Unit #3 Interrelationships Among Economic Citizens

Perfect/ Pure Competition

Uniform goods are bought and sold, price is known; competition in the market between many buyers and sellers, no group of buyers and sellers attempt to fix the price. Rare; e.x, stock exchange or wheat. 

Imperfect Competition

Companies sell different products and services, set their own individual prices, fight for market share, and are often protected by barriers to entry and exit.

Monopoly

One producer of goods or services and many buyers. No substitute for product, high barriers for other firms to enter the market. E.x, LCBO, Ontario Hydro

Oligopoly

Few firms supply most of the goods and service, with many buyers. 

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**Homogeneous Oligopoly:** Same goods with no difference e.x, gas 

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**Differentiated Oligopoly:** Producers differentiate their products such as tires 

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Danger of price fixing where firms agree on the price so they can make more profit

Monopolistic Competition

Many producers are competing against each other. Sellers sell similar but not identical goods or services. E.x, fast food & haircuts

Barriers to Entry

Factors making it difficult for new firm to enter a market

Collusion

Illegal agreement among firms to divide market, set prices, or limit production

Competition

1. Increases consumer choice

2. Increases entrepreneurial freedom

3. Encourages Investment and growth

4. Keeps prices down and product quality high

5. Improves resources allocation and efficiency

How Government Ensures Fair Competition

__**Competition Act:**__ Maintain and encourage competition to promote efficiency and adaptability of the Canadian economy; expand & equitable opportunities, recognizing role of foreign competition, provide consumers with competitive prices and product choices. 

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\- Sole source of competition law in Canada

\- Civil and criminal provisions 

\- Businesses avoid criminal prosecution by being in the Competition Bureau Immunity Program 

\- Activities that __abuse__ dominance is illegal for a dominant position in the marketplace 

\- Act establishes rules for truthful advertising 

Bid-rigging

Bidding companies agree a specific supplier will win a contract

Income Tax

Provincial and federal income tax

Sales Taxes

Tax of purchase of goods and services, Harmonized Sales Tax(HST)

Excise Tax

Imposed on sale of luxury goods or non-essential items (tobacco & liquor)

Customs duties

Goods that are brought into the country. International trade agreements reduce customs duties such as NAFTA

Property Taxes

Cities determine how much each homeowner must pay in taxes. Municipalities provide goods/services such as snow removal, policing, water, garbage collection

Progressive

Mechanism where more taxes as the income of the taxpayer increases. Higher rate is collected from taxpayers that earn more and vice versa (Income Tax)

Regressive

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Takes a larger percentage from low-income people than from high-income people. (Sales Tax)

Proportional Tax

Takes a constant percentage for all income earners.

**Economic Rights**

Recognized in many international human rights documents

• Right to adequate standard of living (food, housing, clothes)

• Work

• Form trade  unions and join a trade union; right to social protection

• Highest attainable standards of physical and mental health

• Education

• Mobility rights

• Economic opportunity

• Free elementary/secondary education

• Private property

**Role of Government**

Fiscal policy: Use of government taxing and spending powers to manage the behavior of the economy

• Government can increase/decrease spending on goods/services (hospitals, highways)

• Change levels of taxation; leads to more employment

• Voting influences these economic policies

**Economic Responsibilities**

• Report discrimination or harassment

• Ensure accessibility

• Comply with human rights legislation

• Enforce regulations that protect workers' right to a safe and harassment-free workplace

• Pay taxes (eg. Paying income tax on money received from the sharing economy - Uber or Airbnb).

Stabilization Policies

Business cycle should be managed and government intervention through use of stabilization policies (fiscal, monetary and trade policy)

Fiscal Policy

Government's power of expenditure, taxation and borrowing to bring changes to consumer demand, employment levels, inflation, and other economic goals

Aggregate Demand (AD)

• Total demand for all goods and services produced in an economy

• One or more variables in the GDP formula must increase in value

GDP = C + I + G + (X - M)

**Expansionary Policy (to stimulate the economy)** 

Implemented when economy is in recession, AD is low, unemployment is high and GDP is low

Government can: Increase its spending, cut taxes or do a combination of both to stimulate eco

Tax Cut

Leads to an increase in disposable income of consumers ➡️increase in spending/consumption ➡️increase in employment and GDP

Works if consumers spend money and not save it

Increase in Government Spending

• Will shift AD curve to the right

• Increases GDP

Contractionary Policy

Economy is suffering from inflation, AD is too high, employment is high and high growth in output

Government can: decrease AD, tax increase, a decrease in government spending

Increase in Taxes

• Decrease in AD, people would have less money to spend (less disposable income)

• Decrease in inflation rate

• Trade-offs of lowering GDP and employment levels

Decrease in Government Spending

• Reduce AD

Drawbacks & Limitations

1. Time Lags

2. Governments have difficulty changing spending and taxation policies

3. Conflict between the various levels of government

4. Regional Variations

5. Size of the current government debt

6. Burden for future generations

Monetary Policy 

Ensures Canada's economy has the **right amount of money** to purchase goods/services without causing inflation or deflation

**4 Functions of The Bank of Canada**

1. Director of Monetary Policy

Controlling growth of money supply by regulating credit, currency and interest rates

2. Banker to the banks

Banks deposit accounts with The Bank of Canada (the central bank)

• Chartered banks use their accounts to settle debts with other chartered banks

• Lends money to chartered banks for short period of time for investment purposes

3. Banker to the Federal Government

Federal government's revenues are deposited in 2 locations: Bank of Canada & Chartered bank accounts

• Buy and sell federal government bonds, make interest payments to bondholders

• Handle foreign exchange reserves - holds foreign currencies (US$) to use when intervening foreign exchange market to manage Canadian dollar

4. Issuer of currency

Issue of paper currency [decides design, printing and deals with counterfeiting]

• Coinage is responsibility of the Royal Canadian Mint

**Bank of Canada Organization** 

• Ran by the boards of directors appointed by the government

• Controls money supply without political interference as its independent from government

• Protects value of money through separating power to spend money (gov’t) from power to create money (B of C)

**Monetary Policy**

• Goal is price stability (low inflation 1% - 3%), influence prices (inflation) to get this range

• Uses Monetary Policy to force supply of money in economy; stimulate or slow down

3 Tool of Monetary Policy

1. The Overnight Target Rate – interest rate B of C charges chartered banks from borrowing

1. Open Market Operation – selling and buying back federal government and other bonds. Use cash reserves to influence both money supply and interest rates.

1. Reserve Requirements – influence money supply by modifying the amount of funds banks must hold against deposits in bank accounts.