Chapter 1 Markets and Prices Chapter 2

Capitalism and the Market System

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

EARLY ECONOMISTS MERCANTILISM

EARLY ECONOMISTS MERCANTILISM

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

EARLY ECONOMISTS MERCANTILISM 1776

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

Smith’s Free Market MARKETS PRIVATE PROPERTY FREEDOM OF CHOICE SELF-INTEREST PRIVATE PROPERTY COMPETITION FREEDOM OF CHOICE NO GOVERNMENT INTERFERENCE

Other Characteristics Specialization and Trade Smith’s Free Market Other Characteristics Specialization and Trade Differences in Ability Division of Labor Increased Productivity

Other Characteristics Investment in Technology and Capital Smith’s Free Market Other Characteristics Investment in Technology and Capital Technological Innovation and Roundabout Production

Other Characteristics Smith’s Free Market Other Characteristics Use of Money Means of Exchange Measure of Value Store of Value

Smith’s Free Market MARKETS PRIVATE PROPERTY FREEDOM OF CHOICE SELF-INTEREST PRIVATE PROPERTY COMPETITION FREEDOM OF CHOICE NO GOVERNMENT INTERFERENCE

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

Production Possibility Frontier Increased Resources Trade Technology Capital Goods The next slide allows the lecturer to demonstrate what happens when resources are not used efficiently and production takes place within the PPF. It then allows the expansion of the PPF and can be used to illustrate the issue of economic growth and where opportunity cost does not exist if the economy moves from point A to point C (in a simple context of course – there is always some form of sacrifice of using resources!). Consumer Goods

Smith’s Free Market MARKETS PRIVATE PROPERTY FREEDOM OF CHOICE SELF-INTEREST PRIVATE PROPERTY COMPETITION FREEDOM OF CHOICE NO GOVERNMENT INTERFERENCE

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

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

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

The Four Fundamental Questions... 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?

The Invisible Hand

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

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

The Circular Flow

ENTREPRENEURS INNOVATE ORGANIZE RESOURCES FOR PRODUCTION TAKE RISKS KEEP PROFITS

HOW ARE BUSINESS FIRMS ORGANIZED? 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

HOW ARE BUSINESS FIRMS FINANCED? OBJECTIVE HOW ARE BUSINESS FIRMS FINANCED?

Business Finance Retained Earnings Commercial Paper Bonds Stock 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 Commercial Paper Bonds Stock 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

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 The table below shows a sample stock table. Each item gives you some clues about the current state of affairs for a particular company. 52-Wk High 52-Wk Low Name (Symbol) Div Vol Yld P/E Last Net Chg 21.50 8.00 SkyHighCorp (SHC) 3143 76 21.25 +.25 47.00 31.75 LowDownInc (LDI) 2.35 2735 5.7 18 41.00 –.50 25.00 21.00 ValueNowInc (VNI) 1.00 1894 4.5 12 22.00 +.10 83.00 33.00 DoinBadlyCorp (DBC) 7601 33.50 –.75

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

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

A Moving Average

How the Stock Market Works

Chapter Conclusions

KEY TERMS 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 Copyright McGraw-Hill/Irwin, 2002 BACK END