Topic 7.3 Stocks

7.3 The Stock Market
Objectives
1. Understand the benefits and risks of buying stock.
2. Describe how stocks are traded.
3. Identify how stock performance is measured.
4. Explain the causes and effects of the Great Crash of 1929.

What is a stock, exactly how is it traded, and when is it a good investment?
Besides selling bonds, companies can sell stock to raise money. But stock represents ownership in a company.

Share – Portion of stock

Dividends – A companies profits paid out to shareholders. This is usually done four times a year.

Capital gain/loss – The difference between a selling price and a purchase price. If the selling price is bigger than the purchase price, it’s a gain. If the selling price is lower than the purchase price, it’s a loss.

Stock Split – The division of a single share of stock into more than one share.

EX: Suppose you own 200 shares of Google at $100 per share. The stock splits and now you have 400 shares at $50.

Companies have stock splits when they feel their stock is too expensive to buy.

Buying stocks can be risky because a company could potentially not make money and not pay dividends. Additionally, the share price could drop.

How Are Stocks Traded
Suppose you want to buy a stock in a company. Do you call up that company, no. You call a stockbroker.

Stockbroker – A person who links buyers and sellers of a stock.

Stock Exchanges – A market for buying and selling stock.

EX: NYSE and NASDAQ

Measuring Stock Performance
Bull Market – A steady rise in the stock market over a period of time.

Bear Market – A steady drop in the stock market over a period of time.

The Dow – An index that show how certain stocks have traded (around 30 stocks)

S&P 500 – An index that shows the price changes of 500 different stocks

The Great Crash of 1929
The 1920s saw a long-term bull market but in 1929 the stock market crashed leading to the Great Depression.

Speculation – The practice of making high-risk investments with borrowed money with the hopes of a big return

7.2 Notes Bonds

7.2 Bonds and Other Financial Assets
Objectives
1. Describe the characteristics of bonds as financial assets
2. Identify different types of bonds
3. Describe the characteristics of other types of financial assets.
4. Explain four different types of financial asset markets.

How do borrowers raise money for investment? One of the most important ways is by selling bonds.

Bond – Certificates sold by a company or government to finance projects or expansion.

EX: War bonds during WWII

Bonds are basically IOUs that the government or companies must pay back to investors with a fixed amount of interest. They are generally considered low-risk investments.
Bonds have three basic components:
Coupon Rate – The interest rate that a bond issuer will pay to a bondholder.

Maturity – The time at which payment to a bondholder is due.

Par Value – The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity.
Example: Suppose you buy a bond from a new company, Jeans Inc.
Coupon rate: 5%, paid to the bondholder annually
Maturity: 10 years
Par Value: $1,000






Advantages and Disadvantages
The person who buys a bond is called a “holder,” while the person who sells the bond is an “issuer.”
Bonds are desirable to the issuer because
1. The coupon rate on a bond does not go up or down so companies know exactly how much they will have to pay back.
2. Unlike stockholders, bondholders do not own a part of the company. So a company does not have to share its profits if it becomes wealthy.

Bonds are undesirable to the issuer because
1. A company must make interest payments on bonds, even during bad years.

Types of Bonds

Savings Bond – A low-denomination ($50 to $10,000) bond issued by the US government.

Municipal Bond – A bond issued by a state or local government to finance highways, libraries, parks and schools.

Corporate Bonds – A bond that a corporation issues to raise money to expand its business.

Junk Bonds – A lower-rated, potentially higher-paying bond.

Savings and municipal bonds are generally considered low-risk compared corporate bonds, whereas junk bonds are the riskiest.

7.1 Notes

7.1 Saving and Investing

Objectives
1. Understand how investing contributes to the free enterprise system.
2. Explain how the financial system brigs together savers and borrowers.
3. Describe how financial intermediaries link savers and borrowers.
4. Identify the trade-offs among risk, liquidity and return

If you go to school today, you give up your time now so that you will be prepared for a career in the future. If a firm builds a new plant, it spends money today for the sake of earning more money in the future. These actions represent investments.

Investment – The act of redirecting resources from being consumed today so that they may create benefits in the future.

Investment promotes economic growth
EX: You put money in bank, the bank lends it to a business, the business invests the money in a new plant, and the plant hires people and produces better products.

In order for investment to take place an economy must have a financial system.
Financial System – The system that allows the transfer of money between savers and borrowers.


Financial Intermediary – An institution that helps channel funds from savers to borrowers.

EX: Banks, saving & loan associations, credit unions, and mutual funds.

Mutual Fund – A fund that pools the savings of many individuals and invest this money in a variety of stocks, bonds and other assets.

Savers give their money to financial intermediaries, who give it to investors. Why don’t savers deal with investors directly? There are three reasons:

1. Diversification – Spreading out investments to reduce risk.

EX: Putting your money in a bank or a mutual fund allows you to pool your money with other people, which is then invested in a variety of places.



2. Financial intermediaries provide information to savers. For example, mutual fund managers are knowledgeable about how the stocks in their portfolios are performing.

Portfolio – A collection of financial assets.

Intermediaries also provide a prospectus to savers.

Prospectus – An investment report to potential investors.

And finally intermediaries provide liquidity.

3. Liquidity – The ease with which people can convert and asset into cash.

EX: You can sell your shares in a mutual fund easily but if you had invested in a piece of art, it might be hard to sell.


Investors must make choices between return on an investment, its risk and how liquid it is.

Return – The money an investor receives above and beyond the sum of money initially invested.

Topic 6.1 combining supply and demand

6.1: Combining Supply and Demand
Objectives
1. Explain how supply and demand create balance in the marketplace.
2. Compare a market in equilibrium with a market in disequilibrium.
3. Identify how the government sometimes intervenes in markets to control prices.
4. Analyze the effects of price ceilings and price floors.

Buyers always want to pay the lowest possible price, while sellers hope to sell at the highest possible price. With buyers and sellers at odds, how can a market system satisfy both groups? In a free market system, supply and demand work together. The result is a price that both sides can agree on.

Price of a slice of pizza ($) Quantity Demanded Quantity Supplied Result
.50 300 100 Shortage from
1.00 250 150 excess demand
1.50 200 200
Equilibrium

2.00 150 250 Surplus from excess
2.50 100 300 supply
3.00 50 350












Equilibrium – The point at which quantity demanded and quantity supplied are equal.

What is the equilibrium price in the example above?

Disequilibrium – describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded.


Excess Demand (Shortage )– When quantity demanded is more than quantity supplied.

Excess Supply (Surplus) – When quantity supplied is more than quantity demanded.

Excess Demand Excess Supply













Suppliers will raise or lower their prices to meet consumers’ wishes. And in the process, restore the market to equilibrium.

Government Intervention

The government can purposefully make a market in disequilibrium in two ways: price floors and price ceilings.

Price Ceiling – A maximum price that can be legally charged for a good or service.

EX: Rent control













Pros/Cons




Price Floor – a minimum price for a good or service.

EX: Minimum wage












Pros/Cons

Topic 4.3 Elasticity

3.3 Elasticity of Demand
Objectives
1. Explain how to calculate elasticity of demand.
2. Determine elasticity of demand from a demand schedule and a demand curve.
3. Identify factors that affect elasticity.

Are there some goods that you would buy no matter the price? Are there other goods that you would not buy if the price changed a little?

Elasticity of Demand – A measure of how consumers react to a change in price.

Inelastic – Describes demand that is NOT sensitive to a change in price.

EX: Gas, medicine, milk

Elastic – Describes demand that is very sensitive to a change in price.

EX: Restaurant meals, foreign travel, specific brands of toothpaste and pizza slices, potato chips





Graphic Examples
Elastic Demand (Chips) Inelastic demand (Gas)







Calculating elasticity of demand

Elasticity of demand = Percentage change in quantity demanded
Percentage change in price

Percentage change = Original number – New number
Original number



Calculation:
If the elasticity is greater than 1, then it is elastic
If the elasticity is less than 1, then it is inelastic
If elasticity is equal to 1, then it is called unitary elastic

Elastic Demand
% change in Qd = 10-20 = 1
10

% change in P = 4-3 = (1/4)
4

Elasticity = % change in Qd = 1 = 4, which is greater than one so gas is inelastic
% change in P (1/4)

Inelastic Demand
% change in Qd = 10-15 = (5/10) = (1/2)
10


% change in P = 6-2 = (4/6) =(2/3)
6

Elasticity = % change in Qd = (1/2) = (3/4)
% change in P (2/3)

(3/4) is less than one so chips are elastic

Four Factors Affecting Elasticity of Demand
1. Availability of substitutes - If there are few subs for a good, then if the price rises greatly, you still might buy it.

EX: Your favorite concert group and Aquafresh toothpaste

2. Relative importance - What percentage of your budget do you spend on goods and services?

EX: ½ your budget goes to clothes or the increase of price in toothpicks

3. Necessities vs. luxuries
i. Necessities tend to inelastic
EX: milk and medicine

ii. Luxuries tend to be elastic
EX: Steak and lobster dinners

4. Change over time - You need time to find subs for goods/services. So demand in short-run maybe inelastic and more elastic in long-run

EX: gas in the Summer of 2008

4.2 Notes Shifts in Demand

Topic 4.2 Shifts in the Demand Curve
Objectives
1. Understand the difference between a change in quantity demanded and a shift in the demand curve.
2. Identify several factors that determine demand and can cause a shift in the demand curve.
3. Explain how the change in the price of good can affect demand for a related good.

The demand schedule only took prices into account, while keeping all other factors the same, or constant. What if a government report came out that stated eating tomato sauce is the best way to cure a cold? What would happen to the demand of pizza?





Graphing Changes in Demand

Change in Quantity Demanded Demand shifting to left














Demand shift to right














Factors that cause the demand curve to shift

1. Income

Normal Good – A good that consumers demand more of when their incomes increase.

EX: New clothing, Roast beef sandwiches

Inferior Good – A good that consumers demand less of when their incomes increase.

EX: Used clothing, “mystery meat” sandwiches



Shift in Demand when your income increases

Used Clothing New Clothing













2. Consumer Expectations – Our expectations about the future affect are buying decisions now.

EX: A salesman tells you a bike you want will go on sale in one week so your demand for the bike now falls.

Demand for Bikes













3. Population
EX: After the baby boom, demand for bottles and baby food increased.

Demand for baby products after baby boom






4. Consumer Tastes and Advertising
EX: Nike pumps shoes, light up shoes (LA Lights), shoes with wheels.

Demand for Pumps after people thought they were not cool anymore













5. Price of Complements – Two goods that are bought and used together.
EX: Basketballs and basketball shoes

Demand for Basketballs after the price for basketball shoes goes up drastically












6. Price of Substitutes – Goods used in place of one another.
EX: Coffee and tea

Demand for coffee if the price of tea goes down

Topic 4.1 Demand schedule

4.1 Understanding Demand
Objectives
1. Explain the law of demand.
2. Understand how the substitution effect and the income effect influence decisions.
3. Create a demand schedule for an individual and a market.
4. Analyze the information presented in a demand curve.

Buyers demand goods, sellers supply those goods, and the interactions between the two groups lead to an agreement on the price and the amount traded.

Law of Demand – Consumers buy more of a good when its price decrease and less when its price increases.

Price Increase Quantity Demanded Decrease

Price Decrease Quantity Demanded Increase

The law of demand is explained by two patterns

Substitution Effect – When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

EX: The price of school pizza goes up so you eat bagels instead.

Income Effect – The change in consumption resulting from a change in real income.

EX: When the price of movie tickets goes up, it makes you feel poorer, so you buy fewer movie tickets.

You only demand goods that you can afford to buy. You may want a Lamborghini, but if you cannot afford one then you don’t demand it.

Demand Schedule – A table that lists the quantity of a good a person will but each different price.

Market Demand Schedule – A table that lists the quantity of a good all consumers in a market will buy at each different price.




Individual Demand
Price of a slice
of pizza ($) Quantity demanded
per day
.50 6
1.00 4
1.50 3
2.00 1
2.50 1
3.00 0

Market Demand (everyone in the classroom added together)
Price of a slice
of pizza ($) Quantity demanded
per day
.50 95
1.00 72
1.50 60
2.00 32
2.50 15
3.00 8

Graphing
Individual Demand Curve Market Demand Curve

Price on y-axis
Quantity Demanded on x-axis
Draw demand for both












The demand curve tells how quantity demanded will be affected by a change in price.

Topic 3.3 Public Goods

3.3 Providing Public Goods

Objectives
1. Analyze market failures.
2. Identify examples of public goods.
3. Evaluate how the government allocates some resources by managing externalities.

If the government did not build roads, who would? If you wanted a road built in front of your house, would you build it? Would you allow your neighbors to use it? Would they have to pay you?

Market Failure – A situation in which the market does not distribute resources efficiently.

The government decides to intervene when the market fails if the benefits outweigh the negatives.

Public Good – A shared good or service for which it would be impractical to make consumers pay individually and to exclude non-payers.

EX: Dams, Parks.

For the most part, any number of consumers can use a public good without reducing the benefits to any single consumer.
EX: People driving next to you don’t diminish your ability to use a road.

To determine whether something is produced as a public good one must look at the costs and benefits. When a good or service is public…
1. The benefit to each individual is less than the cost that each would have to pay if it were provided privately.
2. The total benefits to society are greater than the total cost.
In these cases the government provides the good, or else it wouldn’t get done.

Public Sector – The part of the economy that involves the transactions of the government

Private Sector – The part of the economy that involves transactions or individuals and businesses.

Free-rider – Some who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good.

EX: People who don’t pay taxes or are illegal immigrants benefit from military protection.

Externalities

Externality – An economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.

Externalities are split into two categories: positives and negative externalities.

Public goods generate benefits for many people, even those who do not pay. Such beneficial side effects are called positive externalities.

• Examples: A new neighbor moves in next-door to you into an old rundown house. She paints it, cuts the grass and plants a garden; everyone in your neighborhood benefits from the beautiful new house.

• A computer company has an outreach program that trains underprivileged youth to be computer programmers. These teens will then go out and be hired by other companies who will benefit from the skills the already have.

Some decisions produce goods and services that generate unintended costs, called negative externalities.

• Examples: A sawmill pollutes a river that flows past a nearby town. The town has to clean up the pollution and deal with its consequences.

• Your neighbor has late night polka parties, which keep you awake. Plus, you hate polka music.

The government’s goal is to increase positive externalities, like education, and decrease negative externalities, like pollution.

Topic 3.2 Notes Safety Nets

Topic 3.2 Providing a Safety Net

Objectives
1. Summarize the U.S. political debate on ways to fight poverty.
2. Describe the main programs through which the government redistributes income.

In a free market some people are very rich, some are very poor and most are in between. So how do societies care for the old, poor and young?

Poverty Threshold – An income level below that which is needed to support families or households.

The poverty threshold fluctuates and is determined by the government. What can the government do to combat poverty? What should it do? Is government regulation the best way to help the poor?

Welfare – A general term that refers to government aid to the poor.

There are many government redistribution programs to help those in need.

• Social Security

• Unemployment Insurance

• Workers’ Compensation

• Medicare/Medicaid

• Education

Topic 3.1 Free Enterprise Notes

Topic 3 American Free Enterprise

3.1 Preserving Economic Freedoms

Objectives
1. Identify ways that the government acts to protect Americans’ economic rights within our system of free enterprise.
2. List examples of how the government creates policies to serve the public interest.
3. Describe how the government intervenes to protect public health, safety, and well-being.


Public Interest – The concerns of the public as a whole.

Examples of how the government acts in the public’s interest:
• Warning labels on cigarettes
• Safety ratings on cars and MPG estimates
• Nutritional facts on food

The government can address problems the free market might ignore, like toxic substances in food.

Protecting public interest means giving up some economic freedom. Most Americans are willing to make the trade-off between less economic freedom for some government intervention.

Consumers can let their voices be heard by producers and the government in two ways:
1) Through consumers buying decisions
2) Through electing officials

Public Policy – Law and standards on topics of public interest

EX: Should we spend more money on defense or improve housing for the poor?
Should we dam a river to generate power or leave it in its natural state?

Interest Group – A private organization that tries to persuade public officials to act or vote according to group members’ interests.

EX: The National Rifle Association (NRA) resisting stricter gun laws.

Pros
• Collection of individuals is more influential than just one citizen.
• Can bring about change that reflects interest off the entire public.

Cons
• Corporate funded groups outspend citizens
• Powerful groups can bring about change that is not beneficial to all.

In order create economic freedom and give consumers choices, then the public needs to be informed of relevant information.

Public Disclosure Laws – Laws requiring companies to provide full information about their products.

EX: Many times hamburger will have its label the day it was packed, the “best buy” date and preparation instructions.

Major Federal Regulatory Agencies

FDA (Food and Drug Administration) – Sets and enforces standards for food, drugs and cosmetic drugs.

FTC (Federal Trade Commission) – Enacts and enforces antitrust laws to protect consumers.

FCC (Federal Communications Commission) – Regulates interstate and international communications by radio, television, satellite and cable.

FAA (Federal Aviation Administration) – Regulates civil aviation, air-traffic and piloting standards, and air commerce.

EEOC (Equal Employment Opportunity Commission) – Promotes equal job opportunity through enforcement of civil right laws, educations and other programs.

EPA (Environmental Protection Agency) – Enacts policies to protect human health and the natural environment.

OHSA (Occupational Safety and Health Administration) – Enacts policies to save lives, prevent injuries and protect the health of workers.

FEMA (Federal Emergency Management Agency) – Coordinates a response to a disaster in the U.S. that overwhelms the resources of local and state authorities.

Topic 1.3 PPF

1.3 Production Possibilities Graph

Production Possibilities Graph – Graph that shows alternative ways to use an economy’s resources

GRAPH






Efficiency – Using resources in such a way as to maximize the production of goods and services

Cost – To an economist cost is the alternative that is given up because of a decision. Note: this is not the definition that you may be used to because it does not necessarily refer to money.

Law of Increasing Costs – As we shift factors of production from making one good or service to and, the cost of producing the second item increases

Underutilization – Using fewer resources than an economy is capable of using

Shifts in the PPF

Growth => Increase in the FOP; Increase in technology.
⇨ Outward shift of the PPF

Contraction => Decrease in the FOP, possible from war.
=> Inward shift of the PPF

Topic 1.2 Opportunity Cost Notes

1.2 Opportunity Cost

Trade-off – An alternative that we sacrifice when we make a decision

EX: Having a part-time job might prevent one from playing on the football team. A farmer who plants cherry trees cannot also grow apples on the same land.

Guns or Butter – A phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods.

EX: Resources are limited! Steel being produced could be used to make tanks or butter factories.

Opportunity Cost – The most desirable alternative given up as the result of a decision.

EX: The opportunity cost of spending your savings on a computer is not being able to go on a trip.



Which would use choose?
-Sleep late or wake up early to go on vacation to Cancun?
-Sleep late or wake up early to eat breakfast?
-Sleep late or wake up early to study for a test?

Questions
1. What are some possible things you going to do after school today? List three examples that illustrate how decisions involve trade-offs.

2. Suppose that you can save $50 by buying your car in a different city. If the trip requires only $10 in gasoline, is the trip worthwhile? Why or why not? (Consider other factors beside money)

3. Determine an opportunity cost for each of the following. (a) eating pizza; (b) going to see a movie on a Tuesday; (c) going to see a movie on a Saturday; (4) watching television.

Topic 1.1 Notes

Topic 1

Section 1.1 Scarcity and the Factors of Production

Need – Something like air, food or shelter that is necessary for survival


Want – An item that we desire but that is not essential to survival

Economics – The study of how people seek to satisfy their needs and wants by making choices


Scarcity – Limited quantities of resources to meet unlimited wants


Goods – Physical objects such as clothes or shoes


Services – Actions or activities that one person performs for another



Shortage – A situation in which a good or service is unavailable

Scarcity always exists while a shortage can last a few days (holiday shopping) to years (wars).

Factors of Production – Land, labor and capital; the three groups of resources that are used to make all goods and services

Land – Natural resources that are used to make goods and services

Natural resources are materials found in nature including fertile land for farming and products that are in or on the land, such as coal, water and forests.

Labor – The effort that people devote to a task for which they are paid

EX: Doctor performing surgery, assembly line worker

Capital – Any human made resource that is used to create goods and services. Fall into two categories: human and physical capital.

Physical Capital – All human-made goods that are used to produce other goods and services.

EX: tools (i.e. sewing machine) and buildings (i.e. shoe factory.)

Makes people more productive-dishwasher saves time, adds knowledge (the family learns more about appliances like washing machines and dryers) and more productivity (extra time and knowledge lets the family do other chores or activities that are beneficial to the family.)

Human Capital – The skills and knowledge gained by a worker through education and experience

EX: Assembly line workers use skills and equipment acquired through experience and training to produce goods.

Entrepreneur – Ambitious leader who combines land, labor, and capital to create and market new goods and services.

EX: Bill Gates, Henry Ford


Economists say that all goods and services are scarce because land, labor and capital used to create them are scarce.

Questions
1. Why is the idea of scarcity a starting point for thinking economically?


2. What role do entrepreneurs play in the economy?


3. Which factor of production is represented by each of the following? (a) an office building; (b) an assembly line worker; (c) a tree used to make paper; (d) unused soil; (e) an artist; (f) a student


4. Why might an economist look at hundreds of cars moving along an assembly line and say, “There is an example of scarcity”?

Syllabus

Economics

Welcome to Economics! First, I would like to introduce myself to you. I am a student teacher in the Masters and Certification Program in Secondary Education at the University of Michigan. Additionally, I am student teaching with Mrs. James in Algebra and Geometry, so if I am not in room 306, I'll be in the Freshman Center in room 508. Before entering teaching, I was an undergrad at the University of Michigan and I received my economics and math degree in 2007. I look forward to teaching and getting to know you this semester.

TOPICS COVERED: This course will cover 8 main topics. It is recommended that you organize your course binder according to the following topics:
Topic 1: What is Economics? Topic 5: Supply
Topic 2: Economic Systems Topic 6: Prices
Topic 3: American Free Enterprise Topic 7: Financial Markets
Topic 4: Demand Topic 8: Money & Banking



SUGGESTED SUPPLIES: Supplies should be brought with you to class everyday!
• Three-ring binder- Keep your graded assignments and organize your homework and notes in the binder. Organized information is a valuable resource when preparing for graded assessments.
• Pencil (recommended) or Pen
• Notebook- to be used for this class only


ABSENCE POLICY: If you are absent from class, it is your responsibility to find out what you missed. If you miss a quiz or test you will be expected to take the quiz or test the day you return to class. Failure to do so will result in loss of points.


HOMEWORK POLICY: All homework is due at the start of class. Homework submitted 10 minutes after the bell has rung or later will receive half credit. Late homework for each marking period will be accepted no later than two weeks before the end of the marking period.

EXPECTATIONS:
-Be in the classroom and in your seat when the bell rings.
-Show respect for yourself, your peers and your teacher.
-Be prepared for class.
-Do your own work. Cheating or copying will not be tolerated. You will receive a zero on the assignment or test. Please note that the student handbook states that a second cheating violation results in a failing grade for the semester.
-Participate in class.
-No food or drink in the classroom other than bottled water.

GRADES:
Your grade each term will be determined by the following simple scale:
Homework/In-Class Assignments – 40%
Tests/Quizzes – 50%
Participation – 10%
This scale has the following implications:
• You cannot expect to receive a good grade if you don’t turn in most of your homework assignments.
• The highest grade you may receive if you don’t participate, assuming everything else is completed perfectly, is an A-. Volunteering questions, comments, and answers in class discussion and contributing to classmates during group work are two good examples of participation. Poor behavior will directly affect your participation grade.


GRADING SCALE Final Grade for Semester (subject to change)
A 12 93-100 First marking 40%
A- 11 90-92 Second marking 40%
B+ 10 87-89 Midterm/Final Exam 20%
B 9 83-86
B- 8 80-82
C+ 7 77-79
C 6 73-76
C- 5 70-72
D+ 4 67-69
D 3 63-66
D- 2 60-62
--------------------------
E 1 0-59