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Chapter 2: How Economic Issues Affect Business - Vocabulary Flashcards

  • Macroeconomics vs Microeconomics

    • Macroeconomics: focuses on the operation of a nationā€™s economy as a whole.
    • Microeconomics: focuses on the behavior of people and organizations in particular markets.
    • These are the two major branches of economics.

  • Resource Development

    • The study of how to increase resources and create conditions that enable better use of those resources.

  • Adam Smith and Capitalism (Growth Economics)

    • Wealth of Nations (1776) defined capitalism as a system of rights and freedoms.
    • Core idea: people work hard when incentives exist and rewards follow effort.

  • Understanding Free-Market Capitalism

    • Capitalism: an economic system where the factors of production and distribution (land, factories, railroads, stores) are owned by individuals (not the government).
    • These resources are typically operated for profit.

  • Different Economic Systems

    • Capitalism: individuals pursue profits; goods/services are sold in a free market to those who can pay.
    • Communism: government decides what to produce and who consumes the results.
    • Socialism: combination of free market and government allocation.
    • Most countries have a mixed economy.

  • Capitalism Defined

    • An economic system in which most of the means of production and distribution are privately owned and operated for profit.
    • Capitalism is the common label for free-market economies.

  • Capitalism: Free-Market Economies

    • In a free market, decisions about what to produce and in what quantities are made by buyers and sellers negotiating prices for goods and services.
    • No country is purely capitalist; no market is truly free.

  • The Foundations of Capitalism

    • How a free market works: many buyers and sellers freely trade to determine prices.
    • How prices are determined: the constant interplay between supply and demand determines an equilibrium price at which a transaction will occur.

  • Equilibrium Point

    • The equilibrium point is where quantity demanded equals quantity supplied.
    • Example: prices set so that buyers and sellers are willing to transact ( Nathanā€™s Hotdogs example illustrates the idea that prices adjust to what people are willing to pay).
    • Formal notion: the equilibrium price P* satisfies Qd(P^)=Qs(P^).

  • The Economic Concept of Supply and Demand

    • Supply: the quantity of products that producers are willing to sell at different prices at a given time.
    • Generally, the supply curve slopes upward: higher prices incentivize more production.
    • Demand: the quantity of products that people are willing to buy at different prices at a given time.
    • Generally, demand decreases as price increases; the demand curve slopes downward.

  • The Equilibrium Point (Revisited)

    • The place where quantity demanded and supplied meet is the equilibrium point.
    • In the long run, that price becomes the market price.
    • Market price is determined by supply and demand.

  • Competition Within Free Markets

    • Four degrees of competition exist:
    • Perfect competition
    • Monopolistic competition
    • Oligopoly
    • Monopoly

  • Perfect Competition

    • Exists when there are many sellers and no single seller can dictate the price.
    • Analogies: flea markets or small-community markets where many players are present and none dominates.

  • Oligopoly

    • A few sellers dominate a market.
    • Examples: industries involving oil/gas, tobacco, automobiles, aluminum, aircraft.
    • In Canada, banking is largely oligopolistic with a few big players and limited small banks.
    • High barriers to entry can keep entry difficult (e.g., capital requirements in airlines).

  • Monopoly

    • A single seller controls the total supply and price of a good or service.
    • Historically, monopolies were common in essential services like water, electricity, and telephone services.

  • Understanding Free-Market Capitalism (Recap)

    • Under capitalism, most factors of production are privately owned and operated for profit.
    • Business decisions (what to produce, how much, pricing, and labor payments) are made by businesspeople, not government officials.

  • Understanding Communism

    • Communism is an economic and political system where the state makes nearly all economic decisions and owns most major factors of production.
    • Historically involved in several nations; North Korea and Cuba are cited as examples of remaining communist economies.

  • Understanding Socialism

    • Socialism is an economic system where some basic industries (e.g., steel mills, coal mines, utilities) may be owned by the government to distribute profits more evenly among people.

  • Canadaā€™s Mixed Economy

    • Like most nations, Canada has a mixed economy with varying degrees of government involvement.
    • Government involvement includes areas like health care, education, and business regulation.
    • The extent of government involvement is a matter of ongoing debate.

  • The Canadian Economy: Key Economic Indicators

    • GDP: gross domestic product.
    • Unemployment rate.
    • Housing starts.
    • Commodity prices.
    • Stock markets.
    • Price indexes: Consumer Price Index (CPI), Producer Price Index (PPI).
    • Productivity trends: measured by changes in output per unit of input (e.g., per hour).

  • Gross Domestic Product (GDP)

    • GDP is the total value of all goods and services produced by an economy.
    • A major influence on GDP growth is productivity ā€” how much output is produced per unit of input (often per hour worked).

  • Standard of Living vs Quality of Life

    • Standard of living: the amount of goods and services people can buy with their money.
    • Quality of life: overall well-being including political freedom, environment, education, health care, safety, leisure, and satisfaction.

  • Productivity in Canada

    • Productivity is measured as total output divided by total hours of labor: ext{Productivity}= rac{ ext{Total Output}}{ ext{Total Hours of Labour}}
    • Increases in productivity often come from technology and machinery, which raise output per hour.
    • Higher productivity lowers per-unit costs and can enable lower prices.
    • Canadaā€™s economy is service-oriented, making productivity particularly relevant since services are labor-intensive.

  • Unemployment

    • Four primary types:
    • Frictional unemployment: unemployment due to transitions, entering the labor force, or leaving a job by choice.
      • Includes new graduates entering the workforce and workers temporarily between jobs.
    • Structural unemployment: unemployment caused by mismatches between workersā€™ skills/locations and job requirements/locations.
    • Cyclical unemployment: unemployment arising from downturns in the business cycle (recessions).
      • This is often the most serious type economically.
    • Seasonal unemployment: unemployment tied to seasonal patterns of demand (e.g., agriculture, tourism).

  • Unemployment Rate (Canada 1989-2019)

    • Charted for context; data source cited as Statistics Canada (Labour Force Characteristics by Sex and Detailed Age Group, Annual).

  • Inflation and the CPI

    • CPI (Consumer Price Index) is the index used to measure inflation.
    • Inflation: a general rise in prices of goods and services over time.
    • Disinflation: inflation rates are declining but still positive.
    • Deflation: prices are falling.

  • The Business Cycle

    • The cyclical pattern of economic activity: boom, recession, depression, and recovery.
    • A recession is defined as two or more consecutive quarters of GDP decline.
    • A depression is a severe recession often accompanied by deflation.

  • Chapter Summary (Key Takeaways)

    • Economics: the study of how society allocates resources to produce and distribute goods and services; two main branches: macroeconomics and microeconomics.
    • Capitalism and free markets: privately-owned means of production; decisions driven by market forces; the free market relies on supply and demand signals.
    • Socialism and communism: levels of government involvement in production and distribution; Canadaā€™s mixed economy reflects a blend of private and public roles.
    • Economic indicators and the business cycle: GDP, unemployment, inflation, productivity; understanding cycle phases helps interpret economic health.
    • Real-world relevance: government policy, taxation, and regulation influence the balance between market outcomes and collective welfare; productivity and innovation drive long-term prosperity.