Contemporary Economics Chapter 10

dividends

after tax profit paid to shareholders or reinvested in the corporation

conglomereate merger

a combination of firms in different industries

collateral

banks typically require a borrower to put this up to reduce risk (ex. house for a home mortgage)

market for loans

brings together borrowers (the demanders of loans) and savers (the suppliers of loans) to determine the market interest rate

tax treatment

differences in this affects the interest rate, people are more willing to lend money to state and local gov.

corporation

distinct from its shareholder, they may own property, earn a profit, borrown, and sue or be sued

secondary markets for securities

enhances the liquidity of securities

demand for loans

firms borrow to help fund production and investment, downward slope, negative relationship b/t interest rate and the quantity of loans demanded

duration of loan

interest is generally higher when the duration of the loan is longer

securities

stocks and bonds, SEC (federal body that regulates securities markets), NYSE is the largest security

credit

the ability to borrow now based on a promise to repay in the future

initial public offering IPO

the initial sale of corporate stock to the public

prime rate

the interest rate that banks charge their best customers and most trust worthy business borrowers

equilibrium interest rate

the only interest rate at which the quantity of loans demanded equals the quantity of loans supplied

reducing risk

through diversification

to default on a loan

to not pay loans back

supply of loans

when households give up present consumption in return for interest and interest becomes the reward for not consuming now, positive relationship b/t quantity of loans supplied & interest, slopes upward

financial intermediaries

where savers can indirectly provide funds to borrowers, farmers can get "seed money" to survive winters

first merger wave

1887-1904; horizontal, economies of scale and lower transportation costs extended the geographical size of markets, introduced antitrust laws

second merger wave

1916-1929; stock market boom of 1920's, vertical mergers became more common

third merger wave

1948-1969; conglomerate mergers lost the efficiency gains from special lization and comparative advantage

fourth merger wave

1982-Present; one third: hostile takeovers

production depends on

saving because production of both consumer and capital goods takes time

banks

serve as financial intermediaries, savers need a place for their $ and borrowers need credit, desirable durations for both borrowers and savers

running multinationals

MNC are usually headquartered in the country of origin, (most in the US)

consumption and time

consumers usually value present consumption more than future consumptions

franchise

contract between a parent company and another business or individual

bond

coporations issue these for long term borrowing, their promise to pay back the holder a fixed sum of money on a designated maturity date

multinational corporations (MNC)

corporation that operates globally, AKA transnation, international or global corporations

1920

corporations accounted for most employment and output in the US economy

cost of adminstration

costs of executing the loan agreement, monitoring the loan and collecting payments, decrease as the size of the loan increases

problems of MNCs

countries w/ different business regulations/ tax laws, and fluctuating exchange rates

retained

reinvested profit/divdends, helps the company grow

mutual fund

issues stock to individual investors and uses the proceeds to buy a portfolio of securities

capital increases

labor productivity

banks specialize in

loans, therefore savers are better off dealing w/ banks over making loans directly to borrowers

reducing production costs

makes US firms more efficient and lowers the prices of US goods

line of credit

many businesses negotiate these with a bank, an arragnement with a bank through which a business can quickly borrow cash as needed

profitable firms can grow faster

more profit can be reinvested into the firm owners are willing to invest more of their own money in the firms banks are more willing to lend to them

institutional investors

more than half the trading volume on major exchanges is done by these (banks, insurance companies, and mutual funds)

horizontal mergers

occur when one firm combines with another firm making the same product

vertical mergers

one firm combines with another from which it had purchased inputs or to which it had sold output

time

plays an imporatant role in production and consumption

interest rate

price of borrowing, annual interest expressed as a percentage of the amount borrowed or saved

modern economy

producers don't rely exclusively on their own savings, they can borrow funds from other savers

corporate profit and growths

profitable corporations are more able to grow and it is easier for them to borrow from banks or sell bonds

securites markets

promote the survival of the fittest by supplying financial capital to those firms that seem able to make the most profitable use of those funds

mergers

quickest path to growth

impatience and uncertainty

reasons why people value present consumption more than future consumption