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Chapter 2

75-100 Chapter 2 notes.pdf

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University of Windsor

Chapter 2: How economic issues affect business 2012-09-28 5:59 AM Progress Assessment: • What is the difference between macroeconomics and microeconomics? • What does Adam Smith’s term invisible hand mean? How does the invisible hand create wealth for a country? • How do business people know what to produce and in what quantity? • How are prices determined? • Describe the 4 degrees of competition • What are some of the limitations of free markets? • What led to the emergence of socialism? • What are the benefits and drawbacks of socialism? • What are the characteristics of a mixed economy? • What factors have contributed to the decision to have a mixed economy in Canada? • Name 3 economic indicators and describe how well Canada is doing using each one • What’s the difference between a recession and depression? Summary: Learning Objective #1: explain what capitalism is and how free markets work . As part of this discussion, define supply and demand and explain the relevance of the equilibrium point. • Capitalism is an economic system in which all or most of the means of production and distribution (e.g. land, factories, railroads and stores) are pr ivately owned and operated for profit. • Who decides what to produce under capitalism? o In capitalistic countries, business people decide what to produce; how much to pay workers’ how much to charge for goods and services; whether to produce certain goods in their own countries, import those goods, or have them made in other countries, etc • How does the free market work? o The free 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 for goods and services. Buyers’ decisions in the marketplace tell sellers what to produce and in what quantity. When buyers demand more goods, the price goes up, signaling supplies to produce more. The higher the price, the more goods and services suppliers are willing to produce. Price, then, is the mechanism that allows free markets to work. • What is supply and demand? o Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. The key factor in determining the quantity supplied and the quantity demanded is price. • What is the relevance of the equilibrium p oint? o The equilibrium point, also referred to as the equilibrium price, is the point where the quantity demanded is the same as the quantity supplied. In the long run, that price becomes the market price. Learning Objective #2: define socialism and its benefits and negative consequences. • Socialism is an economic system based on the premise that some businesses should be owned by the government. • What are the advantages and disadvantages of socialism?
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