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Chap. 10.1
Production, Consumption, and
 Explain why production requires
savings. (P 289)
Explain why people often pay more to
consume now. (P290)
Production and Time
•Production takes time- it cannot occur
without savings from prior periods
•Investment takes time- if you want to
utilize a capital good you have to compare
current opportunity cost to future stream of
Production and Time Contd.
Capital Goods Increases Labor Productivityfor the economy as a whole more
investment means more capital goods
increasing the economy’s ability to produce
in the future
Production depends on saving because
production of both consumer goods and
capital goods takes time
Production and Time Cont’d
Financial Intermediaries:
• The Interest rate is the price of
borrowing; the annual interest expressed
as a percentage of the amount borrowed.
• In our economy, producers no longer have
to depend solely on their life savings b/c of
Market Interest Rate
• This brings borrowers and savers
together to determine the market
interest rate (aka- equilibrium interest
Consumption and Time
• Consumers care more about what
they consume now than later
• Paying more to consume now–
because of the previous fact,
consumers are willing to pay more
to consume now. (Ex: Hot Pizza)
• Impatience and uncertainty is why
consumers will pay more
Chap. 10.2
Banks and Interest
To explain the role of banks in bringing
borrowers and savers together.
To understand why interest rates differ.
Banks as Financial
• Banks serve both producers and
consumers by bringing borrowers and
savers together to try and earn a profit.
-Banks are also known as Financial
• Banks serve producers by granting them
loans & charging interest on the loans.
• Banks serve consumers by paying them to
let the bank borrow their money (interest
rate) in a savings account.
Banks as Intermediaries
Banks have 4 main tasks:
1. They serve savers and borrowers.
2. They specialize in Loans.
3. They reduce risk through diversification.
4. They open Lines of Credit. (an
arrangement with a bank through which
a business can quickly borrow needed
Why Interest Rates Differ
Prime Rate- this is lowest interest rate
that lenders charge borrowers. These
are usually granted to the most
trustworthy clients.
Collateral- this is any assets owned by
the borrower that can be sold to pay off
the loan in case the loan defaulted.
Interest Rates differ for 3 main reasons:
1. Risk- the higher the risk, the higher the
interest rates. Before banks issue loans,
they usually require collateral due to this
increased risk.
2. Duration of the Loan- The longer the
duration of the loan, the higher the
interest rate. Why???
3. Cost of Administration of the Loanthis is the costs of executing the loan
agreement, monitoring the loan, and
collecting payments. The relative cost
of administering a loan declines as the
size of the loan increases, thus
reducing the interest rate for larger
Chap. 10.3
Business Growth
Recognize the role of profit in business
Identify the types of corporate mergers.
Identify the multinational corporation as
a source of business growth.
Profitable Firms
• Profitable Firms can grow faster b/c:
1. More profits can be reinvested into the
2. Owners are willing to invest more of
their own money in such firms
3. Banks are more willing to lend to such
Types of Corporate Mergers
1. Horizontal Merger- when one firm
combines with another firm making
the same product (AT&T & Cingular)
2. Vertical Merger- when one firm
combines with another from which it
buys inputs (resources) or to which it
sells output (steel co. & auto co.)
3. Conglomerate Merger- this is a
combination of firms in different
industries (plastics maker and an
electronic firm)
Multinational Corporations
• Multinational Corporations (MNC)these are corporations that operates
• A.K.A.- international corporations and
global corporations.
• What are some problems with MNC’s?
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