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Module 1-3 Notes

by: Claire C

Module 1-3 Notes General Business 310

Claire C

Dr. LaPlante

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Notes on the readings and videos from Modules 1 through 3
Dr. LaPlante
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This 12 page Bundle was uploaded by Claire C on Sunday September 20, 2015. The Bundle belongs to General Business 310 at University of Wisconsin - Madison taught by Dr. LaPlante in Fall 2015. Since its upload, it has received 6 views.


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Date Created: 09/20/15
Module 1 Capitalism and the Big Idea 09082015 0 Business the activity of making buying or selling goods or providing services in exchange for money 0 Law and Ethics local state federal international and moral rules that businesses and rms have to abide by 0 Accounting the language of business What s going on within the rm communicating with external parties 0 Finance Raise capital hire people buy a building buy an equipment etc Need to have someone write you a check 0 Management employing people getting workers to move in the same direction to collectively pursue the big idea 0 Marketing convincing the customer to invest in your product 0 Economics unlimited wants desires but limited resources 0 3 outcomes over semester n Talking the talk 0 Communicate effectively with colleagues from different disciplines Walking the walk 0 Apply knowledge and be able to do stuffquot In Begin to think like a business person El 11 o Microeconomics analyzes behavior of small units consumers workers managers rms individual industries and markets etc a Also known as price theory 12 o 4 Assumptions made by Economics about Buyers amp Sellers Capitalism and the Big Idea Module 12 1 Market participants are goal oriented which can also be assumed as selfinterested 2 Market participants engage in rational behavior weighing the expected bene ts and costs 3 Market participants experience scarce resources 4 Market participants have unlimited wants 13 o Explicit Costs a Money used in the pursuit of a goal that could otherwise have been spent on an alternative objective a Material things such as tuition books parking 0 Implicit Costs n Foregone bene ts from the use of time and other resources in pursuit of a goal a Time and other resources 0 OpportunityEconomic Cost n Sum of explicit and implicit costs a Includes sacri ced alternatives 0 Accounting Costs n Comprises payroll insurance tangible costs 0 Sunk Costs n costs that have already been incurred and are beyond recovery I need to be ignored when making economic decisions a Time is always a sunk cost time spent studying 14 Gains from Trade Capitalism and the Big Idea Module 12 0 Trade provides more variety 0 People can bene t by specializing in what he or she does best then trading with each other What if one person is better at producing every good 0 Production Possibilities Frontier PPF a shows various mixes of output that an individual or economy can produce a illustrates that individuals and rms face tradeoffs a slope captures comparative advantage I also re ects the three basic assumptions about market participants a depicts opportunity cost which is incurred by tradeoffs In Constant Marginal Productivity 0 Straight downward sloping line 0 There are tradeoffs you have to give to get 0 Production Possibilities Frontier 10 Hour Workday 0 Absolute Advantage I the producer that has a smaller quantity of inputs OR larger quantity of outputs a ability to produce more goods or services with a set of resources than another market participant 0 Comparative Advantage n whoever has the smaller opportunity cost has the comparative advantage I ability to produce a particular good or service at a lower opportunity cost per unity w Francisco has comparative advantage in producing brats Hank has comparative advantage in producing beer Capitalism and the Big Idea Module 12 0 Differences in opportunity cost and comparative advantage create gains from trade Cost of 1 lBrat 111 tip 303D o Hank gives up 5 beers to make 1 brat o Francisco gives up 2 beers to make 1 brat 0 They will trade between these two numbers 0 Middleman Mouch in the Middle No Specialization if 8 No Trade Specialization In above picture the bottom graph shows Hank amp Francisco specializing in their comparative advantage which results in overall higher GDP n Acts as intermediary to facilitate trading a Example grocery store a buys low from producer with comparative advantage and sells high to producer with comparative advantage in another product 0 Bid Price dealer s low price 0 Ask Price high selling price 0 BidAsk Spread the middleman s pro t difference between bid price and ask price Number one determinate is how many competitors are in that marketplace a Dealer Market 0 market characterized by dealer who buys assets low at bid price holds them as inventory then ses high later at ask price a Manpower rm that matches workers with jobs Acts as middleman and makes it easier for workers to nd jobs and employers to nd workers Capitalism and the Big Idea Module 12 15 o Barter n exchange of one nonmoney good for another 0 Money I Acts as a medium of exchange amp a unit of account measuring rod of economic value 0 Medium of Exchange an intermediary instrument used to facilitate the sale purchase or trading of goods between parties Desirable Has easily recognized value Easy to transport Easy to store Dif cult to counterfeit 0 Unit of Account a unit of measure used to value goods services or any other economic item a Store of Value it can store purchasing power over time can be saved retrieved and exchanged at a later time and be predictably useful when retrieved 0 Double Coincidence of Wants a Barter requires seller to nd buyer who wants exactly what the seller is offering amp is willing to pay the exact good or service the seller wants a Alt De nition A dif culty in a barter economy where it is improbable that traders will nd counterparties who have the desired goods at the correct time in the correct place 0 Commodity Money I When the best available commodity is adapted as money cigarettes in a prison a Ease of Authentication n Uniformity n Divisibility Capitalism and the Big Idea Module 12 0 Can be divided easily a Durability n Portability o Valuetoweight and valuetobulk ratio 0 Cigarettes are relatively valuable given their size and weight n Fungible individual units are capable of mutual substitution identical cost same attributes 0 Fiat Money I Currency that a government has declared to be legal tender but is not backed by a physical commodity often paper money 0 Disadvantages of Fiat Money n In ation changes value of money Can be counterfeited although rare Corruption of governments can have bad effect hyperin ation Demand Curve 0 Law of Demand the economic principle that says the lower the price of a good the larger the quantity consumers wish to purchase a ASSUMING that all other factors remain constant ie income and preferences a Negative slope of demand curve represents this higher prices associated with lower quantities a Larger quantity can only be sold at a lower price 0 Demand curves pertain to a particular point in time 0 Negative slope also due to consumers entering market andor more consumption per consumer occurring at lower prices Determinants of Demand Capitalism and the Big Idea Module 12 1 Income levels a Normal Goods those goods for which an increase in income leads to greater consumption a Inferior Goods those goods whose consumption falls when income rises 2 Prices of Related Goods n Complements two goods that tend to be consumed together so consumption of both tends to rise or fall simultaneously a Substitutes different goods that at least partly satisfy the same needs of the consumers and therefore can be used to replace one another eitheror choice 3 Consumer Tastes and Preferences n Tastes Preferences the feelings of consumers about the desirability of different goods Shifts amp Movements in Demand Curve 0 SHIFT occurs if a determinant of the demand curve CHANGES o CHANGE IN FACTORS BESIDES PRICE 0 MOVEMENT occurs when the quantity demanded changes in response to a price change while all other factors are HELD CONSTANT Price Elasticity of Demand 0 Price Elasticity of Demand a measure of how sensitive quantity demanded is to a change in a product39s price 1 Determines how a price change will affect total expenditure on product quantity bought 2 Elastic 10 increase in price REDUCES quantity by MORE than 10 Total expenditure will FALL Price and total expenditure move in OPPOSITE directions 3 Inelastic 10 increase in price REDUCES quantity by LESS than 10 Total expenditure will RISE Price and total expenditure move in the SAME direction Capitalism and the Big Idea Module 12 Demand Elasticities Vary Among Goods 0 Factors Affecting Elasticity of Demand 1 Availability and Closeness of Substitutes o The more and the better substitutes there are the more elastic the demand will be 0 A narrowly de ned good will have more substitutes blue cheese 2 Time Period over which Consumers Adjust to Price Change 0 Longer time period more adjustmentmore elasticity consumers can adjust and nd substitutes Supply Curve 0 Law of Supply the economic principle that says the higher the price of a good the larger the quantity FIRMS want to produce 0 ASSUMING all other factors remain constant when the price of the good changes 0 Supply Curve summarizes effect of price on the quantity that rms produce 0 Opportunity cost rises when more units are produced so a higher price is necessary to elicit a greater output 0 Also pertains to a particular period of time 0 Number of rms producing the good may vary along the supply curve Shifts amp Movements along Supply Curve 0 Shift occurs when any factors changes besides price a Determinants of Quantity Supplied 1 Technology 2 Input Supply Conditions Changes in these will in uence the supply curve to shift 0 Movement occurs when the quantity varies in response to a change in the price Capitalism and the Big Idea Module 12 Elasticity of Supply 0 Price Elasticity of Supply a measure of how sensitive quantity supplied is to a change in a product s price 0 Elastic increase in price leads to MORE THAN proportionate increase in quantity supplied Increases when producers have more time to adjust to changes in price 0 Inelastic higher prices produces a LESS THAN proportionate increase in quantity supplied Determination of Equilibrium Price and Quantity 0 Assumption market tends to move toward equilibrium 0 Shortage when quantity demanded exceeds quantity supplied below equilibrium point 0 Surplus when quantity supplied exceeds quantity demanded above equilibrium point 0 0 Command Economy has the government deciding what should be produced in what quantities 1 Gov t can own the means of production 2 Gov t can tell producers how much to produce 0 Mixed Economy private enterprise providing many goods and services that are often regulated by the government a Gov t still provides goods and services 31 0 Market Economy scarce resources are allocated by the interaction between producers and consumers in markets 0 Producers and consumers ultimately decide what is produced 0 Prices signal the importance of a good or service 0 This kind of economy was described as the invisible handquot by Adam Smith Capitalism and the Big Idea Module 12 32 0 Law of Demand as the price of a good decreases the quantity demanded increases amp vice versa 33 o Inelastic change in price has a relatively small effect on the quantity of the good demanded 0 Elastic A change in price has a relatively large effect on the quantity of the good demanded 34 Shifts in Demand Curve 0 Tastes and Preferences age gender religion cultural upbringing ethical considerations 0 Income 0 Normal amp inferior goods complements amp substitutes 0 Positive Relationship if a thing moves in one direction another related thing moves in the same direction Relationship between income and a normal good 0 Inverse Relationship if a thing moves in one direction another related thing moves in the opposite direction Relationship between income and an inferior good 0 Capital Budgeting the process of deciding whether or not to invest in the longterm assets required by the big ideaquot 35 0 Supply curve at higher prices the rm generates greater output Determinants of Shifts in Supply Curve 0 Technology Ex agriculture John Deere tractors 0 Price of inputs Capitalism and the Big Idea Module 12 Labor raw materials equipment 0 Government Policy taxes or subsidies Subsidy payment to producer to reduce cost of production 0 Elastic Supply Curve small change in price large increase in production 0 Inelastic Supply Curve small change in price not much more production 36 0 Producer has to have information about what s going on in their OWN market as well as other related markets 37 o Shortage vs Surplus vs Equilibrium 38 Market Equilibrium WAGES l 0 Above supply and demand for janitorial workers lf wages for janitors are lOkhour there is a huge excess supply Wages will continue to be pushed down until there is a balanced amount of demand 0 Interest Rate is the price of money the rental rate on the money being used up over an interval of time o Borrowers represent demand side of capital market Savers represent lenders They save money then get more down the road because of interest 0 Excess Supply in any case means the price should fall in the market place 0 Too high wages janitors will drop in order to encourage greater demand 0 Too high interest rate 20 discourages people from buying things they will only want to save therefore the price should fall 0 Excess Demand the price will go up to call forth more supply from providers 0 Too low wages no one will work there is high demand Wages must go up in order to encourage janitors to work 0 Too low interest rate people won t be as inclined to save 310 Capitalism and the Big Idea Module 12 0 You only ever see price and quantity in the marketplace o Econometrics economic technique used to try to estimate supply and demand schedules 0 Determining which curve shifted where in order to reach the new equilibrium price and quantity


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