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 4-8 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 4 - 12 Smith’s Free Market Other Characteristics Use of Money •Means of Exchange •Measure of Value •Store of Value 4 - 13 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 4 - 15 Production Possibility Frontier Capital Goods •Increased Resources •Trade •Technology Consumer Goods 4 - 16 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? 4 - 18 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. 4 - 24 The Circular Flow 4 - 25 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 4 - 29 SOLE PROPRIETORSHIP 4 - 30 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 4 - 35 – 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 4 - 37 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 4 - 38 The Economic Functions of the Stock Market 4 - 39 4 - 40 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. 4 - 41 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) 4 - 42 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 4 - 43 4 - 44 4 - 45 Speculators Short term Capital gains from changes in the market price Technical analysis: Price trends Pe ratio 4 - 46 4 - 47 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