4 - 1 Chapter 1 Markets and Prices Chapter 2

4 - 2 and the Market System Capitalism

4 - 3 EARLY ECONOMISTS MERCANTILISTS Wealth is Gold Gold is Limited Whoever has the most Gold, Wins

4 - 4 EARLY ECONOMISTS MERCANTILISM

4 - 5 EARLY ECONOMISTS MERCANTILISM

4 - 6 EARLY ECONOMISTS MERCANTILISM Wealth is Gold Gold is Limited Whoever has the most Gold, Wins 1576

4 - 7 EARLY ECONOMISTS MERCANTILISM 1776

4 - 8 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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FREEDOM OF CHOICE MARKETS NO GOVERNMENT INTERFERENCE COMPETITION Smiths Free Market PRIVATE PROPERTY SELF-INTEREST

Other Characteristics Specialization and Trade Differences in Ability Division of Labor Increased Productivity Smiths Free Market

Other Characteristics Investment in Technology and Capital Technological Innovation and Roundabout Production Smiths Free Market

Other Characteristics Use of Money Means of Exchange Measure of Value Store of Value Smiths Free Market

FREEDOM OF CHOICE MARKETS NO GOVERNMENT INTERFERENCE COMPETITION Smiths Free Market PRIVATE PROPERTY SELF-INTEREST

Use of Money Financial capital Specialization and Interdependence Investment in Technology and Capital CAPITALISM

Production Possibility Frontier Capital Goods Consumer Goods Increased Resources Trade Technology

FREEDOM OF CHOICE MARKETS NO GOVERNMENT INTERFERENCE COMPETITION Smiths Free Market PRIVATE PROPERTY SELF-INTEREST

The Four Fundamental Questions... What will be produced? CAPITALISM AT WORK

The Four Fundamental Questions... How will the goods be produced? What will be produced? CAPITALISM AT WORK

The Four Fundamental Questions... How will the goods be produced? What will be produced? Who will get the goods and services? CAPITALISM AT WORK

The Four Fundamental Questions... How will the goods be produced? What will be produced? Who will get the goods and services? CAPITALISM AT WORK How do we get MORE?

The Invisible Hand

The Case for the Market System Efficiency Growth Freedom COMPETITION AND THE INVISIBLE HAND

ASSIGNMENT Assignment: Name ONE product or service that CANNOT be provided by private individuals for profit.

The Circular Flow

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ENTREPRENEURS INNOVATE ORGANIZE RESOURCES FOR PRODUCTION TAKE RISKS KEEP PROFITS

OBJECTIVE HOW ARE BUSINESS FIRMS ORGANIZED?

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

SOLE PROPRIETORSHIP

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

PARTNERSHIP

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 –Limited life –Unlimited liability –Shared control –Split profits

CORPORATION

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 –Shared profits (dividends) –Double taxation –Lack of control

OBJECTIVE HOW ARE BUSINESS FIRMS FINANCED?

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

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

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. Stockholders may resell their shares on the market, but resales do not put any money in the hands of the corporation.

Stock Prices 52- Wk High 52-Wk Low Name (Symbol)DivVolYldP/ELastNet Chg SkyHighCorp (SHC) LowDownInc (LDI) – ValueNowInc (VNI) DoinBadlyCorp (DBC) –.75 The table below shows a sample stock table. Each item gives you some clues about the current state of affairs for a particular company.

Investors u Long term u Income and growth u Fundamental analysis u Quantitative: u dividends, assets, earnings u Qualitative: u Management, product, market

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Speculators u Short term u Capital gains from changes in the market price u Technical analysis: u Price trends u Pe ratio

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A Moving Average

How the Stock Market Works

Chapter Conclusions

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Copyright McGraw-Hill/Irwin, 2002 BACK END TRADITIONAL BARTER TRANSACTION COSTS COINCIDENCE OF WANTS CAPITALISM PRIVATE PROPERTY LAISSEZ FAIRE ENTREPRENEUR INVENTION INNOVATION MASS PRODUCTION DIVISION OF LABOR SPECIALIZATION CIRCULAR FLOW FINANCIAL CAPITAL CONSUMER SOVEREIGNTY HOUSEHOLD RESOURCE MARKET PRODUCT MARKET REVENUE INCOME WAGES, RENT, INTEREST BUSINESS FIRM LIABILITY SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION BOARD OF DIRECTORS CEO, CIO, COO, and CFO REINVESTMENT COMMERCIAL PAPER BOND PUBLIC OFFERING UNDERWRITER STOCK CAPITAL GAIN DIVIDEND FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS INVESTOR SPECULATOR SHORT SELL