10.1 Production, Consumption, and Time 10.2 Banks, Interest, and Corporate Finance 10.3 Business Growth
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1 CHAPTER 10 Financial Markets and Business Growth 10.1 Production, Consumption, and Time 10.2 Banks, Interest, and Corporate Finance 10.3 Business Growth 1 CONTEMPORARY ECONOMICS: LESSON 10.1
2 CHAPTER 10 Consider Financial Markets and Business Growth What s seed money, and why can t Farmer Jones grow anything without it? Why are you willing to pay more at a first-run movie theater than at other theaters? Why do you repeatedly burn your mouth eating pizza, despite knowing the risk? Why is a bank more likely to be called Security Trust than Benny s Bank? Why do banks charge more interest on car loans than on home loans? 2 CONTEMPORARY ECONOMICS: LESSON 10.1
3 LESSON 10.1 Objectives Production, Consumption, and Time Explain why production requires savings. Explain why people often pay more to consume now. Apply demand and supply analysis to the market for loans. 3 CONTEMPORARY ECONOMICS: LESSON 10.1
4 LESSON 10.1 Key Terms Production, Consumption, and Time interest rate demand for loans curve supply of loans curve market for loans equilibrium interest rate 4 CONTEMPORARY ECONOMICS: LESSON 10.1
5 Production and Time Production takes time Investment takes time Capital increases labor productivity Financial intermediaries 5 CONTEMPORARY ECONOMICS: LESSON 10.1
6 Value of Business Structures and Equipment in the United States 6 CONTEMPORARY ECONOMICS: LESSON 10.1
7 Consumption and Time Value present consumption more than future consumption Willing to pay more to consume now rather than wait 7 CONTEMPORARY ECONOMICS: LESSON 10.1
8 The Market for Loans Demand for loans Supply of loans 8 CONTEMPORARY ECONOMICS: LESSON 10.1
9 Demand for Loans Firms borrow to help fund production and investment. Households borrow to pay for many things. Demand for loans curve reflects the negative relationship between the interest rate and the quantity of loans demanded. 9 CONTEMPORARY ECONOMICS: LESSON 10.1
10 Supply of Loans Supply of loans curve shows the positive relationship between the interest rate and the quantity of loans supplied. 10 CONTEMPORARY ECONOMICS: LESSON 10.1
11 Market Interest Rate Market for loans brings together borrowers and savers to determine the market rate of interest Equilibrium interest rate the rate that exactly matches the intentions of savers and borrowers 11 CONTEMPORARY ECONOMICS: LESSON 10.1
12 Role of Interest Rates: Market for Loans 12 CONTEMPORARY ECONOMICS: LESSON 10.1
13 LESSON 10.2 Objectives Banks, Interest, and Corporate Finance Explain the role of banks in bringing borrowers and savers together. Understand why interest rates differ among types of loans. Identify and discuss a corporation s sources of financial capital. 13 CONTEMPORARY ECONOMICS: LESSON 10.2
14 LESSON 10.2 Key Terms Banks, Interest, and Corporate Finance financial intermediaries credit line of credit prime rate collateral initial public offering (IPO) dividends retained earnings bond securities 14 CONTEMPORARY ECONOMICS: LESSON 10.2
15 Banks As Intermediaries Financial intermediaries are banks and other institutions that serve as gobetweens, accepting funds from savers and lending them to borrowers. Credit is the ability to borrow now, based on the promise of repayment in the future. 15 CONTEMPORARY ECONOMICS: LESSON 10.2
16 Serving Savers and Borrowers Savers are looking for a safe place for their money. Banks gather various amounts from savers and repackage these funds into the amounts demanded by borrowers. 16 CONTEMPORARY ECONOMICS: LESSON 10.2
17 Banks Specialize in Loans Banks can judge the creditworthiness of loan applicants better than an individual saver could. Banks reduce the transaction costs of channeling savings to creditworthy borrowers. 17 CONTEMPORARY ECONOMICS: LESSON 10.2
18 Reducing Risk Through Diversification By lending funds to many borrowers, banks reduce the risk to each individual saver. 18 CONTEMPORARY ECONOMICS: LESSON 10.2
19 Line of Credit A line of credit is an arrangement with a bank through which a business can quickly borrow needed cash. 19 CONTEMPORARY ECONOMICS: LESSON 10.2
20 Prime Rate The prime rate is the interest rate lenders charge the most trustworthy business borrowers. 20 CONTEMPORARY ECONOMICS: LESSON 10.2
21 Why Interest Rates Differ Risk Duration of the loan Cost of administration Tax treatment 21 CONTEMPORARY ECONOMICS: LESSON 10.2
22 Interest Rates Charged for Different Types of Loans 22 CONTEMPORARY ECONOMICS: LESSON 10.2
23 Corporate Finance Corporate stock Corporate borrowing 23 CONTEMPORARY ECONOMICS: LESSON 10.2
24 Corporate Stock Corporations issue and sell stock to fund operations and to pay for new plants and equipment. Initial public offering (IPO) the initial sale of stock to the public Dividends after-tax profit paid to shareholders or reinvested in the corporation Retained earnings reinvested profit 24 CONTEMPORARY ECONOMICS: LESSON 10.2
25 Corporate Borrowing A corporation can acquire financial capital by issuing stock, retaining earnings, or borrowing. A bond is the corporation s promise to pay back the holder a fixed sum of money on the designated maturity date plus make annual interest payments until that date. 25 CONTEMPORARY ECONOMICS: LESSON 10.2
26 Securities Exchanges Both stocks and bonds are called securities. Securities and Exchange Commission (SEC) New York Stock Exchange NASDAQ institutional investors mutual fund 26 CONTEMPORARY ECONOMICS: LESSON 10.2
27 Objectives LESSON 10.3 Business Growth Recognize the role of profit and franchising in business growth. Identify the types of corporate mergers and the four merger waves that occurred during the last century. Examine the multinational corporation as a source of corporate growth. 27 CONTEMPORARY ECONOMICS: LESSON 10.3
28 Key Terms LESSON 10.3 Business Growth vertical merger conglomerate merger multinational corporation (MNC) 28 CONTEMPORARY ECONOMICS: LESSON 10.3
29 Profit and Growth More profitable firms can grow faster because more profits can be reinvested into the firm owners are willing to invest more of their own money in such firms banks are more willing to lend to such firms 29 CONTEMPORARY ECONOMICS: LESSON 10.3
30 Corporate Profits and Growth The greater a corporation s profit, the higher the value of shares on the stock market. More profitable corporations also find it easier to borrow from banks or to sell bonds. 30 CONTEMPORARY ECONOMICS: LESSON 10.3
31 Franchises A franchise is a contract between a parent company and another business or individual. For a fee, the parent company grants the franchisee the exclusive right to sell a certain product in a given region. 31 CONTEMPORARY ECONOMICS: LESSON 10.3
32 Corporate Mergers Vertical merger one firm combines with another from which it buys inputs or to which it sells output. Conglomerate merger a combination of firms in different industries. 32 CONTEMPORARY ECONOMICS: LESSON 10.3
33 Merger Waves in the Past Century First merger wave: Second merger wave: Third merger wave: Fourth merger wave: CONTEMPORARY ECONOMICS: LESSON 10.3
34 Merger Waves Wave Years Dominant Type Examples Stimulus 1st nd rd th Horizontal Vertical U.S. Steel, Standard Oil Copper refiners with fabricators Span national markets Stock market boom Conglomerate Litton Industries Diversification Horizontal and vertical Banking, insurance, telecommunications, health services Span national and global markets, stock market boom 34 CONTEMPORARY ECONOMICS: LESSON 10.3
35 Multinational Corporations A corporation that operates globally is called a multinational corporation (MNC). 35 CONTEMPORARY ECONOMICS: LESSON 10.3
36 Running Multinationals A multinational is usually headquartered in its native country and has affiliates in other countries. An MNC usually develops new products in its native country. It manufactures some or all of the goods abroad, where production costs are usually lower. 36 CONTEMPORARY ECONOMICS: LESSON 10.3
37 Problems of Multinationals Coordinating far-flung operations Adapting operations and products to suit local cultures Coping with different business regulations, different tax laws, and different currencies 37 CONTEMPORARY ECONOMICS: LESSON 10.3
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