Notes, summaries, assignments, exams, and problems for Economy

Adam Smith's Core Economic Principles

Adam Smith was a Scottish economist during the 18^th century. In 1776, he published his most influential book, The Wealth of Nations, where he made the first comprehensive examination of the emerging market capitalist system. He laid the foundations of classical free-market economic theory and developed the concept of division of labor. Smith explained how rational self-interest and competition can lead to economic prosperity.

Elements of Commercial Society

Adam Smith addressed two fundamental economic questions: the growth of wealth and its distribution. He provided an analysis of the relationship between three key elements of commercial society:

• Factors of production
• The market
• The state

From this framework,... Continue reading "Adam Smith's Economic Theories: Foundations of Free Markets" »

Unit 1.6: Growth and Evolution

Economies of Scale

• The long-run average costs fall as more output is produced.
• The idea of getting bigger is cheaper.
• When the costs of a business go down as the business grows.

Internal Economies of Scale

• Purchasing: The price is lower if you buy in large quantities.
• Financial: Big businesses are seen as less of a risk than smaller businesses.
• Managerial: They have specialized managers in the different areas which brings costs down as efficiency rises.
• Technical: Only big businesses can afford to buy the best technology, which in the long run brings down costs.
• Marketing: Large-scale businesses are the ones who can afford and spread the cost of the most effective and expensive types of marketing.

External Economies of Scale

• Consumers:

Hidden Unemployment: Definition and Market Data Effects

Hidden unemployment refers to discouraged workers who are not officially counted as unemployed but are available for or seeking employment. Because these individuals are not included in the standard definition of the labor force, their unemployment is not visible through normal labor market data, such as the official unemployment rate.

The Relationship Between Hidden Unemployment and Discouraged Workers

Discouraged workers are defined as people who want to work but have stopped actively searching because they believe there are no jobs available for them, even if suitable jobs might exist. This group forms the core of hidden unemployment.

Determining Hidden Unemployment in the Labor Market

Economists... Continue reading "Labor Market Dynamics: Unemployment, Sector Shifts, and Union Wage Effects" »

Understanding Terms of Trade (TOT)

TOT Definition and Calculation

The Terms of Trade (TOT) is an economic indicator that measures the relative prices of a country's exports in relation to its imports. It quantifies the amount of imports a country can obtain per unit of its exports.

The formula for calculating TOT is:

TOT = (Average Price Index of Exports / Average Price Index of Imports) x 100

Interpreting Changes in Terms of Trade

Changes in the TOT indicate shifts in a country's purchasing power in international trade:

• TOT Improves / More Favorable: This occurs when export prices rise relatively to import prices. The country is then able to exchange the same amount of exports for a greater quantity of imports. This generally signifies an increase

1. Net Income

The net income is rising from 2015 to 2017, which is good. However, net income as a percent of sales rises from 2015-2016, but falls from 2016-2017. Why?

2. Total Revenue

Total revenue is increasing each year from 2015 to 2017, which is good. On a percentage basis revenue increased by 27% from 2015-2016 and accelerated to 31% in 2016-2017, which is very good.

3. Cost of Revenue

Cost of revenue is going up from 2015 to 2017, which is to be expected because revenue is going up. On a percent of sales basis, cost of revenue is going down each year from 67% to 62%, which is very good.

4. Gross Profit

Gross profit is rising over time from 2015 to 2017 which is good. As a percent of sales it is getting better over time, which we expected because... Continue reading "Financial Analysis: Trends and Concerns" »

The Three Indispensable Roles of the State

But that didn’t mean that the state is unimportant for Smith. He saw that it performed three indispensable roles in the commercial stage of society:

• First, the state should provide defense of the territory in order for perfect liberty to be exercised.
• Second, the state must uphold the rule of law. Without secure property rights over the use and disposal of goods and capital, the market cannot function. To cap the interest rate was very important. He realized that if the reward was too big, investors would forget the risk. But with the rate capped, people will take reasonable risks.
• Third, the state should provide certain “public goods” that it may never be profitable for individuals to produce privately.

Market Research

Market research is the process of gathering, analyzing, and interpreting information about a market.

Product-Orientated vs. Market-Orientated Businesses

A product-orientated business focuses primarily on the product itself. Key characteristics include:

• They produce the product first, then attempt to find a market for it.
• They often produce basic necessities, such as agricultural tools or fresh foods.
• They may lack a recognizable brand name.
• Products are sometimes launched without testing, meaning consumers may hesitate to purchase them until they are fully evaluated.

A market-orientated business carries out market research to identify consumer wants before a product is developed and produced. These businesses are generally more successful... Continue reading "Market Research and Business Orientation Strategies" »

1929 Crisis: Stock Market Crash

1. The Booming Twenties

• After WW1, a period of peace emerged.
• Countries experienced economic growth.
• The League of Nations aimed to prevent wars.
• The Dawes and Young Plans aided Germany's economic recovery and reintegration into the League of Nations.
• The US provided financial assistance to Europe for post-war recovery.

The US appeared prosperous with high production, wages, and cheap labor. However, many lived in poverty. European countries imposed tariffs on US imports to protect domestic products. Overconfidence led US citizens to borrow money to buy shares, despite low share prices. European countries grew wary of the US.

Germany borrowed heavily for post-war reconstruction, but it wasn't enough. France occupied... Continue reading "1929 Stock Market Crash: Causes and Effects" »

Tax Deductions for Business Operations

You can write off operational expenses from your taxes for the year in which they occur. This means you can deduct 100 percent of your daily expenses each year.

Operational Expenses vs. Capital Expenditures

• Operational Expenses (Write-offs): Offer the most advantageous tax deductions for the short term, allowing a 100% deduction in the year incurred.
• Capital Expenditures (Depreciation): Must be depreciated. This means you can deduct only a part of the cost of the asset each year over the life of the asset.

Understanding Risk Aversion

Risk Averse: Investing conservatively, avoiding risk unless there is adequate compensation.

Standard Deviation and Investment Volatility

Standard Deviation is applied to the annual... Continue reading "Investment Metrics, Market Structures, and Tax Deductions" »