Transcript Chapter 4

Chapter 2
Markets
and Prices
4-1
Capitalism
and the
Market
System
4-2
EARLY ECONOMISTS
MERCANTILISTS
•Wealth is Gold
•Gold is Limited
•Whoever has the
most Gold, Wins
4-3
EARLY ECONOMISTS
MERCANTILISM
4-4
EARLY ECONOMISTS
MERCANTILISM
4-5
EARLY ECONOMISTS
MERCANTILISM
•Wealth is Gold
•Gold is Limited
•Whoever has the
most Gold, Wins
1576
4-6
EARLY ECONOMISTS
MERCANTILISM
1776
4-7
ADAM SMITH
“It is not from the benevolence of the butcher, the
brewer, and the baker that we expect our dinner, but
from their regard to their own self-interest.”
-The Wealth of Nations
1776
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4-9
Smith’s Free Market
SELF-INTEREST
PRIVATE
PROPERTY
FREEDOM
OF CHOICE
4 - 10
MARKETS
COMPETITION
NO
GOVERNMENT
INTERFERENCE
Smith’s Free Market
Other Characteristics
Specialization and Trade
•Differences in Ability
•Division of Labor
•Increased Productivity
4 - 11
Smith’s Free Market
Other Characteristics
Investment in
Technology and Capital
Technological Innovation
and
Roundabout
Production
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Smith’s Free Market
Other Characteristics
Use of Money
•Means of Exchange
•Measure of Value
•Store of Value
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Smith’s Free Market
SELF-INTEREST
PRIVATE
PROPERTY
FREEDOM
OF CHOICE
4 - 14
MARKETS
COMPETITION
NO
GOVERNMENT
INTERFERENCE
CAPITALISM
Specialization and
Interdependence
Investment in Technology
and Capital
Use of Money
Financial capital
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Production Possibility
Frontier
Capital Goods
•Increased
Resources
•Trade
•Technology
Consumer Goods
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Smith’s Free Market
SELF-INTEREST
PRIVATE
PROPERTY
FREEDOM
OF CHOICE
4 - 17
MARKETS
COMPETITION
NO
GOVERNMENT
INTERFERENCE
CAPITALISM AT WORK
The Four Fundamental Questions...
What will be produced?
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CAPITALISM AT WORK
The Four Fundamental Questions...
What will be produced?
How will the goods be
produced?
4 - 19
CAPITALISM AT WORK
The Four Fundamental Questions...
What will be produced?
How will the goods be
produced?
Who will get the goods
and services?
4 - 20
CAPITALISM AT WORK
The Four Fundamental Questions...
What will be produced?
How will the goods be
produced?
Who will get the goods
and services?
How do we get MORE?
4 - 21
The
Invisible
Hand
4 - 22
COMPETITION AND
THE INVISIBLE HAND
The Case for the Market System
Efficiency
Growth
Freedom
4 - 23
ASSIGNMENT
Assignment:
Name ONE product
or service that
CANNOT be
provided by private
individuals for
profit.
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The Circular
Flow
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4 - 26
ENTREPRENEURS
• INNOVATE
• ORGANIZE RESOURCES FOR
PRODUCTION
• TAKE RISKS
• KEEP PROFITS
4 - 27
OBJECTIVE
HOW ARE
BUSINESS
FIRMS
ORGANIZED?
4 - 28
Types of Business Firms
• Sole Proprietorship: Owned by a
single individual
• Partnership: Two or more people
own and manage a business
• Corporation: A fictitious legal
person separate and distinct from
its owners
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SOLE PROPRIETORSHIP
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Types of Business Firms
• Sole Proprietorship: Owned by a
single individual
• Advantages
– Easy and inexpensive to establish
– Owners have complete control of
business
• Disadvantages
– Limited resources
– Unlimited liability
4 - 31
PARTNERSHIP
4 - 32
Types of Business Firms
• Partnership: Two or more people
own and manage a business
• Advantages
– Easy and inexpensive to establish
– Access to greater resources
– More specialization
• Disadvantages
4 - 33
–
–
–
–
Limited life
Unlimited liability
Shared control
Split profits
CORPORATION
4 - 34
Types of Business Firms
• Corporation: A fictitious legal
person separate and distinct from
its owners
• Advantages
– Limited liability
– Unlimited life
– Unlimited access to resources
• Disadvantages
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– Shared profits (dividends)
– Double taxation
– Lack of control
OBJECTIVE
HOW ARE
BUSINESS
FIRMS
FINANCED?
4 - 36
Business Finance
• Retained Earnings
– Revenue not kept as profits but instead
reinvested in the company
• Commercial Paper
– Loans from Banks.
• Bonds
– Loans from Individuals
• Stock
– Selling Ownership by Going Public
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Business Finance
• Retained Earnings
– Revenue not kept as profits but instead
reinvested in the company
• Commercial Paper
– Loans from Banks.
• Bonds
– Loans from Individuals
• Stock
– Selling Ownership by Going Public
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The Economic Functions
of the Stock Market
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

Each share of the stock
represents partial ownership in
the firm.
People buy the stock of a
corporation :


get future dividends paid from
corporate earnings
capital gains derived from
increases in share prices.

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Stockholders may resell their
shares on the market, but
resales do not put any money in
the hands of the corporation.
Stock Prices
The table below shows a sample stock table. Each item gives you some clues about
the current state of affairs for a particular company.
52Wk
High
52-Wk
Low
Name (Symbol)
21.50
8.00
SkyHighCorp
(SHC)
47.00
31.75
LowDownInc
(LDI)
2.35
2735
25.00
21.00
ValueNowInc
(VNI)
1.00
1894
83.00
33.00
DoinBadlyCorp
(DBC)
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Div
Vol
Yld
P/E
Last
Net Chg
76
21.25
+.25
5.7
18
41.00
–.50
4.5
12
22.00
+.10
33.50
–.75
3143
7601
Investors
Long
term
Income and growth
Fundamental
analysis
Quantitative:
dividends,
assets, earnings
Qualitative:
Management,
product, market
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Speculators
Short
term
Capital gains from
changes in the
market price
Technical
analysis:
Price trends
Pe ratio
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A Moving Average
4 - 48
How the
Stock
Market
Works
4 - 49
Chapter
Conclusions
4 - 50
4 - 51
TRADITIONAL
BARTER
TRANSACTION COSTS
COINCIDENCE OF
WANTS
CAPITALISM
PRIVATE PROPERTY
LAISSEZ FAIRE
ENTREPRENEUR
INVENTION
INNOVATION
MASS PRODUCTION
DIVISION OF LABOR
SPECIALIZATION
CIRCULAR FLOW
4 - 52
Copyright McGraw-Hill/Irwin, 2002
FINANCIAL CAPITAL CEO, CIO, COO, and CFO
CONSUMER
REINVESTMENT
SOVEREIGNTY
COMMERCIAL PAPER
HOUSEHOLD
BOND
RESOURCE MARKET
PUBLIC OFFERING
PRODUCT MARKET
UNDERWRITER
REVENUE
STOCK
INCOME
CAPITAL GAIN
WAGES, RENT,
DIVIDEND
INTEREST
FUNDAMENTAL
BUSINESS FIRM
ANALYSIS
LIABILITY
TECHNICAL ANALYSIS
SOLE
INVESTOR
PROPRIETORSHIP
SPECULATOR
PARTNERSHIP
SHORT SELL
CORPORATION
BOARD OF DIRECTORS
BACK
END