Lecture 4

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Review: Chapters 1 to 4
Review: “Business” Defined
Business:
an organised effort,
to create or provide something,
that people want
and will pay for,
in order to make a profit. 
 Review: Profit
Profit - The difference between:

$$$ in (revenues or sales)

$$$ out (costs or expenses)
 Review: The Profit Motive
People give their time, energy and
money if there is incentive

Profit is the incentive

he liked the idea he did not

 Review: Risk and Reward
some businesses
make huge profits

some businesses
do not
Risk and Reward
 Review: Factors of Production
A theory to explain:
what businesses are made of

First, there were 3 factors

.
 Review: Factors of Production
entrepreneurs
people motivated to take time, take risks, to make
something happen

Then: there were 4 factors

.
 Review: Factors of Production
But given more recent trends in industry, we now believe there
are 5 fundamental factors

INFORMATION

.
 Review: Economic Systems
How people decide
What to produce
How to produce it
What to consume
Who gets it
i.e. Who owns and controls the factors?
 Review: 2 Types of System
Planned Market
All or mostly All or mostly
government control individuals control

Pure
Communism Socialism Mixed Capitalism

more less
government government
Review: Canada is Mixed Market

Canada (US, UK, Germany, Japan)

uses mixed market system
Businesses and governments
share responsibility
to produce goods and services
Review: Mixed Market Systems

In Canada:
Businesses and government co-exist
Businesses provide most
goods & services
Government provides some others
Review: Canada is mixed market

The government gets involved

in 3 main ways:
 
taxes
laws and regulations
provides some goods and services
 Review: Market
The interaction of buyers and sellers

exchanging information about products

Review: Markets not all the same

Some markets have lots of sellers

(good for buyers, lots of choice, “fair” price)
Review: Markets not all the same

Some markets have few sellers

(less choice, good for sellers, higher price)
Review: Degree of Competition

The combination of the numbers of

buyers and sellers in a market:
“degree of competition”

Also called “market structure”

Review: Degree of Competition

Degree of competition determines:

Variety of choice buyer has
Negotiating power seller has
Review: Degrees of Competition

The combination of the numbers of

buyers and sellers in a market
Perfect
Oligopoly
Monopoly
Monopolistic
Review: Perfect Competition

Lots and lots of suppliers

All are small
More or less the same
Must sell at the same price
Review: Perfect Competition
Example: cartons of milk
 Review: Oligopoly

“Small” (3,4,5) number of suppliers

All are "large"
They follow each other closely
Oligopoly: Barriers to Entry
Oligopolies exist because

an industry is difficult to enter

 Review: Barriers to Exit
Oligopolies also hard to exit

Due to: large size, large investment

 Review: Oligopoly
Competitors try to appear different

“differentiation”
 Review: Monopoly
Only one supplier
(By definition) 100% market share
Can set whatever price it likes
Example: LCBO
Review: Monopoly in Canada
We prefer to give people choice
Not always possible
(difficult or expensive)

Therefore: a few monopolies

e.g. local cable
Review: Monopolistic Competition

Lots of sellers
No barriers to entry
Most competitors are small
Most (more or less) the same
A few are big
Review: Monopolistic Competition

Most sell at the same price

Few big sellers can charge more