4 - 1 chapter 1 markets and prices chapter 2 4 - 2 and the market system capitalism
TRANSCRIPT
4 - 1
Markets and Prices
Chapter 2
4 - 2
and the Market System
Capitalism
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EARLY ECONOMISTSMERCANTILISTS
•Wealth is Gold
•Gold is Limited
•Whoever has the most Gold, Wins
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EARLY ECONOMISTSMERCANTILISM
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EARLY ECONOMISTSMERCANTILISM
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EARLY ECONOMISTSMERCANTILISM
•Wealth is Gold
•Gold is Limited
•Whoever has the most Gold, Wins
1576
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EARLY ECONOMISTSMERCANTILISM
1776
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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 Nations1776
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FREEDOM OF CHOICE
MARKETS
NOGOVERNMENT
INTERFERENCE
COMPETITION
Smith’s Free Market
PRIVATEPROPERTY
SELF-INTEREST
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Other Characteristics
Specialization and Trade
•Differences in Ability•Division of Labor•Increased Productivity
Smith’s Free Market
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Other Characteristics
Investment in Technology and Capital
Technological Innovation and
RoundaboutProduction
Smith’s Free Market
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Other Characteristics
Use of Money
•Means of Exchange•Measure of Value•Store of Value
Smith’s Free Market
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FREEDOM OF CHOICE
MARKETS
NOGOVERNMENT
INTERFERENCE
COMPETITION
Smith’s Free Market
PRIVATEPROPERTY
SELF-INTEREST
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Use of MoneyFinancial capital
Specialization and Interdependence
Investment in Technology and Capital
CAPITALISM
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Production Possibility Frontier
Capital Goods
Consumer Goods
• Increased
Resources
• Trade
• Technology
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FREEDOM OF CHOICE
MARKETS
NOGOVERNMENT
INTERFERENCE
COMPETITION
Smith’s Free Market
PRIVATEPROPERTY
SELF-INTEREST
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The Four Fundamental Questions...What will be produced?
CAPITALISM AT WORK
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The Four Fundamental Questions...
How will the goods be produced?
What will be produced?
CAPITALISM AT WORK
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The Four Fundamental Questions...
How will the goods be produced?
What will be produced?
Who will get the goods and services?
CAPITALISM AT WORK
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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?
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TheInvisible
Hand
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The Case for the Market System
EfficiencyGrowth
Freedom
COMPETITION ANDTHE INVISIBLE HAND
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ASSIGNMENTAssignment:
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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ENTREPRENEURS• INNOVATE• ORGANIZE RESOURCES FOR
PRODUCTION• TAKE RISKS• KEEP PROFITS
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OBJECTIVE
HOW ARE BUSINESS
FIRMS ORGANIZED?
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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
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PARTNERSHIP
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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
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CORPORATION
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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
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OBJECTIVE
HOW ARE BUSINESS
FIRMS FINANCED?
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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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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.
Stockholders may resell their shares on the market, but resales do not put any money in the hands of the corporation.
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Stock Prices
52-Wk
High
52-Wk Low
Name (Symbol) Div Vol Yld P/E Last Net Chg
21.50 8.00SkyHighCorp
(SHC) 3143 76 21.25 +.25
47.00 31.75LowDownInc
(LDI) 2.35 2735 5.7 18 41.00 –.50
25.00 21.00ValueNowInc
(VNI) 1.00 1894 4.5 12 22.00 +.10
83.00 33.00DoinBadlyCorp
(DBC) 7601 33.50 –.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.
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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
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How the Stock
Market Works
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ChapterConclusions
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4 - 52Copyright McGraw-Hill/Irwin, 2002 BACK END
TRADITIONALBARTER
TRANSACTION COSTSCOINCIDENCE OF
WANTSCAPITALISM
PRIVATE PROPERTYLAISSEZ FAIRE
ENTREPRENEURINVENTION
INNOVATIONMASS PRODUCTIONDIVISION OF LABOR
SPECIALIZATIONCIRCULAR FLOW
FINANCIAL CAPITALCONSUMER
SOVEREIGNTYHOUSEHOLD
RESOURCE MARKETPRODUCT MARKET
REVENUEINCOME
WAGES, RENT, INTEREST
BUSINESS FIRMLIABILITY
SOLE PROPRIETORSHIP
PARTNERSHIPCORPORATION
BOARD OF DIRECTORS
CEO, CIO, COO, and CFOREINVESTMENT
COMMERCIAL PAPERBOND
PUBLIC OFFERINGUNDERWRITER
STOCKCAPITAL GAIN
DIVIDENDFUNDAMENTAL
ANALYSISTECHNICAL ANALYSIS
INVESTORSPECULATORSHORT SELL