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Chapter 1 Markets and Prices Chapter 2.

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Presentation on theme: "Chapter 1 Markets and Prices Chapter 2."— Presentation transcript:

1 Chapter 1 Markets and Prices Chapter 2

2 Capitalism and the Market System

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

4 EARLY ECONOMISTS MERCANTILISM

5 EARLY ECONOMISTS MERCANTILISM

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

7 EARLY ECONOMISTS MERCANTILISM 1776

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

9

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

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

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

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

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

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

16 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

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

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

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

20 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?

21 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?

22 The Invisible Hand

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

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

25 The Circular Flow

26

27 ENTREPRENEURS INNOVATE ORGANIZE RESOURCES FOR PRODUCTION TAKE RISKS
KEEP PROFITS

28 HOW ARE BUSINESS FIRMS ORGANIZED?
OBJECTIVE HOW ARE BUSINESS FIRMS ORGANIZED?

29 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

30 SOLE PROPRIETORSHIP

31 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

32 PARTNERSHIP

33 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

34 CORPORATION

35 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

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

37 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

38 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

39 The Economic Functions of the Stock Market

40

41 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.

42 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

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

44

45

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

47

48 A Moving Average

49 How the Stock Market Works

50 Chapter Conclusions

51

52 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

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