Ch.2 * What is an economic system?
Business organizations exist in an economic system or environment that provides employment for workers, pays taxes to as many as three levels of government (in Canada), and supports many charities.
The system in which sellers and buyers can exchange goods and services is called a market. The local farmers market is a market. Farmers bring their fruits and vegetables to a single location to attract customers to that location. A stock exchange, like the Toronto Stock Exchange, is another example of a market. This is a market in which people can buy or sell shares.
This chapter will review how the different countries of the world are divided between those that follow the concepts of command economies - socialism and communism - and those that have adopted a market economic system - capitalism and a mixed economy. The pursuit of social, economic, and political goals; the treatment, use, and motivations of the workforce; and market dynamics are different under each of the two approaches.
Many countries have changed their economic systems. The strength of an economic system, or the economy overall, has a major impact on business. Canada enjoys a mixed economy. As such, economic concepts such Gross Domestic Product (GDP), productivity, unemployment rates, inflation, Consumer Price Index (CPI), and the overall business cycle, need to be carefully and continuously monitored, understood, and analyzed.
Learning Goals Key Concept/Learning Goal | Summary | Explain what capitalism is and how free markets work. | Capitalism is an economic system in which all or most of the factors of production and distribution (e.g., land, factories, railroads, and stores) are privately owned (not owned by the government) and are operated for profit.
In capitalist countries, business people decide what to produce, how much to pay workers, how much to charge for goods and services, where to sell these goods and services, and so on. | Define supply and demand and explain the relevance of the equilibrium point. | In a free market, prices are not determined by sellers; they are determined by buyers and sellers negotiating in the marketplace.
Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Generally speaking, the amount supplied will increase as the price increases. Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. Generally speaking, the quantity demanded will increase as the price decreases.
The place where quantity demanded and supplied meet is called the equilibrium point. | Define socialism and its benefits and negative consequences. | Socialism is an economic system based on the premise that some, if not most, basic businesses—such as steel mills, coal mines, and utilities—should be owned by the government so that profits can be evenly distributed among the people. Historically, socialism has become popular in countries were the government or monarchy became corrupt and average people were not able to buy goods and services at a reasonable price. Free education, health care, child care, and unemployment insurance are some of the benefits evident in socialist countries. However socialist countries are also places were entrepreneurs feel discouraged and many leave to go “make their fortune” in more capitalist countries. | Understand communism and the challenges of such a system. | Communism is an economic and political system in which the state (the government) makes almost all economic decisions and owns almost all of the major factors of production.
In reality, pure communism does not exist in the world today – China is supposed to be communist, but many private and state owned businesses make great profits by selling products to Europe and North America which has created a class of wealthy people in Beijing. Cuba is supposed to be communist,
