Transcription of Business 101 Notes Chapter 1 – Understanding the …
1 1 Business 101 Notes Chapter 1 understanding the canadian business system Don Wagner, July 28, 2008 Free Enterprise - In most countries, anybody can set up a new Business . In Canada the freedom to do so is quite extensive. In fact, many students have already engaged in free enterprise. Have you? For example, have you mowed grass for neighbours, or participated in a Junior Achievement enterprise? - Even in communist countries a certain degree of free enterprise may be permitted. Over half of China s GDP1 is now produced by the private Some countries, however, suffer from much greater restrictions. An example is Cuba, where almost all Business is conducted by government-owned enterprises and the government has little tolerance of free enterprise. In 2005 Fidel Castro closed down 2,000 street vendors of sandwiches, pizzas and the like, so that a government enterprise could control the sale of those - In non-communist countries, almost anybody can set up almost any kind of Business .
2 Yet, there are restrictions even in the freest and most developed countries. For example: o Some types of businesses are illegal ( selling heroin). o Some governments may not allow foreigners to operate certain types of businesses. For example, the does not allow foreigners to own military equipment producers within the US. Canada does not allow foreigners to operate bookstores in Canada. Why do you think governments make it illegal for foreigners to own certain types of businesses? o Some businesses require licensing or permits. Such requirements can range from the reasonable to the ridiculous. An example of a reasonable restriction is Canada s requirement that only qualified dentists can operate a dentistry Business . But some countries require so many licenses, permits and approvals that most potential entrepreneurs do not bother setting up a legal Business .
3 They are either dissuaded from setting up their Business , or they run it illegally. - Nevertheless, while a few restrictions exist, in Canada the legal right to set up a new Business is mostly wide open. - There are over two million businesses in The vast majority of these businesses are small (such as farms and restaurants), but a few are very large with billions of dollars in sales. 1 GDP stands for Gross Domestic Product , and is a measure of a country s economic output. 2 The Economist, October 9, 2004, Investing in China: Milking it , page 85. 3 The Economist, June 25, 2005, Cuba s economy: Unappetising , page 38. 4 Based on Statistics Canada s Business Register per accessed on July 28, 2008. 2 The Pursuit of Profits - Most privately-owned operations seek to earn a profit.
4 - Some people have a very negative view of people who pursue profits. Do you think there is anything immoral about pursuing profits? - Profits are generally regarded as the reward to owners for providing capital and for risk-taking. If the owner actively manages the Business , part of the profits might also be a reward for labour that the owner contributes to the Business . - The profit motive is one of the main reasons that entrepreneurs establish new businesses. What are some other reasons? - But earning profits is not easy. Businesses need resources (the textbook refers to these as factors of production ). o Labour: All businesses need labour. In some cases the entrepreneur provides all the labour himself/herself, but often the Business hires employees to do the labour.
5 Since people are free to choose whether or not to work for a particular Business , the Business has to provide wages and a working environment that entice employees to work there. (The Business has to simultaneously find ways to motivate employees to work effectively for the success of the Business .) o Capital: Businesses need capital. For example a lawn-mowing Business needs a lawn-mower. An auto manufacturer needs a factory, and also needs money to pay for up-front costs that will not be recovered until later, such as wages, supplies, research and development, and marketing costs. This capital may come from existing owners, new owners or lenders (such as banks). Lenders must be paid back with interest, while owners expect to get a share in future profits. Since people with money are free to choose where to invest, the Business needs to offer a sufficient interest rate or profit potential to obtain those funds.
6 O Supplies: Most businesses need to buy products from other businesses. For example, a lawn-mowing Business needs gas. An auto manufacturer needs parts. Again, supplier businesses will only choose to sell if they can receive a high enough price. o Know-how and data: To succeed in a competitive environment, the Business needs to know what it is doing. It needs to provide a product or service that the customer cannot produce himself/herself at the same price. The necessary know-how and data is accumulated through effort and experience. - So, in a free country, a Business needs to make customers better off, employees better off, suppliers better off, and investors better off. Accomplishing all that while earning a profit at the same time is challenging. But millions of businesses all over the world succeed!
7 - This course covers the basics of the Business activities that are required. We will cover numerous topics that address the above issues. For example: o marketing focuses on how businesses reach the customer; o human resource management focuses on the Business interaction with labour; 3 o finance focuses on Understanding the financial aspects of Business and its interaction with investors; and o accounting focuses on Understanding data that measure the Business performance. Business is a multi-faceted discipline that requires competence in all of these areas. Free Markets - In 1776, the Scottish economist/philosopher Adam Smith published a famous book entitled The Wealth of In this book, he claimed that a free market, in which everyone behaves self-interestedly, produces socially desirable results.
8 That is, products are priced correctly and the proper quantities of goods are produced, even though there is no master-planner directing and coordinating the economy. The economy works as if controlled by an invisible hand. - Further refinement of Adam Smith s ideas led to the concepts of supply and demand , which determine the appropriate price and production volumes. In a competitive environment, prices and production volumes will be such that supply equals demand. - In class we will do an exercise that illustrates this. Government Intervention - Based on the concept of the invisible hand, some people believe that governments should adopt a laissez-faire policy, and not intervene in the economy. No country, however, is completely laissez-faire. There are a number of ways in which free markets can fail to produce optimal results.
9 Consequently, governments intervene to try to rectify these failures. Monopoly Power - A monopoly is a situation in which one company is the sole supplier of a product. An example is Maritime Electric, which is the sole supplier of electricity in PEI. Can you think of other monopolies? A monopsony is a situation in which one company is the sole buyer of a product. An example is the canadian Wheat Board, which buys all wheat produced by canadian farmers. - Consider the monopoly first. When one company is the only supplier of a product, that company has an incentive to raise prices above those that would exist if there were competitors. The higher prices make that particular company much more profitable, but leave the customers worse off. All the customers that continue to buy end up paying a higher price than they otherwise would have paid.
10 In addition, there are some lost customers who would have been willing to buy at a price above the cost of production, but are not willing to pay the price set by the monopolist. 5 Actually, the full name of the book is An Inquiry into the Nature and Causes of the Wealth of Nations, but people commonly refer to the book by the shorter title. 4 - There are a number of ways in which governments address the problem of monopolies. o Price regulation. In some industries dominated by a monopolist, governments regulate the prices to prevent the monopolists from charging excessive amounts. Examples include PEI s regulation of gasoline prices and PEI s regulation of electricity prices. o Protecting competition. Governments have also enacted laws to encourage competition.
