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What Makes Money . . . Money?
 Money has three basic functions
 as a medium of exchange,
 a standard of value,
 a store of value
 Money also has six main characteristics
 acceptability
 scarcity
 portability
 durability
 divisibility
 uniformity
 Commodity money was used for thousands of years before the creation
of banks.
 Banknotes replaced commodity money and were eventually replaced
by fiat money.
What Makes Money . . . Money?
 The money supply is made up of these assets:
 currency
 checkable deposits
 traveler’s checks
 Credit cards and debit cards can be used to make
purchases, but they are not part of the money supply.
How Does the Banking System
Work?
 Saving is any form of putting money aside for later
use.
 Banks are financial institutions that provide two main
services:
 receiving deposits from savers
 making loans to borrowers
 Banks charge interest on the loan principal. They profit
by charging more interest on loans than they pay on
deposits.
 Banks are required to keep a fraction of deposits in reserve
and can make loans with the rest.
 The Federal Reserve System regulates and manages the
nation’s banks.
How Is Saving Important to the
Economy—And to You?
 Saving helps the economy grow by supplying the funds
that financial institutions lend out for business
investment.
 Putting money aside today can help one reach future
goals, weather hard times, and fund retirement.
 Retirement is often funded by three sources of money:
 Social Security
 company retirement plans
 personal savings
How Do Americans Invest Their
Savings?
 Investing involves using money that has been saved to
earn more money, usually through compounding.
Investment options have different risks and returns.
 Government bonds: low risk, low rate of return
 Corporate bonds: higher risk and rate of return than
government bonds
 Stocks: historically high rate of return, with high risk
 Mutual funds: diversification keeps risk lower than with
individual stocks or bonds, with a relatively high rate of
return
 Asset allocation involves dividing the assets in one’s
portfolio among different types of investments.
What Does It Take to Start a New
Business?
 Entrepreneurs play a critical role in the economy
because they start businesses to meet consumer
demand, create jobs, and spur economic growth.
 Running a business can bring great rewards, such as
personal satisfaction and being one’s own boss.
 Entrepreneurs also face challenges, such as the risk of
failure.
What Kinds of Businesses Are Best
Organized as Sole Proprietorships?
 A sole proprietorship is a business owned and managed by
one person. The owner makes the profits and is responsible for
the debts.
 Advantages:
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ease of start-up and closing
few restrictions
full decision-making power
profits
individual taxation
 Disadvantages:
 unlimited liability,
 limited growth potential
 limited life.
What Kinds of Businesses Are
Organized as Partnerships?
 In a partnership, two or more owners own and operate a
business together. In most cases, they share the profits and the
liability.
 Advantages:
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ease of start-up
few restrictions
shared decision-making power
specialization by partners
individual taxation
increased growth potential
 Disadvantages:
 unlimited liability for some partners
 conflict between partners
 keeping continuity if a partner leaves
Why Are Large Businesses
Organized as Corporations?
 A corporation is a business owned by shareholders who have limited liability in
the firm’s debts. It is a legal entity that can conduct business affairs in its name.
 Advantages:
 limited liability
 greater growth potential
 professional management
 long life
 Disadvantages:
 complexity of start-up
 loss of owner control
 greater government regulation
 tax on profits at the corporate
 shareholder levels
 A multinational corporation operates in more than one country. It offers such
advantages as access to global markets and diversification of operations.
What Purposes Are Served by Franchises,
Cooperatives, and Nonprofit Organizations?
 In a business franchise, a parent company (franchiser)
grants to an independent business owner (franchisee)
the exclusive right to use its trade name and sell its
products in a designated location.
 A cooperative is a business that is owned and operated
by a group of individuals for their shared benefit.
Examples include credit unions and agricultural co-ops.
 A nonprofit organization functions mostly like a
business, though it does not operate to make a profit. It
is established to support a particular private or public goal.
What Rights and Responsibilities Do Businesses
Have in a Free Enterprise System?
 In a free enterprise system, businesses have many of
the rights individuals have, such as freedom of speech.
They also have legal obligations, such as paying taxes.
 Business ethics are the notions of right and wrong that
guide the decisions and actions of a company and its
employees.
 Studies show that consumers reward good corporate
conduct and respond unfavorably to unethical
behavior.
What Trends Are Shaping Today’s
Labor Market?
 In recent decades, an influx of women and minorities has resulted in a
larger and more diverse labor force.
 Labor force consists of those people age 16 and over who have
jobs or who are actively looking for work.
 The labor force does not include; unpaid workers (homemakers,
volunteers) active members of the military, or prison inmates.
 Job growth has shifted from manufacturing to the service sector.
 Training and technology have increased worker productivity
 Knowledge workers—people like financial experts who develop or apply
information in the workplace—have become increasingly important.
 Other trends changing the labor market include

Outsourcing (the practice of using outside contractors instead of staff), temping,
and telecommuting.
 Globalization has impacted the U.S. labor force by offshoring some
jobs to other countries, inshoring some jobs to the United States, and
increasing global competition.
What Determines How Much
Workers Earn?
 Wage rates reflect various factors, but mainly depend on the skill level of
workers and the value of what workers produce. Much like the equilibrium
price of goods and services, an equilibrium wage results when labor
demand and labor supply come into balance.
 Other factors that influence wages include:
 minimum wage laws
 working conditions
 location
 cost of living
 fringe benefits such as health insurance (increases the overall coast to
employers)
 Foreign competition
 A difference in wages earned by various groups in society, called the wage gap,
exists for a variety of reasons.
 Nondiscrimination laws and affirmative action programs have attempted to
decrease wage discrimination and reduce this gap by increasing the presence of
historically underrepresented groups.
How Can You Increase Your
Human Capital?
 People should develop their human capital throughout their
lifetimes. They can start this process by identifying their
abilities, interests, and aspirations.
 Obtaining a good education is an important step in building
human capital, as is securing necessary certification or licensing.
 Through work experience and on-the-job training, people can
gain vital skills and knowledge that can be applied in future
employment.
 Some methods of developing human capital are not easily
quantifiable but are still very important. These include:
 having high personal standards
 exhibiting a strong work ethic
 building a network of friends and colleagues
What Role Do Unions Play in the
Labor Market?
 Historically, unions have helped workers defend their rights and
improve their pay and working conditions.
 Often this is achieved through collective bargaining in which
workers, represented by their union, negotiate their conditions of
employment with their employers. Collective bargaining was most
supported through New Deal Legislation in the 1930’s.
 A decline in manufacturing jobs and right-to-work laws that
make it illegal to require union membership have led to a
decrease in union membership since the 1970s.
 However, unions still help many workers achieve concrete gains
in the workplace.
 Although men and women are equal, women tend to earn less
than men due to their careers being interrupted for families.