Chapter 1 Understanding the Canadian Business System

Sept 15, 2021

Spin Master Story
- Anton Rabie & Ronnen Harary formed a company called “Spin Master”
o Was a craze like fidget spinners
o It like died, but then it got revived bc the founders learned stuff and now it
employs over 1500 ppl globally

The Idea of Business and Profit

- Business
o An organization that produces or sells goods or services to make a profit (DFN)
o Produce most of the goods and services we consume
o Employ most workforces
o Ex.:
 Netflix
 Walmart
 Shoppers
 Restaurants
- Profit
o What remains after a business’s expenses have be subtracted from its revenues
(DFN)
o Reward businesses for taking risks
 Time + money risks
o Profits can be big or small
- Not-for-profit organizations
o Use government funds or sales/goods to provide public services
 Charities
 Hospitals
 Educational institutions
Economic Systems Around the World
- Economic system
o The way in which a nation allocates its resources among its citizens (DFN)
o They differ in who owns & controls the resources
 “factors of production”
Factors of Production
- Factors of production
o The resources used to produce goods and services: (DFN)
 Labour
 The people who work for a company represent labour
 The mental and physical capabilities of people
 Capital
 The funds required to start a business and to keep it operating and
growing
 Major sources of capital:
o Personal investments
o Stock of investors
o Profits from the sale of products
o Borrowed funds (ex. banks)
 Entrepreneurs
 The people who accept the opportunities and risks involved in
creating and operating businesses
o Ex. Mark Zuckerberg
 Natural resources
 Physical resources needed
o Land
o Water
o Mineral deposits
o Trees
 Information
 Specialized knowledge and expertise of people who work in
businesses
 Market forecasts
 Other economic data
 Can be shared w.o being diminished
Types of Economic Systems
- Different systems manage production in different ways
o Ex. private owned vs govt owned
- Command economy
 o An economic system in which government controls all or most factors of
production and makes all or most production decisions (DFN)

- Market Economy
o An economic system in which individuals control all or most factors of
production and make all or most production decisions (DFN)
Command Economies
o 2 basic forms of command economies are communism and socialism
 Communism
 A government system in which the government owns and operates
all sources of production (DFN)
 Members of society contribute based on their abilities and receive
based on their needs
 Ex. china
o Socialism
 Government owns and operates selected major industries
 Smaller businesses such as clothing stores and restaurants can be privately
owned
 Many people tend to work for government but don’t have to
 Extensive public welfare systems result in high taxes & most govt
operated places are inefficient bc the leaders r chosen by politics instead of
ability
 Lead to decline of socialism
Market Economies
o Market
 An exchange process between buyers and sellers of a particular good or
services (DFN)
 Ex. technology brings buyers and sellers together via ecommerce
o B2C
 Business to consumer transactions
o B2B
 Business to business transactions
o Both b2b and b2c take place w.o much govt involved
Input and Output Markets

- Input market
 o Firms buy resources from households that supply the resources (DFN)
- Output market
o Firms supply good and services in response to demand of consumers (DFN)
- These 2 markets create a circular flow
o Ex. Ford buys labour from households buy can supply capital via stock purchases
 Customer buying patterns then tell ford which models to produce and
discontinue, etc
- Capitalism
o An economic system in which markets decide what, when, and for whom to
produce (DFN)
o Free-market economy allows private ownership of factors of production
 Encourages entrepreneurship via profits as incentive
o Contrasts a command economy
Mixed Market Economy

- Mixed Market Economy

o An economic system with elements of both a command economy and a market
economy, which in practice is typical of most nations’ economies (DFN)
- Privatization
o The transfer of activities from the government to the private sector
 Ex. air traffic control system
- Deregulations
o A reduction in the number of laws affecting business activities (DFN)
 Can also reduce powers of government enforcement agencies
 Caused an increase in airline productivity

How Government Influences Business

- Government plays many key roles in influencing business activities
Government as a Customer
- Government buys thousands of products and services from businesses
o Ex. office supplies
o Computers
o Highways
o Services
- Many businesses depend on govt. for revenue
Government as a Competitor
- Govt. Competes with business via Crown corporations
 o Accountable to parliament
o Ex. Canada Post generates billions of revenue and are v involved in economic
activity

Government as a Regulator
- Federal and Provincial govt in Canada regulate many aspects of business activity
o Administrative boards
o Tribunals
o Commissions
o Reasons for business regulations:
 Promoting competition
 Competition is crucial to market economy
 W.o restrictions big companies could screw over small companies
 Competition policy is outlined in Canada’s “Competition Act”
o Prohibits many business practices that lessen competition
 Protecting consumers
 Federal govt. has programs to protect consumers
o Ex. Tobacco Act, which prohibits advertising tobacco
o Ex. Food and Drug act:
 Prohibits sale of food that has poison or harmful
substances
 Achieving social goals
 Universal access to healthcare, safe workplaces, employment
insurance require govt & businesses to interact
 Protecting the environment
 Ex. Canada Water Act
o Controls water quality in fresh and marine waters
Government as a Taxation Agent
- Taxes are imposed and collected by the federal, provincial and local governments
- Revenue taxes (income taxes for example)
o Levied by governments to provide revenue funding various services and programs
- Progressive revenue taxes
 o Levied at a higher rate on higher income tax payers vs low-income tax payers
- Regressive revenue tax (ex. sales tax)
o Levied at the same rate regardless of one’s income
- Restrictive taxes (ex. gas, alcohol, tobacco)
o Levied partially for revenue they provide
 Also bc of the substances needing to be controlled

Government as a Provider of Incentives and Financial Assistance

- Federal, provincial and municipal govts. Offer incentive programs to try and stimulate
economic development
o Ex. give subsidies to film companies to try and produce more movies
o Ex. tax rebates for companies in certain areas
- Industry Canada
o Offers programs to help small businesses
o Ex. Canada Business programs
 Provides info on govt programs, services, and regulations to help
small/medium business start & survive
- Government incentives can and can’t stimulate economy

Government as a Provider of Essential Services

- Government facilitates business activity via services they supply
o Ex. highways, postal service, money minting, armed forces
- Provincial and municipal governments provide:
o Streets
o Sanitation systems
o Police
o Hospitals
o Education
o All which create stability and stimulate business activity
How Business Influences Government
- Businesses try to influence govt via lobbyists
- Lobbyist
o A person hired by a company or an industry to represent its interests with
government officials (DFN)
 - Trade Association
o An organization dedicated to promoting the interests and assisting the members of
a particular industry (DFN)
o Usually used by employees and owners of small businesses that can’t afford
lobbyists

Demand and Supply in a Market Economy

- Market
o An exchange process between buyers and sellers of a particular good or service
The Laws of Supply and Demand
- Decisions of what to buy and sell are determined mostly by supply and demand.
o Demand
 The willingness and ability of buyers to purchase a product or service
(DFN)
o Supply
 The willingness and ability of produces to offer a good or service for sale
(DFN)
o Law of demand
 Buyers will purchase (demand) more of a product as its price drops (DFN)
o Law of supply
 The produces will offer (supply) more of a product as the price rises
(DFN)

Demand and Supply Schedules

- Example:
o If lots of people will pay $25 for a pizza (high price), restaurant will make lots of
pizzas, but…
o If lots of people will only pay $5 for a pizza (low price), restaurant will make few
pizzas, to cause more ppl to buy pizza which will increase the price of pizza since
low supply and high demand
- Demand and supply schedule
 o An assessment of the relationships between different levels of demand and supply
at different price levels (DFN)
o Are obtained from market research and systematic studies of the market
Demand and Supply Curves
- Demand curve
o Graph showing how many units of a product will be demanded (bought) at
different prices
- Supply curve
o Shows how many pizzas will be supplied (cooked) at different prices
 - Market price (Equilibrium price)
o The price at which the quantity of goods demanded and the quantity of goods
supplied are equal (DFN)
o Tends to maximize profits

Surpluses and Shortages

- Ex. with pizza:
o If the supplier put 1200 pizzas for $10 each, only 1000 get sold so they are 200
left over (surplus)
- Surplus
o A situation in which quantity supplied exceeds quantity demanded (DFN)
 Ex. extra pizzas left
- Shortage
o A situation in which the quantity demanded exceeds the quantity supplied (DFN)
 Ex. not enough pizzas for everyone
Private Enterprise and Competition
- Private enterprise system
o An economic system characterized by private property rights, freedom of choice,
profits, and competition (DFN)
o Private property
 Ownership of the resources used to create wealth is in the hands of
individuals
o Freedom of choice
 You can sell your labour to any employer you choose
 Can choose which products to buy and who to hire, and what to produce
o Profits
 You get the most profits!
o Competition
  Competition motivates businesses to operate efficiently
 Ex. find equilibrium price
Degrees of Competition
- 4 degrees of competition within a private enterprise system:
o Perfect competition
 A market or industry characterized by a very large number of small firms
producing an identical product so that none of the firms has an ability to
influence price (DFN)
o Monopolistic competition
 A market or industry characterized by a large number of firms supplying
products that are similar but distinctive enough from one another to give
firms some ability to influence price (DFN)

o Oligopoly
 A market or industry characterized by a small number of very large firms
that have the power to influence the price of their product/resources.
(DFN)
 Hard to enter this kind of market because large capital investment is
necessary
 Ex. automobile
 Rubber
 Oli/gas industries
 Actions of one firm vastly affect others in the industry
 Ex. if u have 3 insurance 1 is $1000/yr 2 is $800/yr and 3 is $900 a
yr, if they r same quality ppl insta go to option 2 which fks
companies 1 and 3
o Monopoly
 A market or industry with only one producer that can therefore set the
prices of its products and resources (DFN)
 Ex. ICBC
 Most monopolies can’t exist in Canada bc of Competition Act
 “natural monopolies” etc electric utilities or ICBC are watched by
provincial boards so they don’t grief consumers