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Business 6th
Canadian Edition
By Griffin, Ebert,
Starke
(Solutions Manual,
All Chapters 100%
Original Verified, A
+ Grade)
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Chapter 1—Understanding the Canadian Business System
CHAPTER 1
UNDERSTANDING THE CANADIAN
BUSINESS SYSTEM
CHAPTER SYNOPSIS
Chapter 1 creates a context for understanding the business concepts to follow in the
text. It defines business and profit, outlines the world's major economic systems, and
describes the basic aspects of Canada's market economy, including markets,
demand, supply, the business cycle, private enterprise, and degrees of competition.
The chapter concludes with a brief discussion about the history of business in
Canada as well as a discussion regarding the transformation of the economy from
one based on sole proprietorship to the complex corporate structure of today.
Opening Exercise
This exercise is designed to help your students assess their level of knowledge
about business and set their own learning goals for the class. The underlying
agenda is to get them talking to each other, setting the stage for active
participation throughout the class.
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ƒ
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Ask each student to take out a piece of paper and divide it into two
columns. In the first column, students should write the most important
four or five things they currently know about business, and in the
second column, the four or five things they would like to learn.
Divide students into groups of three to five people, and ask them to
share their lists with each other. As they listen, they can delete or add
anything that seems relevant.
After five minutes, ask them to switch groups so that they are with all
new people, and repeat the process of sharing their lists.
After five minutes, ask students to switch to a third group of all new
people. With this group, the goal is to synthesize their lists into one big
idea of what they know, and one big idea of what they want to learn.
Have each group report briefly back to the class. You may want to
record their responses on butcher paper and post them in the room for
reference as you move through the course.
Another useful approach on the first day of class is to ask how many students
want to eventually launch their own business. (Typically a third to a half of
each class will raise their hands.) Call on individual students to briefly share
their specific interests, including type of business and timeframe. You can then
use their personal goals to illustrate concepts for each section you teach.
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CHAPTER OUTLINE
I.
THE CONCEPT OF BUSINESS AND PROFIT (LO #1 – p. 7) -- A
business is an organization that seeks to earn profits by providing goods and
services to customers. Profit is what remains after the expenses incurred by a
business are subtracted from its sales and revenues. The opportunity to earn
profits is what encourages people to open and expand businesses. Profits
are required in order for the organization to be “a going concern” and
continue to operate into the future.
II.
GLOBAL ECONOMIC SYSTEMS (LO #2 – p. 7) -- An economic system
is the way in which a nation allocates its resources among its citizens.
Various systems differ in who owns or controls these resources, or "factors
of production".
A. Factors of Production -- The basic resources used by a business to produce
goods and services include natural resources (broad concept of all physical
resources – including information), human resources (labour), capital (funds
needed to operate an enterprise) and entrepreneurs (AKA managers).
B. Types of Economic Systems -- Different types of economic systems manage
the factors of production in different ways. Command economies, market
economies, and mixed economies are three basic types.
1. In command economies (like communism and socialism), a centralized
government controls many (or all) of the factors of production. The
government decides how much will be produced and who will produce it.
Command economies have fallen into disfavour during the past decade,
and only a few are left (e.g., Cuba and North Vietnam).
2. In market economies (e.g., capitalism), the factors of production are
privately owned and controlled. . Individuals are free to start their own
businesses and will buy the resources they need on the input market,
from those resources made available by their owners. Businesses make
their products and services available on the output market, and
consumers are free to buy from whomever they wish (right to choose).
3. Mixed economies are characterized by having features of both command
and market economies. Most countries of the world, including Canada,
have mixed economies. The rationale for public ownership of a business
or industry may differ from one country to another, and from one
industry to another. For example, an industry may be government owned
because it is considered to be essential to the proper functioning of the
economy, or because the capital investment is so significant that it is not
realistic to expect a private company to make the investment..
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Chapter 1—Understanding the Canadian Business System
III. INTERACTIONS BETWEEN BUSINESS AND GOVERNMENT
A. A discussion of how the government influences business in terms of
government being a customer, competitor, regulator, taxation agent, provider
of incentives, and a provider of essential services.
1. Government as a Customer -- Government buys many services and
products from private industry, amounting to billions of dollars in
spending each year.
2. Government as a Competitor -- Crown corporations at both federal and
provincial levels compete with business. Examples of some of Canada’s
Crown corporations are given in Table 1.1.
3.
Government as a Regulator -- Although there has been a strong move
toward deregulation, federal and provincial governments still regulate
many aspects of business activity. Four of the important areas of
regulation involve protecting competition, protecting consumers,
achieving social goals, and protecting the environment. Competition is
a fundamental component of a market economy. Government may
intervene if it determines that the actions of a business result in a
lessening of competition that is detrimental to the functioning of the
market economy. . The guidelines for Canada’s competition policy are
contained in The Competition Act (see Table 1.2). The Hazardous
Products Act, the Tobacco Act, Weights and Measures Act, Textile
Labelling Act, and the Food and Drug Act, are described as examples of
regulations to protect consumers. The achievement of social goals
promotes the well-being of our society. Social goals include universal
access to health care, safe workplaces, employment insurance and
decent pensions. In terms of ecological protection, The Canada Water
Act, Fisheries Act and Environmental Contaminants Act are described.
4.
Government as a Taxation Agent -- Taxes are imposed and collected by
all three levels of government. Revenue taxes (e.g., income taxes) are
levied primarily to fund government services and programs; they form
the majority of all taxes. Progressive taxes (higher rate of tax as income
increases) and regressive taxes (higher proportion of income paid in tax
by lower income earners) are described. Restrictive taxes, such as
excise taxes on alcohol, tobacco and gasoline serve as both a revenue
source and a "deterrent to excesses".
5. Government as a Provider of Incentives Incentive programs are
intended to stimulate economic development. Governments offer
financial incentives directly to businesses in the form of grants,
subsidies, and relief from taxes and duties. Government also provides
incentives to businesses by providing services through government
organizations. Several examples of grant incentive programs are
described.
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Part 1—Introducing the Contemporary Business World
6. Government as a Provider of Essential Services -- Business activity is
facilitated by the government services supplied, e.g. roads, postal service,
minting of money, police and fire departments.
B. A discussion of how business can influence government – illustrates that
business can influence governments through the use of Lobbyists, Trade
Associations, and Advertising.
1. Lobbyists are paid to represent their client’s interests to government
officials. Trade associations represent the interests of the industry to
which their members belong. Advertising is carried out to indirectly
influence government by swaying voters’ opinions
IV. THE CANADIAN MARKET ECONOMY (LO #3 – p. 17)
A. Markets, Demand and Supply The exchange process between individuals
and businesses in the various markets are described. Demand, supply, the
law of demand, the law of supply, equilibrium, surplus and shortage are
defined.
B. Private Enterprise – The concept of private enterprise is introduced.
Classroom discussion may be enhanced by introducing Adam Smith's belief
that allowing individuals to pursue self-interest would eventually benefit
society as a whole through "the invisible hand of competition." Four
elements must be present in private enterprise: private property rights,
freedom of choice, profits and competition.
1. Private Property rights - The right to buy, own, use and sell an item. This
is a right generally taken for granted by Canadians, but not available to
individuals in all countries.
2. Freedom of Choice Businesses usually may choose what products and
services to provide and which individuals to hire. Individuals may
choose the type of work they do, for whom they work, and what products
and services they buy.
3. Profits - The ability to keep profits motivates individuals to start and
expand businesses, and accept the uncertainties involved in owning a
business.
4. Competition A company competes for both the resources it requires and
for customers. The need to make its products or services attractive to
customers and to earn a profit motivates efficiency.
C Degrees of Competition -- Four degrees of competition within a private
enterprise system are identified (see Table 1.3).
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1. Pure Competition - A market or industry characterized by a large number
of small firms producing an identical product so that no one firm is
powerful enough to influence the price of their product in the market
place. The market is easy for firms to enter and exit. Agriculture (wheat
production) is given as an example.
2. 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.
The market is easy for firms to enter and exit. Examples given:
detergents, soft drinks, fashion.
3. Oligopoly - A market or industry characterized by a small number of
large firms that have the power to influence the price of their product
and/or resources. Generally large initial capital investment is necessary
for new competitors to enter the market, therefore barriers to entry are
high. Examples given: automobile, airline, and steel industries.
4. Monopoly - a market or industry with only one producer, who can set the
price of its product and/or resources. Natural monopolies exist when a
single company is the most efficient way to provide the product or
service. In recent years, several industries previously considered to be
natural monopolies have been opened to competition. (example – long
distance telephone service.).
V. A BRIEF HISTORY OF BUSINESS IN CANADA (LO #5 – p. 24) -- Table
1.4 highlights some of the specific events in Canadian business history.
A. The Early Years -- European involvement began in the late 1400's. Fishing,
fur trading, lumber and farming were the main industries of Canada
up until the mid 1700's.
B. The Factory System and The Industrial Revolution -- Canadian
manufacturing expanded rapidly with The Industrial Revolution's
introduction of the factory system, mass production and
specialization of labour and even more with the coming of steam
power.
C. The Entrepreneurial Era -- The last half of the nineteenth century saw
entrepreneurs taking huge risks to earn profits. Some became
immensely wealthy and their power discouraged competition. This
triggered the passing of legislation to regulate business.
D. The Production Era -- Beginning with Ford's introduction of the moving
assembly line, the early twentieth century saw businesses focus on
increasing the volume of goods available for sale by improving
productivity and manufacturing methods. .
The dominance of
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Part 1—Introducing the Contemporary Business World
leaving workers with little choice of employers. Pressure for
increased productivity made working conditions difficult. These
conditions were countered by the rise of labour unions and collective
bargaining.
Intervention by the federal government during The
Great Depression and Second World War has established three
countervailing powers in Canadian society, business, labour, and
government.
E. The Sales and Marketing Eras -- The sales era of the 1930's and 1940's saw
businesses try to gain a competitive edge by focusing on sales forces,
advertising, and product availability. The marketing era of the 1950's and
1960's had a new philosophy for gaining competitive advantage -- identify
consumer needs through market research and meet those needs.
F. The Finance Era -- During the finance era of the 1980s, businesses achieved
increased profits through mergers, buying and selling of businesses,
and through hostile takeovers.
G. The Global Era -- Foreign markets expand the number of potential customers
for Canadian businesses while foreign imports increase the level of
competition in the Canadian market place.
H. The Internet Era -- The beginning of the twenty-first century marked what
experts call the Internet Era. The growth of the Internet is expected to
affect businesses in at least three different ways: (1) give a dramatic
boost to trade in all economic sectors, (2) level the playing field, at
least somewhat between larger and smaller enterprises, (3) build an
effective and efficient business-to-business and business-to-customer
networking mechanism .
TEACHING TIPS
1.
Individuals set up businesses in Canada with the intention of making a profit.
As a course opener, you might ask students to provide a definition of the
term "profit."
2.
There have been business people who have said: "For me, making a profit is
NOT the most important thing about operating my business!" Ask students
to identify some other good reasons for opening a business and going
through the work of making that business a successful venture.
3.
Have the students imagine a typical new small business that has just
completed its first period of operation. If there are profits from operations,
where are some places to which these profits might be allocated? Have
students make the list as long as possible.
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Chapter 1—Understanding the Canadian Business System
4.
Most, if not all, of the students have heard of non-profit or not-for-profit
organizations. Ask the students to explain what such terms mean. Is there
really such a thing as a non-profit organization? How do the goals of a notfor-profit organization differ from a business?
5.
Profits reward owners for taking the risks involved in investing their money
and time in a business. Ask students to explore with the professor some of
the risks involved.
6.
It has been said that entrepreneurs are a special breed. Encourage some
students to indicate why they would or would not like to be an entrepreneur.
7.
Ask students to evaluate this statement: "An owner of a business can take
more time away from work than a hired employee can."
8.
As a way to make the factors of production--labour, capital, entrepreneurs,
and natural resources--stay with the students, engage in a synonym game.
Ask students, perhaps in teams, to develop a string of synonyms for the four
factors. Here's an example: "people, money, risk takers, and raw materials."
9.
Ever since the factors of production were first proposed, various individuals
have attempted to indicate which of the four is most important. Have
students do the same. Usually entrepreneurs come out ahead. However, you
can point out that all are needed and making one of them the "star" could be
a mistake.
10.
Encourage students to see the logic behind some of the ideas that Karl Marx
espoused. Students should also be encouraged to take from Marxian theory
several notions that we accept in Canada today.
11.
If students agree that some Marxian ideas truly have merit, they are ready to
tackle a timely question: "What has gone wrong in so many nations that have
tried to follow the teachings of Marx?"
12.
The specialization of labour and time-and-motion studies developed during
the Industrial Revolution were successful in increasing production. A
capitalist perspective emphasizes increased efficiencies and economies of
scale. A Marxian perspective suggests that this increase in output was
achieved on the backs of the workers, with difficult working conditions
arising from the pressure to meet standards. Ask students to consider the
change in production methods from the point of view of both the businesses
and their workers.
13.
The text has identified as "avowedly communist systems" the nations of
Cuba, North Korea, and Vietnam. Ask students to do some investigative
research on the status of human rights in these nations. Is there a common
thread? If students find a common thread, ask them this: "What seems to be
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the relationship between communism and the value placed on the rights of
the individual?"
14.
Cuba is on the list of communist countries. Assume that tomorrow morning,
Fidel Castro calls the Canadian Prime Minister and says: "I want to restore
economic stability to my country. Please help me!" Appoint one of your
students (or a student team) as High Commissioner for Economic
Restoration in Cuba. What will that student (or student team) do to help
Cuba?
15.
Have students reveal what picture comes to mind when someone uses the
term "capitalist." Is the first reaction positive or negative? Why?
16.
Price represents a balance between supply and demand, so consumers should
be able to do a lot to determine prices of products and services. Why do
consumers often feel that they have little or no power over prices they are
charged?
17.
Ask the students to show ways in which consumers can cause the price of
certain products to fall.
18.
Degrees of competition are best taught through liberal use of examples.
Moderate a class discussion where the goal is to develop examples of each of
the four degrees of competition.
19.
What degree of competition exists in major league baseball?
20.
On the first day of class, have your students jot down what they think when
they hear the word "business." Have students share their impressions.
21.
The concept of the "invisible hand of competition" is often hard for students
to grasp. Help them understand the concept by working through an example
which begins with an individual perspective and show how many individuals
working for their own benefit actually benefit a much larger group of people.
Price reductions, which occur over time in products (e.g., electronic
calculators or computers) are good examples.
22.
Although internet use has grown dramatically, this does not mean that sales
transactions on-line are growing at the same pace. Have students identify
factors that affect the willingness of customers to make purchases over the
internet.
23.
Remind students of the importance of learning the key terms in the text.
Although the "jargon" of a field of study can be annoying to some, it
provides useful shorthand for describing concepts and learning about the
field.
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Chapter 1—Understanding the Canadian Business System
24.
Remind students that in an introductory course we only survey the material,
and do not cover it in depth. This approach provides for a "sampling" of all
the important areas of business.
25.
One of the review questions at the end of the chapter asks students to give
examples of the four basic degrees of competition. Ask students to share
these in class.
26.
Have students interview an entrepreneur and ask the person about their
experiences. Have students make a brief report to the class about their
findings.
27.
Have students make a list of products they use every day. Compile a master
list as part of a class discussion. Most will be surprised at how long the list.
28.
Ask the students to discuss the importance of the 3 levels of government and
their influence on the Canadian economy.
USING THE BOXED INSERTS
OPENING CASE
Canadian Megaprojects
The case discusses two major natural resource extraction projects in Canada,
Alberta Tar Sands and Voisey’s Bay. The case does an excellent job of highlighting
the risk and return trade off which is fundamental to entrepreneurship. In both
projects massive investments in time and resources were made because of
opportunities to earn significant profits, although the amount of profit to be earned is
still far from certain.
For the Alberta Tar Sands project, investments have taken place over a thirty-year
period. (Although not mentioned in the case, the technology to extract the oil from
the sand had to be developed, also requiring a significant investment.)
In addition to the investment that Inco had to make to develop its nickel mine at
Voisey’s Bay, Inco was unable to begin development until agreements were
reached with the government of Newfoundland, the Innu nation and the Labrador
Innuit Association.
The case provides an excellent lead-in to discussing the nature of entrepreneurship,
the role of the government, the laws of supply and demand, the degree of
competition, and the impact of operating in a global marketplace.
Potential questions/discussion points are:
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2. Should the government have the power to force Inco to build a
smelter ?
3. Why would Inco resist building a smelter in Labrador?
4. What impact does supply and demand have on the viability of these
projects?
5. Who controls the factors of production in the case?
6. How much influence do these two companies have on the selling
price of the natural resources they produce? What degree of
competition exists in these industries?
7. What should government’s role be in developing the Tar Sands?
Should tax dollars be used to fund such risky projects?
8. Have students research the current state of the project.
BUSINESS ACCOUNTABILITY (p.10)
What Happened to Communism?
The decline in communism is discussed in terms of both the number of countries
with communist economic systems and the role free enterprise plays in three of the
remaining communist countries. Survey results indicate that support for capitalism
is low in countries where free market reforms were implemented quickly into
societies characterized by high levels of corruption.
ENTRPRENEURSHIP AND NEW VENTURES (p. 18)
Pulse of a Nation
Saskcan Pulse Trading Inc., an agri-business located in Regina, Saskatchewan, is
used as an example of how Canadian business is continuing to evolve from
exporters of raw materials to value-added processors. Saskcan splits and polishes
pulse crops (lentils, chick peas and peas). Despite high transportation costs,
Saskcan has become the world’s low-cost producer, while providing high quality
pulse, polished and packaged according to customer specifications. Saskcan has
obtained the necessary expertise by partnering with an established Turkish
company. While these are not traditional crops, such diversification has benefited
farmers .
QUESTIONS FOR ANALYSIS
1.
Is one factor of production more important than the others? If so, which
one? Why?
All of the factors of production are important, as a business cannot operate
successfully without all four. In a specific situation, a factor with limited
maydownload
be more important
the other
that are readily
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Chapter 1—Understanding the Canadian Business System
available, simply due to the scarcity of supply. One might make the
argument that the entrepreneur is the most important, because without the
individual’s ideas and drive, there is no demand for the other factors.
2.
On various occasions, government provides financial incentives to business
firms. For example, the Canadian government provided expert assistance to
Bombardier Inc. with its Technology Transfer Program. Is this consistent
with a basically free market system? Explain how this might distort the
system.
Financial incentives are not consistent with a true capitalist system where the
forces of supply and demand dictate which businesses are successful and
which businesses fail. Financial incentives allow a less efficient firm to
survive, by allowing it to reduce the selling price of its products and services
to a competitive level, even though its operating costs exceed those of its
competitors.
In a mixed market economy, however, government is accepted as a
participant in the economy, and financial incentives are often used as
instruments of social and economic policy. For example, financial
incentives may assist Canadian companies to compete with global
competitors. Financial incentives may also be used to reduce unemployment
rates in specific parts of the country.
.3
In recent years, many countries have moved from planned economies to
market economies. Why do you think this has occurred? Can you envision a
situation that would cause a resurgence of planned economies?
In many countries, planned economies failed because of inefficiencies in
production and the resulting stagnation in the economy. Strong real growth
in the mixed market economies likely acted as a model for change. .
Extreme civil unrest leading to authoritarian rule could cause a country to
revert to a command economy. In the past, control of the factors of
production by the small upper class and a large underprivileged class has
resulted in political upheaval and implementation of a planned economy, and
this could reoccur.
4
Find an example where a surplus of a product led to decreased prices.
Then find an example where a shortage led to increased prices. What
eventually happened in each case? Why? Is what happened consistent with
what economics predicts? Why?
DVD players and digital cameras are examples of excess supplies of a
product leading to decreased prices. When each of the products first entered
the market, a price in excess of $1,500 was not uncommon (due to few
producers and the use of new technology). As more and more of these
products came on the market, the price was driven down (the price also
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because
companies became
efficient
production).
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The introduction of the Mercedes-Benz M-Class is an example of a product
shortage leading to increased prices. In many areas of the country, buyers
were paying well above the sticker price to receive one of the cars.
Eventually in each case the laws of demand and supply interacted to set a
market price and quantity on which buyers and sellers could agree. The
companies involved worked to find the right combination of price and
quantity supplied to maximize their profits.
5.
Familiarize yourself with a product or service that is sold under conditions of
perfect competition. Explain why it is an example of perfect competition
and identify the factors that make it so. Then do the same for a product in
each of the other three competitive situations described in the chapter.
Perfect competition – It is getting more difficult to find an example of
perfect competition. The traditional example is an agricultural product such
as wheat or potatoes. Potatoes are a product where the customer views the
product offered by one firm as identical to that of other firms, prices are
known by buyers and sellers, entry and exit into the market is easy, and
individual producers and buyers have no impact on price. In the current
market, however, some farmers have successfully differentiated their output
by selling organic produce.
Monopolistic competition – Clothing manufacturing occurs under conditions
of monopolistic competition. There are many more purchasers than sellers
in the industry, and entry into and exit from the industry are easy. While
there is little functional difference between different brands of clothing,
manufacturers try to differentiate their products on the basis of style and
colour, brand image, and quality.
Oligopoly – Automobile manufacturing is an oligopoly, as there are few
manufacturing firms and the large capital investment required creates a
significant barrier to entry into the industry. In addition, pricing strategies
developed by one manufacturer strongly influence the pricing strategies of
its competitors.
Monopoly – Electric power in the Province of Manitoba is a natural
monopoly, as it would be an inefficient use of resources to have duplicate
power lines throughout Manitoba.
6.
Analyze how the factors of production work together for a product or service
of your choice.
Selected service - meals prepared in a restaurant. The restaurant owner is the
entrepreneur who is operating the business for profit and risking the
possibility of failure. The business employs a variety of chefs, cooks,
managers, wait staff, kitchen staff and cleaners. The entrepreneur may or
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not be employed
in the operation
of the restaurant,
and may or may not
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Chapter 1—Understanding the Canadian Business System
do the hiring of all the staff members, depending on the size of the
restaurant. While most of the staff is hired for their physical skills, the chef
must have creative talents to make the business successful. Most restaurants
are privately owned, and therefore financed by the owner’s personal
resources, credit from suppliers, bank or credit union financing, and possibly
loans from friends and family. Another important source of financing is
cash flow provided by the profitable operation of the restaurant. The natural
resources employed are limited, but include the land on which the restaurant
is situated.
7.
Government plays a variety of roles in the Canadian mixed economy.
Consider each of the roles discussed in the text and state the criteria you
would use to decide whether government involvement in each role is
excessive, insufficient, or about right.
Government as customer - Does the government’s purchasing strategy
provide its customers with an unfair advantage over its competitors? (This
may be due to the ability to price government contracts more profitably than
sales to other customers, for example.) Is there a fair process by which
government contracts are awarded, subjecting each supplier to the same
requirements?
Government as a competitor - Does the government compete on a level
playing field, or does it obtain a competitive advantage through the fact that
it is a government entity? Is there a social or economic reason for
government to be operating in an industry already occupied by private
enterprise? Are the costs of operating the government entity comparable to
the costs incurred by private enterprise? If the costs are greater, are there
benefits to society and the economy that would not be achieved without
government participation?
Government as a regulator - Is the objective of the government regulation
consistent with societal expectations? Are the objectives being met? Do the
government regulations provide protection from actions that would be
detrimental to society or the economy if the regulations were removed? Are
the existing regulations sufficient to provide the desired protections?
Government as a taxing agent - Are the taxes levied sufficient to fund the
cost of running the government at the desired level of involvement? Are the
taxes being borne by those citizens best able to afford to pay? Are the taxes
visible to the citizens? Are the taxes levied to fund specific programs or
general operations?
Government as a provider of incentives - Are financial incentives being
offered in situations where the desired activities would not otherwise occur?
Are the financial incentives promoting social and economic development
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Are financial
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incentives targeted to specific constituencies or to specific conditions? Are
financial incentives available in other areas facing the same conditions?
Government as a provider of essential services - Is a government entity the
most effective way of ensuring that the essential services are available to all
who require them? Is a government entity an efficient way of delivery the
essential services? Do the benefits in accessibility outweigh the costs of
inefficiency in delivery? Will the taxpayers be adversely affected if the
industry were changed to a mix of private and public?
APPLICATION EXERCISES
1.
Choose a locally owned and operated business. Interview the owner to find
out how the business uses the factors of production, and identify its sources
for acquiring them.
This should be an interesting exercise for students. Have them categorize
the factors of production to make class comparison easier. After the
information is brought back to class, you can have a class discussion about
whether some businesses have an "easier" time locating the factors of
production and why.
2. Visit a local shopping mall or shopping area. List each store you see and
determine what degree of competition it faces in the immediate environment.
For example, if there is only one store in the mall that sells shoes, that store
represents a monopoly. Note the businesses with direct competitors (for
example, two jewellery stores) and describe how they compete with each
other.
This assignment will provide students with an opportunity to appreciate the
realities of the different degree of competition.
3. Go to the library or on the Internet and research 10 different industries. Classify
each according to degree of competition.
Encourage students to select industries that interest them: for example,
record companies, clothing companies, and car manufacturers. This would
also be a good time to introduce your students to some of the available
business periodicals.
BUILDING YOUR BUSINESS SKILLS
Analyzing the Price of Doing E-Business
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Answers to Follow-Up Questions
1.
Discuss the role that various inducements other than price might play in
affecting demand and supply in the market for Internet service.
Encourage the students to think about “what do they look for when they are
considering a service provider”. They should look at the company (e.g., its
reputation, reliability, length of time it has been in the business , etc.) and
the actual service (e.g., speed of connection, services offered, etc.).
2.
Is it always in a company’s best interest to feature the lowest prices?
No, it depends on many factors. Sometimes business failure is a result of
cutting prices below costs associated with providing the products or services.
These factors would include the reputation of the company, the image that it
is trying to portray, factors regarding the competition (e.g., their reputation,
their financial position, etc.), your cost structure, your company’s position in
the market, etc.
3.
Eventually, what form of competition is likely to characterize the market for
Internet service?
We are already seeing larger telecommunications companies (e.g., Shaw
Cable) becoming dominate players in the Internet service industry. Smaller
less competitive companies are being purchased by the larger companies that
can offer “bundled products” that the smaller companies cannot provide.
This suggests that in the future the market will evolve into an oligopoly.
EXERCISING YOUR ETHICS (p. 21)
Prescribing a Dose of Competitive Medicine
1.
What are the roles of supply, demand, and competition in this scenario?
Since prescription drugs are essentially the same regardless of at which
pharmacy the customer shops, the market has determined an equilibrium
price at which supply and demand are equal. Competition keeps the price in
check. One or the other of the pharmacies could raise its prices only if it
offered additional services (e.g. free prescription delivery) that differentiated
its products enough that consumers were willing to pay extra. If one
pharmacy were to close, however, the local competition would be
eliminated. New competition would include internet pharmacies and the
pharmacies located in more distant communities. If customers were
reluctant to order prescriptions over the internet the surviving pharmacy
could increase prices. In comparison to its new competition, the surviving
pharmacy would be able to differentiate its service on the basis of
this would allow
pharmacy
charge a premium
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price for urgent purchases, too high a price would result in customers
patronizing the competition. Depending on the size and growth rate of the
community, and the premium consumers are willing to pay, the profitability
of the surviving pharmacy may attract new competitors, even if one of the
existing pharmacies closes.
2.
What are the underlying ethical issues?
The success of our economic system is based on competition and choice.
One might argue that by engaging in collusion (rather than active
competition) the pharmacy owners are inhibiting the fair operation of the
market. This is an ethical issue in that for many people prescription drugs
are crucial to achieving or maintaining health. By colluding, the pharmacy
owners would be forcing the weakest residents of the town to pay inflated
prices.
Another argument, however, is that competition continues to exist, although
in a broader area rather than the immediate community. Is it ethical to
expect a business that is not generating adequate profits to remain in
business to maintain local competition? Entrepreneurs are in business
primarily to generate profits in return for the risks they accept. The two
pharmacies are not colluding, as there has been no attempt to have both
pharmacies increase their prices to improve their profitability. One
pharmacist has offered to sell his or her business to the other pharmacy.
3.
What would you do if you were actually faced with this situation?
Answers will vary.
CASE ANALYSES
Concluding Case 1-1: Supply and Demand: Some Practical Lessons
1.
What are the basic factors of production in the petroleum industry?
Natural Resources - the supply of oil located in the ground, the land on
which the drilling rigs, etc. are located to extract the oil.
Labour - the engineers who determine how to extract the oil, the construction
workers who build the rigs, the employees working on the rig who operate
the rigs, plus all the management and support staff that support the
operations.
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Capital - the proceeds received from issuing shares to shareholders,
borrowing money through the sale of debenture, cash flow generated through
profitable operations and short term financing provided by suppliers.
Entrepreneurs - the individuals exercising creativity and initiative to expand
this established industry through oil sands development.
2.
Describe the concepts of input and output markets as they apply to the
petroleum industry.
Input markets - where the oil and gas companies obtain the resources they
need to operate. Separate markets exist for each type of input.
Labour market - separate markets exist for skilled and unskilled
workers. A specific firm may compete with other firms in the oil and gas
industry for skilled workers, but may compete with different industries as
well for unskilled workers.
Other inputs that would be purchased in the markets include
equipment and supplies.
Oil companies with refineries may choose to purchase crude oil from
other companies to ensure a cost effective supply of crude oil at a particular
refinery.
Output markets - the oil and gas industry will have two separate output
markets as most companies not only extract the oil reserves but operate
refining facilities as well. Crude oil may be sold to other refineries. The
outputs from refining the oil may be sold directly to individual customers
through gas stations or sold in bulk to other companies.
A specific oil company may both buy and sell crude oil to avoid
transportation costs to get its own crude oil to all of its refineries.
3.
Explain how the concepts of demand and supply combine to determine
market prices for diverse commodities like palladium, oil, and coffee.
The laws of supply and demand are the same no matter what the product or
service being sold. Total supply will increase as price increases, as more
producers find the industry attractive to enter. As prices increase, demand
falls. The market price will be established at that point where the quantity
demanded is equal to the quantity available for sale.
4.
Does the global energy situation increase or decrease your confidence in a
capitalistic system based on private enterprise?
Answers here will vary. Issues that may arise include the role of the profit
motive in expanding production and seeking out alternative energy sources,
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the unequal distribution of resources globally, the challenges for developing
countries when the developed countries are monopolizing the oil resources.
5
Did automakers respond to increases in the price of palladium in the way
predicted by economic theory? Explain.
Yes, as the price of palladium rose, car manufacturers’ willingness to buy the
product decreased. Automakers responded to the increasing price by
developing manufacturing methods that used less palladium. At the same
time the rising price resulted in additional suppliers entered the marketplace
that were willing to supply palladium at higher prices.
6.
Not everyone agrees that there is an impending oil crisis. Develop
arguments that we are not likely to run out of oil any time soon.
Various arguments may be presented, such as that as the price of oil
continues to rise
- consumers will reduce consumption so that the demand for oil will
decrease and existing stocks will be sufficient to satisfy demand in the short
term.
- the opportunities for significant profits will motivate oil companies to
extract more oil in the short term. (While this may be seen as a solution to
short term demand, oil is a non-renewable natural resource so this is simply a
change in the timing of the availability of supply.)
- oil reserves previously considered uneconomical to develop will become
profitable. This increases total supply and includes not only tar sands
projects, but small deposits.
- alternative energy sources will be developed, reducing the need for oil and
allowing the limited reserves to be used over a much longer period.
-brand new technology may revolutionize our energy needs and eliminate
our need for oil.
Concluding Case 1-2: Business, Government and Liquor
1.
What are the different roles that government plays in the Canadian mixed
economic system? What are the appropriate roles that the government
should play in the liquor business?
Government acts as a customer, competitor, regulator, taxing agent, provider
of incentives and provider of essential services.
Answers as to the appropriate roles will differ. Some students may believe
that liquor sales should be regulated, most will recognize the conflict in
being both a competitor and regulator at the same time.
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2.
What roles does government play in, say, retail trade and manufacturing?
Should the government’s role in the liquor business be different from its role
in retail trade or manufacturing?
In the retail trade and manufacturing, government will play the role of
customer, regulator, taxing agent and provider of incentives. The regulator
function is likely to focus more on protecting competition, consumers and
the environment, and the provision of incentives is normally to help the
businesses grow and expand into new markets.
While the liquor business is retail trade, there are social implications to its
sale, and some believe that this warrants different treatment. Liquor sales
are restricted to adults, and the poor track record that private industry has in
restricting sales of cigarettes to the appropriately aged customers may
persuade individuals that liquor sales should only occur in government
owned stores. There is an inherent conflict when a private company with a
profit motive is expected to ensure sales to minors does not occur.
Another perspective is that customers who choose to drink should have the
choice of products they would like to buy and that government owned stores
are not responsive to customer needs and wants. Privately run stores are
more responsive to customer requests.
Alcohol sales are subject to restrictive taxes that make up a significant
portion of the selling price of the product. This should not be a factor in the
public versus private decision, however, as these taxes could still be levied
on product sold through private outlets.
3.
Should the sale of liquor be a government monopoly, or should other
provinces do what Alberta did? Defend your answer.
Various answers may be given.
4.
Critics argue that government-run monopolies like liquor stores should make
a profit. Is this a reasonable claim? Explain.
If the main rationale for government-owned liquor stores is to preserve the
well-being of society by ensuring proper sales of a controlled substance,
whether or not a profit is generated is irrelevant. This is also true if the
restrictive taxation is already very high, as the government may strip its
profits out through the taxes levied. In these circumstances, operating at a
breakeven position would be acceptable.
On the other hand, operating government liquor stores at a loss means that
taxpayer dollars are used to subside the sale of a controlled substance to
customers, which is unacceptable.
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Another question that could be asked comes from liquor sales through the
Manitoba Liquor Control Commission. The MLCC offers Air Miles rewards
to customers. Should a government liquor store be actively promoting liquor
sales? Is this in conflict with the argument that government liquor stores are
justified on the basis of preserving the well-being of society?
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