  Each participant has some control over price (can result in major losses if prices are dropped).  Start-up prices make it difficult for new firms to enter into the industry. o Monopoly (i.e. Google/Microsoft)  A single seller controls trade in a good or service (no close substitutes).  Control over price in a pure monopoly is considerable.  The government regulates entry by new firms into the industry. o Regulated Monopoly  A firm is granted exclusive rights in a specific market by local/provincial/federal government.  The government regulates the price.  Planned Economy: an economic system where business ownership, profits, and resource allocation are shaped by a plan to meet government goals, not goals set by individual firms.  Socialism: an economic system where the government owns and operates the major industries, such as communications (private ownership existed in industries considered less important to social welfare such as restaurants).  Communism (economic system suggested by Karl Marx): an economic system where all property is shared equally by the people in a community under the direction of a strong central government. The government decides what people can buy because it controls what is produced.  Mixed Market Economy: an economic system that draws from both private enterprise economies and planned economies (degrees vary).  Privatization: the conversion of government-owed and –operated companies to privately held businesses.  An economic system should provide: o A stable business environment (supply m
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