The world's major currencies

 

Apart from a few misguided misers like Ebennezer Scrooge, no one wants a currency "to have and to hold, until death do you part." Currencies are used to buy goods and services, both at home and abroad. The currencies of the world's major economies have names and backgrounds that are as diverse as the counties themselves.

The dollar, used in many countries including the United States, Canada, and Australia, gets its name from a silver coin minted during the Middle Ages in a small valley, or "Thal," in Bohemia called Joachimsthal. Just as a sausage from Frankfurt came to be called a frankfurter, the coins from Joachimsthal were called "Joachimsthaler" or simply "Thaler," and came to be called "dollar" in English.

The pound, used in Britain, Egypt, and Lebanon among others, refers to the weight used in determining the value of coins, based on precious metals such as gold or sterling. The penny has the same origin as the word pawn, found in terms such as pawnshop, and originally meant "to pledge." A penny, like any currency, is a "pledge" of value.

In Italy and Turkey, the currency is called lira. The word is based on the Latin lira, meaning "pound," and once again refers to the weight of the original coins.

In Spanish, the word meaning "weight," peso, is used to describe the coins that were based on a certain weight of gold or silver. Originally, there were gold coins called peso de oro and silver ones called peso de plata. In Spain, the currency is called peseta, meaning "small peso." The word peso is used to describe the currency in many Spanish-speaking countries in Latin America.

In Denmark, Norway, and Sweden, the word for crown - krone in Denmark and Norway, krona in Sweden - is used to describe the currency that was originally minted by the king and queen, with royal crowns stamped on the earlier coins. Today, the crown has been replaced by other symbols, but the name remains.

The franc, used in France, Belgium, Switzerland, and other countries and territories, is based on the early coins used in France that bore the Latin inscription franconium rex, meaning "king of the Franks." The coin, as well as the country, took its name from one of the original tribes that settled in the area, the Franks.

The German mark and Finnish markka derive their names from the small marks that were cut into coins to indicate their precious metal content. The German mark, deutsche mark in German is often called by its shortened name, D-mark.

The riyal, in Saudi Arabia and Qatar, and the rial in Iran, are based on the Spanish word real - which, in turn, was derived from the Latin regal(is) - referring to earlier "royal" coins. The dinar, used in Iraq and Kuwait among others, derives its name from "denarius," a Roman coin that was worth ‘ten bronze asses’, an item of considerable value in days of old. In India, Pakistan, and other countries of the subcontinent the currency is called rupee (in Indonesia, rupiah), based on the Sanskrit word rupya, meaning "coined silver."

The ancient Chinese word yiam meant "round" or "small round thing." The name of the Japanese currency, the yen, and the name of the Chinese currency, the yuan, both derived from the old Chinese word refer to the round shape of the original coins.

It used to be that a currency's value was fixed by its government or was linked to some item of value. This is not necessarily the case today. In the United States, for example, dollars held by foreigners could be converted into gold until 1971. This gold standard was meant to guarantee that currencies would always have a fixed value, determining by the amount of gold in each country's vault. The value of the major world currencies - such as the U.S. dollar, the Swiss franc, and the Japanese yen - is no longer fixed but is allowed to fluctuate freely on the world's foreign exchange markets. Just like a concert ticket on the night of a sold-out performance, a freely floating currency's price goes up when it is increased demand.

Currencies are "scarce" commodities subject to the laws of supply and demand, as long as governments do not start printing too much money. When everyone wants to buy much French wine, for example, the "price" of the franc tends to increase. The franc's value will rise as importers around the world buy francs - with dollars, yens or D-marks - to pay for it. Likewise, if Danish should decide to buy the latest Japanese stereo systems and video games, the krone will lose value as it is sold on the foreign exchange market to buy yens.

The free-floating system still does not keep governments from trying to influence the value of their currency by buying or selling on the open markets. The present system, sometimes referred to as a "dirty float," is based on periodic central bank intervention to keep currencies from changing its value too quickly or from moving out of a predetermined range, such as those periodically fixed in the European Monetary System. However, like trying to reverse the flow of water, it is very difficult to intervene in the international currency markets. Because of the enormous amount of currencies traded every day on the foreign exchange (forex) markets, interventions by the central banks usually succeed in only slowing down a freely floating currency's inevitable rise or fall.

 

 

THEORY OF THE CONSUMER

 

The branch of economics known as microeconomics focuses on the behavior of individual consumers and individual firms. This section reviews the theory of the consumer and the following section reviews the theory of the firm. The theory of the consumer describes how individual consumers make economic decisions, given their preferences, their incomes, and the prices of the goods and services that they desire to purchase. Individuals consume goods and services because they derive pleasure or satisfaction from doing so. Economists use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her consumption of goods and services. Utility is a subjective measure of pleasure or satisfaction that varies from individual to individual according to each individual's preferences.

For example, if an individual's choices for a Sunday evening are to go out for dinner, to read a book or to watch television, then, depending on that individual's preferences, he or she will attribute different levels of utility to each of these three activities. Of course, it is not possible to measure utility, nor is it possible to claim that one individual's utility is higher than another's. Utility is just a ‘unitless’ measure that economists have found useful in their explanation of consumer choice. The utility that an individual receives from consuming a certain amount of particular goods or services is referred to as that individual's total utility. The marginal utility of a good or service is the addition to total utility that an individual receives from consuming one more unit of that good or service.

The law of diminishing marginal utility states that the marginal utility that one receives from consuming successful units of the same good or service will eventually decrease as the number of units consumed increases. As an example of the law of diminishing marginal utility, consider the utility that one obtains from drinking successful glasses of mineral water on a hot day. Suppose the first glass just begins to quench one's thirst. After two glasses, however, the thirst has all but disappeared. A third glass of mineral water might also provide some utility, but not as much as the second glass. A fourth glass cannot be finished. In this example, the marginal utility - the addition to total utility that one obtains from drinking mineral water on a hot day - is increasing for the first two glasses but is decreasing beginning with the third glass and would continue to decrease if one were to consume further glasses.

When consumers make choices about the quantity of goods and services to consume, it is presumed that their objective is to maximize total utility. In maximizing total utility, the consumer faces a number of constraints, the most important of which are the consumer's income and the prices of the goods and services that the consumer wishes to consume. The consumer's effort to maximize total utility, subject to these constraints, is referred to as the consumer's problem. The solution to the consumer's problem, which entails decisions about how much the consumer will consume of a number of goods and services, is referred to as consumer equilibrium.

Consider the simple case of a consumer who wants to purchase quantities of goods 1 and 2 so as to completely exhaust the budget for such purchases. Suppose that the price of good 1 is $2 per unit and the price of good 2 is $1 per unit. Suppose also that the consumer has a budget of $5. The consumer equilibrium is found by comparing the marginal utility per dollar spent for goods 1 and 2, subject to the constraint that the consumer does not exceed his budget of $5. The consumer's equilibrium choice is to purchase two units of good 1 and one unit of good 2.

The consumer's choice of how much to consume of various goods depends on the prices of those goods. If prices change, the consumer's equilibrium choice will also change. The effect of a price change on the consumer's equilibrium choice is often divided into two effects - known as the substitution effect of a price change and the income effect of a price change. When the price of a good changes the price of that good relative to the price of other goods also changes. Relative price changes cause consumers to substitute from one good to another - this is known as the substitution effect. The income effect takes account of how price changes affect consumption choices by changing the real purchasing power or real income of the consumer.

The consumer equilibrium condition determines the quantity of each good the individual will demand. The individual consumer, however, is only one of many participants in the market for good X. The market demand curve for good X includes the quantities of good X demanded by all participants in the market for good X found by summing together all the quantities.

The difference between the maximum price that consumers are willing to pay for a good and the market price that they actually pay for a good, is referred to as the consumer surplus. For example, the market price is $5, and the equilibrium quantity demanded is 5 units of the good. The market demand curve reveals that consumers are willing to pay at least $9 for the first unit, $8 for the second unit, $7 for the third unit, and $6 for the fourth unit. However, they can purchase 5 units of the good for just $5 per unit. Their surplus from the first unit purchased is therefore $9 - $5 = $4. Similarly, their surpluses from the second, third and fourth units purchased are $3, $2, and $1, respectively. The sum total of the surpluses equal to 10 is the consumer surplus.

 

 

THEORY OF THE FIRM

 

The theory of the consumer is used to explain the market demand for goods and services. The theory of the firm provides an explanation for the market supply of goods and services. A firm is defined as any organization or individual that purchases factor of production (labor, capital, and raw materials) in order to produce goods and services that are sold to consumers, governments, or other firms. The theory of the firm assumes that the firm's primary objective is to maximize profits. In maximizing profits, firms are subject to two constraints: the consumers' demand for their product and the costs of production.

Consider a firm that produces a single good. In order to produce this good, the firm must employ or purchase a number of different factors of production. The firm's production decision is to determine how much of each factor of production to employ. In the short-run, some of the factors of production that the firm needs are available only in fixed quantities. For example, the size of the firm's factory, its machinery, and other capital equipment cannot be varied on a day-to-day basis. In the long-run, the firm can adjust the size of its factory and its use of machinery and equipment, but in the short run, the quantities of these factors of production are considered fixed. The short-run is defined as the period during which changes in certain factor of production are not possible. The long-nm is defined as the period during which all factor of production can be varied.

Other factors of production, however, are variable in the short run. For example, the number of workers the firm employs or the quantities of raw materials the firm uses can be varied on a day-to-day basis. A factor of production that cannot be varied in the short run is called a fixed factor of production. In the short run, a firm can increase its production of goods and services only by increasing its use of variable factors of production.

A firm combines its factors of production in order to produce goods or output. The total amount of output the firm produces, the firm's total product, depends on the quantities of factors that the firm purchases or employs. The marginal product of a factor of production is the change in the firm's total product that results from an increase in that factor by one unit, holding all other factors constant.

The law of diminishing returns says that as successful units of a variable factor of production are combined with fixed factors of production, the marginal product of the variable factor of production will eventually decline. Note that diminishing returns is a short-run phenomenon that will persist only as long as there are fixed factors of production; in the long-run, it will be possible to vary the amount of the fixed factor capital so as to eliminate the problem of diminishing returns.

The firm's primary objective in producing output is to maximize profits. The production of output, however, involves certain costs that reduce the profits a firm can make. The relationship between costs and profits is therefore critical to the firm's determination of how much output to produce. A firm's explicit costs comprise all explicit payments to the factors of production the firm uses. Wages paid to workers, payments to suppliers of raw materials, and fees paid to bankers and lawyers are all included among the firm's explicit costs. A firm's implicit costs consist of the opportunity costs of using the firm's own resources without receiving any explicit compensation for those resources. For example, a firm that uses its own building for production purposes forgoes the income that it might receive from renting the building out.

As another example, consider the owner of a firm who works along with his employees but does not draw a salary; the owner forgoes the opportunity to earn a wage working for someone else. These implicit costs are not regarded as costs in an accounting sense, but they are a part of the firm's costs of doing business, nonetheless. When economists discuss costs, they have in mind both explicit and implicit costs.

The difference between explicit and implicit costs is crucial to understanding the difference between accounting profits and economic profits. Accounting profits are firm's total revenues from sales of its output, minus the firm's explicit costs. Economic profits are total revenues minus explicit and implicit costs. Alternatively stated, economic profits are accounting profits minus implicit costs. Thus, the difference between economic profits and accounting profits is that economic profits include the firm's implicit costs and accounting profits do not.

A firm is said to make normal profits when its economic profits are zero. The fact that economic profits are zero implies that the firm's reserves are enough to cover the firm's explicit costs and all of its implicit costs, such as the rent that could be earned on the firm's building or the salary the owner of the firm could earn elsewhere. These implicit costs add up to the profits the firm would normally receive if it were properly compensated for the use of its own resources - hence the name, normal profits.

In the short-run, some of the input factors the firm's fixed costs. The firm's fixed costs do not vary with increases in the firm's output. The firm also employs a number of variable factors of production. The costs of these variable factors of production are the firm's variable costs. In order to increase output, the firm must increase the number of variable factors of production that it employs. Therefore, as firm output increases, the firm's variable costs must also increase.

The firm's total cost of production is the sum of all its variable and fixed costs. The firm's marginal cost is the per unit change in total cost that results from a change in total product. The firm's variable, fixed, and total costs can all be calculated on an average or per unit basis.

At low level of output, a firm can usually increase its output at a rate that exceeds the rate at which it increases its factor inputs. When this situation occurs, the firm's average total costs are falling, and the firm is said to be experiencing economies of scale. At higher levels of output, the firm may find that its output increases at the same rate at which it increases its factor inputs. In this case, the firm's average total costs remain constant, and the firm is said to experience constant returns to scale. At even higher output levels, the firm's output will tend to increase at a rate that is below the rate at which it increases its factor inputs. In this situation, average total costs are rising, and the firm is said to experience diseconomies of scale. The firm's minimum efficient scale is the level of output at which economies of scale end and constant returns to scale begin.

 

 

MONOPOLY

 

In a perfectly competitive market, there are many firms, none of which is large in size. In contrast, in a monopolistic market there is only one firm, which is large in size. This one firm provides all of the market's supply. Hence, in a monopolistic market, there is no difference between the firm's supply and market supply.

Conditions for monopoly characterize a monopolistic market structure. First, as mentioned above, there is only one firm operating in the market. Second, there are high barriers to entry. These barriers are so high that they prevent any other firm from entering the market. Third, there are no close substitutes for the good the monopoly firm produces. Because there are no close substitutes, the monopoly does not face any competition.

A barrier to entry is anything that prevents firms from entering a market. Many types of barriers to entry give rise to a monopolistic market structure. Some of the most common barriers to entry are:

1. Patents: If a firm holds a patent on a production process, it can legally exclude other firms from using that process for a number of years. If there are no other production processes that can be used, the firm that holds the patent will have a monopoly.

2. Large start-up costs: In some markets, firms will face large start-up costs - for example, the cost of building a new production facility. If these start-up costs are large enough, most firms will be discouraged from entering the market.

3. Limited excess to resources: A monopolistic market structure is likely to arise when access to resources needed for production is limited. The market for diamonds, for example, is dominated by a single firm that owns most of the world's diamond mines.

Not all monopolies arise from these kinds of barriers to entry. A few monopolies arise naturally, in markets where there are large economies of scale. For example, a local telephone company's marginal and average costs tend to decline as it adds more customers; as the company increases its network of telephone lines, it costs the company less and less to add additional customers. The telephone company's long-run average costs may eventually rise but only at a level of output that is beyond the level the local market demands. Hence, in the market for local telephone services, there is a need for only one firm; competition will not naturally arise. Gas, electric power, and other local utilities are also examples of natural monopolies.

Unlike a perfectly competitive firm, the monopolist does not have to simply take the market price as given. Instead, the monopolist is a price searcher; it searches for the profit maximizing price. The monopolist's marginal revenue from each unit sold does not remain constant as in the case of the perfectly competitive firm. The price that the monopolist can get for each additional unit of output must fall as its output is increasing. Consequently, the monopolist's marginal revenue will also be falling as it increases its output. If it is assumed that the monopolist cannot price discriminate, that is, charge a different price for each unit of output it produces, then the monopolist's revenue from each unit of output it produces will not equal the price that the monopolist charges. In fact, the marginal revenue that the monopolist receives from producing an additional unit of output will always be less than the price that the monopolist can charge for the additional unit.

The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the condition that marginal revenue equals marginal cost is used to determine the profit maximizing level of output of every firm, regardless of the market structure in which the firm is operating. However, in order to determine the profit maximizing level of output, the monopolist will need to supplement its information about market demand and prices with data on its costs of production for different levels of output. The monopolist’s market supply will not be independent of market demand.

In the discussion of a perfectly competitive market structure, a distinction was made between short-run and long-run market behavior. In the long-run, all input factors are assumed to be variable, making it possible for the firms to enter and exit the market. The consequence of this entry and exit of firms was that each firm's economic profits were reduced to zero in the long-run.

The distinction between the short-run and the long-run is not as important in the case of a monopolistic market structure. The existence of high barriers to entry prevents firms from entering the market even in the long-nm. Therefore, it is possible for the monopolist to avoid competition and continue making positive economic profits in the long-run. A monopolist produces less output and sells it at a higher price than a perfectly competitive firm. The monopolist's behavior is costly to the consumers who demand the monopolist's output. The cost to the consumer of a monopolistic market structure is the reduction in consumer surplus that results from monopoly output and price decisions.

Perfect competition and pure monopoly represent two extreme possibilities for a market's structure. The structure of almost all markets, however, falls somewhere between these two extremes. This section considers two market structures, monopolistic competition and oligopoly, which lie between the extreme cases of perfect competition and monopoly. According to its name, monopolistic competition is more closely related to perfect competition than to monopoly. Oligopoly is also a combination of monopoly and competition, but it is more closely related to monopoly than to perfect competition.

Three conditions characterize a monopolistically competitive market. First, the market has many firms, none of which is large. Second, there is free entry and exit into the market; there are no barriers to entry or exit. Third, each firm in the market produces a differentiated product. This last condition is what distinguishes monopolistic competition from perfect competition. Examples of monopolistic competitive firms include restaurants, retail clothing stores, and gasoline service stations.

In many markets, competing firms sell products that can be differentiated from one another. A firm's product can be differentiated in a number of different ways: by its quality, its convenience, its size, its color, its look, its taste - even by its brand name! As a firm's product becomes more and more differentiated, the firm faces less and less competition and will be able to act more like a monopolist in its output and pricing decisions. Thus, in a monopolistically competitive industry, firms seek to differentiate their products as much as possible. Much of this differentiation is accomplished through advertising.

Because the monopolistically competitive firm's product is differentiated from other products, the monopolistically competitive firm has less control over the price that it can charge for its output. The firm's control over its price will depend on the degree to which its product is differentiated from competing firms' products. The firm's control over its price will depend on the degree to which its product is differentiated from competing firms' products. The monopolistic competitive firm will be a price-searcher rather than a price-taker. The firm searches for the price that it will charge in the same way that a monopolist does, by comparing marginal revenue with marginal cost at each possible price along the market demand curve. The monopolistically competitive firm's behavior appears to be no different from the behavior of a monopolist. In fact, in the short-run, there is no difference between the behavior of a monopolistically competitive firm and a monopolist. However, in the long-run, an important difference does emerge.

The difference between the short-run and the long-run in a monopolistically competitive market is that in the long-run new firms can enter the market, which is especially likely if firms are earning positive economic profits in the short-run. New firms will be attracted to these profit opportunities and will choose to enter the market in the long-run. In contrast to a monopolistic market, no barriers to entry exist in a monopolistically competitive market; hence, it is quite easy for new firms to enter the market in the long-run.

The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. In the long-run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm. When the firm produces below its minimum efficient scale, it is under-utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.

Oligopoly is the least understood market structure; consequently, it has no single, unified theory. Nevertheless, there is some agreement as to what constitutes an oligopolistic market. Three conditions for oligopoly have been identified. First, an oligopolistic market has only a few large firms. This condition distinguishes oligopoly from monopoly, in which there is just one firm. Second, an oligopolistic market has high barriers to entry. This condition distinguishes oligopoly from perfect competition and monopolistic competition in which there are no barriers to entry. Third, oligopolistic firms may produce either differentiated or homogeneous products. Examples of oligopolistic firms include automobile manufacturers, oil producers, steel manufacturers, and passenger airlines.

As mentioned above, there is no single theory of oligopoly. The two that are most frequently discussed, however, are the kinked-demand theory and the cartel theory. The first one applies to oligopolistic markets where each firm sells a differentiated product. It illustrates the high degree of interdependence that exists among the firms that make up an oligopoly. The kinked-demand theory, however, is considered an incomplete theory of oligopoly for several reasons. First, it does not allow for the possibility that price increases by one oligopolist are matched by other oligopolists, a practice that has been frequently observed. Second, the theory does not consider the possibility that oligopolists collude in setting and price. The possibility of collusive behavior is captured in the alternative theory known as the cartel theory of oligopoly.

A cartel is defined as a group of firms that get together to make output and price decisions. The conditions that give rise to an oligopolistic market are also conductive to the formation of a cartel; in particular, cartels tend to arise in markets where there are few firms and each firm has a significant share of the market. The organization of petroleum ­exporting countries (OPEC) is perhaps the best-known example of an international cartel; OPEC members meet regularly to decide how much oil each member of the cartel will be allowed to produce.

Oligopolistic firms join a cartel to increase their market power, and members work together to determine jointly the level of output that each member will produce and/ or the price that each member will charge. By working together, the cartel members are able to behave like a monopolist. Once established, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on their agreement to limit production. By producing more output than it has agreed to produce, a cartel member can increase its share of the cartel's profits. Hence, there is a built-in incentive for each cartel member to cheat. Of course, if all members cheated, the cartel would cease to earn monopoly profits, and there would no longer be any incentives for firms to remain in the cartel. The cheating problem has plagued the OPEC cartel as well as other cartels and perhaps explains why so few cartels exist.

 

 

LABOR MARKET

 

In addition to making output and pricing decisions, firms must also determine how much of each input to demand. Firms may choose to demand many different kinds of inputs such as labor and capital. The demand and supply of labor are most common inputs. They are determined in the labor market. The participants in the labor market are workers and firms. Workers supply labor to firms in exchange for wages. Firms demand labor from workers in exchange for wages. The firm’s demand for labor is a derived demand; it is derived from the demand for the firm's output. If demand for the firm's output increases, the firm will demand more labor and will hire more workers. If demand for the firm's output falls, the firm will demand less labor and will reduce its work force.

When the firm knows the level of demand for its output, it determines how much labor to demand by looking at the marginal revenue product of labor. The marginal revenue product of labor (or any input) is the additional revenue the firm earns by employing one more unit of labor. The term is related to the marginal product of labor. In a perfectly competitive market, the firm's marginal revenue product of labor is the value of the marginal product of labor. The marginal revenue product of labor is the additional revenue that the firm earns from hiring the additional worker; it represents the wage that the firm is willing to pay for each additional worker. The wage that the firm actually pays is the market wage rate, which is determined by the market demand and market supply of labor. In a perfectly competitive labor market, the individual firm is a wage-taker; it takes the market wage rate as given, just as the firm in a perfectly competitive market takes the price for its output as given. The market wage rate in a perfectly competitive labor market represents the firm's marginal cost of labor, the amount the firm must pay for each additional worker that it hires.

An individual supply of labor depends on his or her preferences for two types of "goods": consumption goods and leisure. Consumption goods include all the goods that can be purchased with the income that an individual earns from working. Leisure is the good that individuals consume when they are not working. By working more (supplying more labor), an individual reduces his or her consumption of leisure but is able to increase his or her purchases of consumption goods.

In choosing between leisure and consumption, the individual faces two constraints. First, the individual is limited to twenty-four hours per day for work or leisure. Second, the individual's income from work is limited by the market wage rate that the individual receives for his or her labor skills. In a perfectly competitive labor market, workers - like firms - are wage-takers; they take the market wage rate that they receive as given. As wages increase, so does the opportunity cost of leisure. As leisure becomes more costly, workers tend to substitute more work hours for fewer leisure hours in order to consume the relatively cheaper consumption goods, which is the substitution effect of a higher wage.

An income effect is also associated with a higher wage. A higher wage leads to higher real incomes, provided that prices of consumption goods remain constant. As real income rise, individuals will demand more leisure, which is considered a normal good - the higher an individual's income, the easier it is for that individual to take more time off from work and still maintain a high standard of living in terms of consumption goods. The substitution effect of higher wages tends to dominate the income effect at low wage levels, while the income effect of higher wage­ tends to dominate the substitution effect at high wage levels.

Many different markets for labor exist, one for every type and skill level of labor. For example, the labor market for entry level accountants is different from the labor market for football pros. The demand for labor in a particular market - called the market demand for labor - is the amount of labor that all the firms participating in the market will demand at different market wage level. The market supply of labor is the number of workers of particular type and skill level who are willing to supply their labor to firms at different wage levels. There will always be some workers in the market who will be willing to supply more labor and take less leisure time, even at relatively high wage levels. While each labor market is different, the equilibrium market wage rate and the equilibrium number of workers employed in every perfectly competitive labor market is determined in the same manner: by equating the market demand for labor with the market supply of labor.

A labor market in which there is only one firm demanding labor is called a monopsony. The single firm in the market is referred to as the monopsonist. An example of a monopsony would be the only firm in a "company town," where the workers all work for that single firm. Because the monopsonist is the sole demander of labor in the market, its demand for labor is the market demand for labor. The supply of labor that the monopsonist faces is the market supply of labor. Unlike a firm operating in a perfectly competitive labor market, the monopsonist does not simply hire all the workers that it wants at the equilibrium market wage; it is a wage-searcher rather than a wage-taker. If the monopsonist wants to increase the number of workers that it hires, it must increase the wage that it pays to all of its workers including those whom it currently employs.

The monopsonist's marginal cost of hiring an additional worker, therefore, will not equal to the wage paid to that worker because the monopsonist will have to increase the wage that it pays to all of its workers. Because the monopsonist is the only demander of labor in the market, it has power to pay wages below the marginal revenue product of labor and to hire fewer workers than a perfectly competitive firm. So monopsony like monopoly in a product market reduces society's welfare.

 

 

INTERNATIONAL TRADE

 

The basic idea of international trade and investment is simple: each country produces goods and services that can be either consumed at home or exported to other countries. The main difference between domestic trade and international trade is the use of foreign currencies to pay for goods and services crossing international borders. Although global trade is often added up in U.S. dollars, the trading itself involves a lot of currencies. Trading in goods may be done between countries, states, and individuals for their mutual benefit. If a country has exports in excess of its imports, that country will be magnifying its income. In trade, two fundamental concepts are absolute advantage and comparative advantage.

Absolute advantage is when one nation can produce a product more efficiently than the other. Thus, a basis of trade is created. Comparative advantage allows even a nation that can produce two goods more efficiently to establish a basis for trade. The law of comparative advantage is the fundamental reason for trading. It is when two entities, each one producing the same two types of goods, specialize in one good that it can produce at a lower opportunity cost. Therefore, both entities derive more goods by trading because each entity can offer the best produced goods at the best possible price. Any two entities can engage in trade, i.e. two nations, two states, or two persons. Through specialization and free trade, nations can achieve a more efficient allocation of scarce world resources, thereby raising standards of living.

Whenever a country imports or exports goods and services, there is a resulting flow of funds: money returns to the exporting nation, and money flows out of the importing nation. Trade and investment is a two­-way street, and with a minimum of trade barriers, international trade and investment usually make everyone better off.

In an interlinked global economy, consumers are given the opportunity to buy the best products at the best prices. By opening up markets, a government allows its citizens to produce and export those things they are best at and to import the rest, choosing from whatever the world has to offer. While free trade has advantages and disadvantages, a nation may elect to restrict trade through tariffs and import quotas, and non-tariff barriers. The economic consequences of import restrictions are almost the same as those resulting from an increase in transportation costs. Such costs raise prices in the importing country and reduce the volume of goods consumed. Such restrictions may be made to protect a new industry, or to protect national security.

Just like any business, a country has to keep track of its inflow and outflow of goods, services, and payments. At the end of any given period, each country has to look at its "bottom line" and add up its international trade in one way or another. The narrowest measure of a country's trade, the merchandise trade balance, looks only at "visible" goods such as videocassette recorders, wine, and oranges.

The current account is a better measure of trade, because it includes a country's exports and imports of services, in addition to its visible trade. It may not be obvious, but many countries make a lot of money exporting "invisibles" such as banking, accounting, and tourism. The current account tells us which countries have been profitable traders, running a current account surplus with money in the bank at the end of the year, and which countries have been unprofitable traders, having imported more than they have exported, running a current account deficit, or spending more than they have earned.

Trade deficits and surpluses are balanced by payment that makes up the difference. A country with a current account surplus, for example, can use the extra money to invest abroad, or it can put it in its cookie jar 0 foreign currency reserves. A country running a current account deficit has to look abroad for loans or investments, or be forced to dip into its own reserves to pay for its excessive imports. All of these payments and transfers of funds are added up in a country's capital account.

The widest measure of a country's trade is called its balance of payments. It includes not only payments abroad, but the goods, services, and all transfers of funds that cross international borders. The balance of payments adds up everything in a country's current account and capital account. Since all the trade in goods and services is "balanced" by the international transfers of funds, the balance of payments should add up to zero at the end of the accounting period. Every banana, every automobile, every payment and investment that crosses a country's borders gets included in the balance of payment.

Foreign investment is a result of trade surpluses. When a hardworking country exports more than it imports, it ends up with money to invest in the world markets. This money can be used abroad to buy anything from foreign government bonds to real estate and companies. The United States, for example, has a long history of investing in other countries whenever it runs trade surpluses. However, when the United States began running trade deficits in the 1980s,.the billions of dollars spent by Americans on foreign goods, such as videocassette recorders, returned as foreign investments in the U.S. economy. Despite the criticism these investments received, they did help to keep the American economy nll1ning on track and created many new jobs for local workers.

 

 

INTERNATIONAL FINANCE

The foreign exchange market is a market where foreign exchange transactions take place; that is, where different currencies are bought and sold. In practice, this market is not located in anyone place, most transactions being conducted by telephone, wire service, or cable. The three functions of the foreign exchange market are to transfer purchasing power, provide credit, and minimize exchange risk.

The market is dominated by banks; non-bank foreign exchange dealers; individuals and firms conducting commercial and investment transactions; and exchange brokers who buy and sell foreign currencies, making a profit on the difference between the exchange rates and interest rates among the various world financial centers. In addition to the settlement of obligations incurred through investment, purchases, and other trading, the foreign exchange market involves speculation in exchange futures. New York and London are the major centers for these transactions.

Foreign exchange is an instrument used for international payment. Instruments of foreign currency consist not only of currency, but also of checks, drafts, and bills of exchange. A foreign exchange market is available for trading foreign currencies. A foreign exchange rate is the price of one currency in terms of another. For example, one American dollar is 135 yen in Japanese currency. Fixed exchange rates result from an international financial arrangement in which governments directly intervene in the foreign exchange market to prevent exchange rates from deviating of more than a very small margin from some central value.

Flexible rates derive from an arrangement by which exchange rate levels are allowed to change daily in response to market demand and supply. Arrangements may vary from free float, that is, absolutely no government intervention, to managed float, that is, limited but sometimes aggressive government intervention in the foreign exchange market. The forward rate is the contracted exchange rate for receipt of and payment for foreign currency at a specified date, usually 30 days, 90 days, or 180 days in the future, at a stipulated current or "spot" price. By buying and selling forward exchange contracts, importers and exporters can protect themselves against the risks of fluctuations in the current exchange market.

There are three forces that will lead to alleviation of a country's payments imbalance: A rise in the home country's price of imports; a fall in the foreign country’s price of exports; and a possible rise in interest rates. In the event of a depreciation of a currency, that currency will, of course, purchase fewer units of foreign currency, and imports will thus become more expensive to domestic consumers. If, for example, the dollar depreciates, the dollar amount of U.S. expenditure on imports will fall if demand is elastic, but will rise if demand is inelastic.

The Marshall-Lerner condition states that depreciation of a currency will result in an excess of exports over imports for the depreciating country if the sum of the elasticity of the home and foreign demands is greater than one. This assumes that supply elasticity is infinite, and that the trade balance was zero before the depreciation. Since currency depreciation has inflationary effects, the monetary authorities of a country undergoing depreciation may choose to use contraction monetary policy. If so, there will be a rise in interest rates that will attract a short-term capital inflow. This capital inflow will help to cure the payments imbalance. Conflicts will occur between external and internal policies in cases where a country has a balance of payments deficit during a period of internal recession.

Contraction monetary and fiscal policies are appropriate to cure the trade deficit but recession calls for expansionary monetary and fiscal policies. One way to reduce pressure toward currency depreciation is to restrict imports, as well as to place special taxes on interest or dividends from foreign investment. Such policies tend to disrupt trade and resource allocation and are not widely favored by economists. Comparing international investments, like comparing apples and oranges, can be a difficult task. Just as an apple and an orange can be priced according to its weight, an international investment can be evaluated according to its total return, the total increase in value plus any dividend or other payments.

College endowment funds, pension fund managers, insurance companies, and individual investors use yields to compare their growing portfolios of global investments. In this way, all investment instruments - ranging from stocks and commodities to art and real estate - can be compared and evaluated by looking at their yield: their percentage increase in value over a given period of time. Yield, however, is only one factor to consider in evaluating international investments. The final decision has to take into account the risks and tax considerations as well.

Inflation also has to be considered when comparing international investments. Money is worth only what it will buy in goods and services. If prices rise, money loses its value. For example, in order to have the same purchasing power after a decade of inflation, a $ 10,000 investment in 1980 have had to rise to $ 16,410 by 1990 just to keep up with the rise in prices.

 

FUNDUMENTAL CONCEPTS

 

What is economics about? Many people relate it to anything having to do with money and how to make as much of it as possible. Others claim that it deals with making choices and facing tradeoffs. Still others associate it with government fiscal and monetary policies and how they can best help a country's economic health. The real purpose of economics research is its ability to explain how we can most optimally achieve the highest standard of living possible. A good definition therefore is: economics is the study of how we can best increase a country's wealth with the resources that we have available to us. Wealth in this definition includes tangible (cars, houses, etc) as well as intangible (more leisure time, clear air, etc.) products.

As you may know, there is quite some disagreement over how a country should go about achieving the optimum amount of wealth. Some economics advocate a great amount of government involvement, price controls, active monetary policy, etc. Others believe that government involvement should be minimal and limited to tasks related to defending individual rights, defense, police and fire protection, etc. And many believe that a combination of moderate government involvement and private initiative is ideal in achieving the highest standard of living.

There are also various opinions about the role of profits, consumer spending, saving, capital formation, unions, etc. in our economy. Should we tax profits to more equally distribute the wealth in our country? Should we encourage spending (and discourage saving) to stimulate economic growth? Do unions raise real wages? We will touch on this and other important economic issues in this study.

The United States is currently a mixed economy with a substantial amount of government involvement in the form of direct government spending, taxation, regulations, price controls, and monetary policies. Economic conditions were not always like this though. During the latter part of the 19th century and the beginning of the 20th century the United States economy was primarily an economy with very little government involvement, free banking, and minimal regulations. Prices, wages, interest rate and other economic variables were determined by economic conditions of private businesses and households.

Then, due to influences from, among others, Karl Marx, Friedrich Engels in the late 19th century and John Maynard Keynes in the 1920s and 1930s, the country experienced a dramatic change in economic beliefs about the role of the private sector and a country's government. Subsequently, the role of the government in this country as well as many other industrialized countries has increased considerable particularly since the Great Depression of the 1930s. Central banks took control of the monetary system; labor unions, supported by government legislation gained in influence; regulations about worker safety, anti-discrimination and anti-trust (against big businesses) multiplied; social programs, such as social security, unemployment compensation, and subsidies to farmers were deemed necessary.

A production possibilities curve represents outcome or productions that can be produced with a given amount of resources. For instance, let's say that a (very small) country currently availing itself of 100 acres of land, 20 machines, and 50 workers, is able to produce maximally 500 machines and 350 units of consumer goods with these resources. However, it could also, with the same resources, produce 400 machines and 500 units of consumer goods. Or it could produce 300 machines and 580 units of consumer goods.

Numerous other combinations, producing fractions of capital goods or consumer goods, are possible. A curve representing all possible combinations is called a production possibilities curve. Any point on the curve illustrates an output combination that is produced with all available resources and as efficiently as possible.

If an economy is operating at a point on the production possibilities curve, it means, by definition, that all resources are used and they are utilized as efficiently as possible. It is, in other words, the maximum that can be produced with the existing resources and technology. It follows then that output cannot increase if resources and technology remain constant. When economists discuss the concept "scarcity", they refer to the economic reality that resources are limited and that at any given point in time, output is limited. The production of one particular good or a category of goods (consumer goods) can increase, but only at the expense (opportunity const) of decreasing production of another good or category of goods.

 

 

CAPITAL MARKET

 

Capital goods are input goods that are purchased in order to increase the production of future output. Capital goods include tangible goods, such as buildings and structures, machinery and equipment, and inventories of goods in process. Capital goods also include intangible goods such as franchises, literary rights, and product brand names. All individual's investment in knowledge from taking classes or learning "on the job" is another form of intangible capital called human capital.

While labor is measured in terms of the number of workers hired or the number of hour worked, it is difficult to measure capital in terms of physical units because there are so many different types of capital goods. Capital goods, therefore, are simply measured in terms of their market or currency value. The market value of capital goods at a given point in time, for example, at the end of a year, is referred to as the capital stock. A firm's capital stock is the market value of its factory, equipment, and other capital goods at a given point in time. A household's capital stock is the market value of its residential structures, human capital, and other capital goods at a given point in time. Firms' and households' capital stocks will vary over time due to investment and depreciation.

Investment is the addition of new capital goods to a firm's or household's capital stock. Investment is a flow measurement; it represents the market value of new capital purchased or produced per unit of time. For example, if a firm with $90,000 in capital at the end of last year purchased $10,000 in capital during the current year, its investment for this year is $10,000, while its capital stock at the end of the current year is $100,000. Depreciation is also a flow measurement; it measures the reduction in market value of a firm's or household's capital stock per unit of time. Depreciation of the capital stock is caused by normal wear and tear and by obsolescence of capital goods over time.

When depreciation over a period of time exceeds investment over the same period of time, the capital stock decreases; otherwise, the capital stock increases or remains the same. For example, if the firm with $90,000 in capital at the end of last year purchases $10,000 in new capital during the current year, but experiences $20,000 in depreciation during the current year, its capital stock at the end of the current year will have decreased to $80,000 ($90,000 + $10,000 - $20,000). If depreciation during the current year is only $5,000, instead of $20,000, then the firm's capital stock at the end of the current year will have increased to $95,000.

The demand and supply for different types of capital take place in capital markets. In these capital markets, firms are typically demanders of capital, while households are typically suppliers of capital. Households supply capital goods indirectly, by choosing to save a portion of their incomes and lending these savings to banks. Banks, in turn, lend household savings to firms that use these funds to purchase capital goods.

The term loanable fund is used to describe funds that are available for borrowing. Loanable funds consist of household savings and/ or bank loans. Because investment in new capital goods is frequently made with loanable funds, the demand and supply of capital is often discussed in terms of the demand and supply of loanable funds. The interest rate is the cost of demanding or borrowing loanable funds.

Alternatively, the interest rate is the rate of return from supplying or lending loanable funds. The interest rate is typically measured as an annual percentage rate. For example, a firm that borrows $20,000 in funds for one year, at an annual rate of 5%, will have to repay the lender $21,000 at the end of the year; this amount includes the $20,000 borrowed plus $1,000 in interest ($20,000 x 0.5).

 

 

FINANCIAL STATEMENT

 

 

Financial statements are the final product of the accounting process. They provide information on the financial condition of a company. The common financial statements are (1) the balance sheet, (2) the income statement or the profit and loss statement (P&L), and (3) the cash flow statement. Financial statements allow interested parties to compare one organization to another and/ or to compare accounting periods within one organization. For example, an investor may compare the most recent income statements of two corporations in order to find out which one would be a better investment.

The balance sheet, one type of financial statement, provides a summary of what a company owns and what it owes on one particular day. Assets represent everything of value that is owned by a business, such as property, equipment, and accounts receivable. On the other and, liabilities are the debts that a company owes to suppliers and banks. If liabilities are subtracted from assets, the amount remaining is the owners' share of a business. This is known as owners' or stockholders' equity.

One key to understanding the accounting transactions of a business is to understand the relationship of its assets, liabilities, and owners' equity. This is often represented by the fundamental accounting equation: assets equal liabilities plus owners' equity. These three factors are expressed in monetary terms and therefore are limited to items that can be given a monetary value. The accounting equation always remains in balance; on other words, one side must equal the other.

The balance sheet expands the accounting equation by providing more information about the assets, liabilities, and owners' equity of a company at a specific time, for example, on May 31, 2007. It is made up of two parts. The first part lists the company assets, and the second part details liabilities and owners' equity. Assets are divided into current and fixed assets. Cash, accounts receivable, and inventories are all current assets. Property, buildings, and equipment make up the fixed assets of a company. The liabilities section of the balance sheet is often divided into current liabilities (such as accounts payable and income taxes payable) and long-term liabilities (such as bonds and long-term notes). The balance sheet provides a financial picture of a company on a particular date, and for this reason it is useful in two important areas. Internally, the balance sheet provides managers with financial information for company decision-making. Externally, it gives potential investors data for evaluating the company's financial position.

An income statement is another example of a financial statement. It communicates financial information about a company over a period of time. A standardized format is used to present the financial information. This allows interested parties to compare one income statement to another in order to make informed financial decisions. But there is still a great deal of risk involved in financial decision making because the information reflected in an income statement is subject to a variety of interpretations.

The third type of financial statements is called cash flow. It is a quick measure of the money coming into and going out of a company during a given period of time. It givens a clear idea of a company's true earnings because it excludes accounting tools, such as depreciation, that allow a company to reduce the amount of profits reported on its books in order to pay less taxes. Cash flow factors out of all the accounting tricks allow looking at what a company really earned.

 

FUNCTIONS OF MANAGEMANT

 

 

There is a statement: "Management is getting work done through people." Most of achievements in any society take place because groups of people get involved in joint effort. Almost everyone is, was, or someday will be a manager, i.e. the person who coordinates human information, physical, and financial resources of an organization. In order to perform their functions adequately, managers need interpersonal, organizational, and technical skills. Management is a team of managers who are in charge of the organization at different levels. Regardless of the specific nature of their job, most managers perform five basic functions: planning, organizing, staffing, directing, controlling.

Planning involves determining overall company objectives and deciding how these goals can best be achieved. Managers consider alternative plans before choosing a specific course of action at all managerial levels. Planning is listed the first management function because the others depend on it. However, even as managers move on to perform other functions, planning continues with the goals and alternatives which are further evaluated and revised.

Organizing, the second management function, is putting the plan into action. Organizing involves allocating resources, especially human resources, so that the objectives can be attained. This function also includes creating new positions and determining responsibilities. Staffing means choosing the right person for the right job, and is an integral part of the process of organizing. Fourth function is the day-to-day direction and supervision of employees. In directing, managers guide, teach, and motivate people so that they reach their potential abilities, and at the same time achieve the company goals set in the planning stage.

At last managers control and evaluate how well overall company objectives are being met. If there are any problems and objectives are not being met, changes need to be made in the company's organizational, or managerial, structure. In making changes, managers might have to go back and re-plan, reorganize, and redirect. Effective managers achieve the goals of the company through a successful combination of planning, organizing, staffing, directing, and controlling.

Personal business management is a one-semester course for the high school students. Its purpose is to provide students with a variety of tools necessary to meet future needs - making career decisions, managing money, providing economic security, managing credit, and keeping up to date with technology. It is useful for all the students for better understanding and adaptation to the financial world they will enter. A student examines his or her societal and personal expectations, needs and wants, controls and restraints both for the present and future.

The emphasis is made on decision-making skills, planning and analysis. The informed person is better able to draw maximum benefit and is well-adjusted to the social, economic, and technological changes.

 

 

MARKETING

 

 

In modern terms, marketing is defined as the movement of goods and services from manufacturer to consumer in order to satisfy the customer and to achieve the company's objectives. It can be considered as dynamic field that involves a wide variety of activities. The ABC of marketing is the so-called marketing mix. It includes the four P's: product, price, placement, and promotion.

Product (service) is often connected with development of a new product or service, searching the potential markets, and, finally, introduction it to the market. Target market selection is the most important task for any firm. A target market is a group of individuals

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