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Personal Finance Economics
Unit 5: Chapters 8-11
Personal Finance Economics
2: ChaptersEconomics
Essential Questions
1) How will varying degrees of knowledge, skills and
abilities affect earnings?
2) How are banks and financial institutions important to
the economy?
3) How do changes in tax rates and interest rates
respectively affect individual’s spending and saving
4) How can the use of credit impact personal financial
5) Why do individuals carry different types of
• Civilian Labor Force (CLF)
– Men and women 16 and up not in the military, prison,
or otherwise institutionalized who are working or
actively looking for a job.
• Who does this not include?
– The number of people in the CLF is determined by
the Bureau of Labor Statistics (BLS)
• They also determine the unemployment rate
– Good rate = 4-6%
– Current Rate?
Types of Labor
Lack training to operate specialized machines
Workers with some mechanical skills
Operate complex equipment
Higher level skills
Doctors, lawyers, engineers, teachers
No level competes with any other
People tend to stay at the same level their whole lives
Carpenters, computer technicians, crane operators
Floor polisher, cashier
“ditch diggers”
Cost of education and training
Lack of opportunities
Lack of initiative
Supply and demand of each level determines wages
Could also be caused by
Learning Effect
Education increases productivity, leading to higher wages
Screening Effect
College degree means that employee must be intelligent or hard working. Thus, he/she should receive a higher
Wage Determination
• Theories
– Traditional Theory of Wage Determination
• Based on supply and demand
• People will be paid the equilibrium wage rate
– Exceptions: racism, sexism, uninformed buyers and sellers
– Theory of Negotiated Wages
• Good negotiators may get better than equilibrium price
– Unions
» Strikes, pickets, and boycotts
» Employer strategies: lockout or a company union
Wage Determination cont.
• Regional wage differences
– Higher supply or demand in certain regions
– Cost of living
– Location: attractive?
• Wage between genders and race
– “Glass Ceiling”
• Barrier that prevents minorities and women from advancing
– Ways to get around it
• Comparable Worth
– The idea that some jobs in society have equal value and should receive
equal pay
• Set Aside Contracts
– The government can give a certain percentage of contracts to
businesses owned by women and minorities.
– Both the problems and the solutions violate laws of economics
and lead to inefficiencies in the market for labor.
• Gender gap reading
Business Organizations
Sole Proprietorship
– Owned and run by one person
• Strengths
– Easy to start, make decisions quickly and easily, owners do not share profits, personal freedom,
no business taxes
• Weaknesses
– Unlimited liability, tough to raise capital, difficult to be efficient, limited experience, tough to
attract employees
– Owned and run by more than one person
• General
– Everyone shares in management and finance of the company
• Limited
– Some manage and pay while others just pay
• Strengths
– Easy to start, make decisions quickly, easier to efficient, easier to attract employees, no
business taxes
• Weaknesses
– Each partner is responsible for others, conflict, limited life span
– Business that has shareholders who own stock in the company. Recognized as
having the rights of an individual by the government.
– The government grants a charter that specifies the number of stock
• Strengths
– Easy to raise capital through the use of stocks or bonds, hire good management, limited
liability, unlimited life, easy to transfer ownership through stocks
• Weaknesses
– Difficult to make decisions quickly, heavily regulated by the government, stockholders/owners
have little say in day to day operation of the company, business taxes
• Combining Corporations
– Horizontal Merger
• Two or more firms in the same market join.
– Ex. Sirius and XM Radio
– Vertical Merger
• Two or more firms involved in different stages of producing a
good or service join.
– Ex. USX
• Conglomerate
– More than 3 businesses making unrelated products
all owned by the same company
• 3M, Unilever
• Multinational Corporation
– Corporations that make and sell products
all over the world
• Disposable Income = Consumption + Savings
• Savings = Disposable Income – Consumption
– Saving
• The absence of spending
• For investment to occur, people must save
– Investing
» The act of redirecting resources from being consumed
today so that they may create benefits in the future.
» Saving = Investing
• How does a bank make money?
– Banks lend saved funds and charge a higher interest rate on
loans that they do on savings.
Financial System
• The financial system is a way to transfer savers’ dollars
to investors.
– When you save, you receive a receipt called a financial asset.
Ex. Bond, bank statement
– Financial assets are claims on the property and income of the
borrower. Savers use these to prove a payment is expected if
the borrower defaults on a loan.
– Households and businesses provide some funds directly to
borrowers through bonds, but mostly they supply funds through
financial intermediaries.
– Financial intermediaries are institutions such as banks, life
insurance companies, and pension funds.
• Financial intermediaries Handout
– Money is then loaned to borrowers