17.1 How Businesses Raise Financial Capital - Principles of Microeconomics 2e | OpenStax
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Principles of Microeconomics 2e17.1 How Businesses Raise Financial Capital
Principles of Microeconomics 2e17.1 How Businesses Raise Financial Capital
Table of contents
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Table of contents
Preface
1 Welcome to Economics!
Introduction
1.1 What Is Economics, and Why Is It Important?
1.2 Microeconomics and Macroeconomics
1.3 How Economists Use Theories and Models to Understand Economic Issues
1.4 How To Organize Economies: An Overview of Economic Systems
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
2 Choice in a World of Scarcity
Introduction to Choice in a World of Scarcity
2.1 How Individuals Make Choices Based on Their Budget Constraint
2.2 The Production Possibilities Frontier and Social Choices
2.3 Confronting Objections to the Economic Approach
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
3 Demand and Supply
Introduction to Demand and Supply
3.1 Demand, Supply, and Equili
ium in Markets for Goods and Services
3.2 Shifts in Demand and Supply for Goods and Services
3.3 Changes in Equili
ium Price and Quantity: The Four-Step Process
3.4 Price Ceilings and Price Floors
3.5 Demand, Supply, and Efficiency
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
4 Labor and Financial Markets
Introduction to Labor and Financial Markets
4.1 Demand and Supply at Work in Labor Markets
4.2 Demand and Supply in Financial Markets
4.3 The Market System as an Efficient Mechanism for Information
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
5 Elasticity
Introduction to Elasticity
5.1 Price Elasticity of Demand and Price Elasticity of Supply
5.2 Polar Cases of Elasticity and Constant Elasticity
5.3 Elasticity and Pricing
5.4 Elasticity in Areas Other Than Price
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
6 Consumer Choices
Introduction to Consumer Choices
6.1 Consumption Choices
6.2 How Changes in Income and Prices Affect Consumption Choices
6.3 Behavioral Economics: An Alternative Framework for Consumer Choice
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
7 Production, Costs, and Industry Structure
Introduction to Production, Costs, and Industry Structure
7.1 Explicit and Implicit Costs, and Accounting and Economic Profit
7.2 Production in the Short Run
7.3 Costs in the Short Run
7.4 Production in the Long Run
7.5 Costs in the Long Run
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
8 Perfect Competition
Introduction to Perfect Competition
8.1 Perfect Competition and Why It Matters
8.2 How Perfectly Competitive Firms Make Output Decisions
8.3 Entry and Exit Decisions in the Long Run
8.4 Efficiency in Perfectly Competitive Markets
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
9 Monopoly
Introduction to a Monopoly
9.1 How Monopolies Form: Ba
iers to Entry
9.2 How a Profit-Maximizing Monopoly Chooses Output and Price
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
10 Monopolistic Competition and Oligopoly
Introduction to Monopolistic Competition and Oligopoly
10.1 Monopolistic Competition
10.2 Oligopoly
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
11 Monopoly and Antitrust Policy
Introduction to Monopoly and Antitrust Policy
11.1 Corporate Mergers
11.2 Regulating Anticompetitive Behavio
11.3 Regulating Natural Monopolies
11.4 The Great Deregulation Experiment
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
12 Environmental Protection and Negative Externalities
Introduction to Environmental Protection and Negative Externalities
12.1 The Economics of Pollution
12.2 Command-and-Control Regulation
12.3 Market-Oriented Environmental Tools
12.4 The Benefits and Costs of U.S. Environmental Laws
12.5 International Environmental Issues
12.6 The Tradeoff between Economic Output and Environmental Protection
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
13 Positive Externalities and Public Goods
Introduction to Positive Externalities and Public Goods
13.1 Why the Private Sector Underinvests in Innovation
13.2 How Governments Can Encourage Innovation
13.3 Public Goods
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
14 Labor Markets and Income
Introduction to Labor Markets and Income
14.1 The Theory of Labor Markets
14.2 Wages and Employment in an Imperfectly Competitive Labor Market
14.3 Market Power on the Supply Side of Labor Markets: Unions
14.4 Bilateral Monopoly
14.5 Employment Discrimination
14.6 Immigration
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
15 Poverty and Economic Inequality
Introduction to Poverty and Economic Inequality
15.1 Drawing the Poverty Line
15.2 The Poverty Trap
15.3 The Safety Net
15.4 Income Inequality: Measurement and Causes
15.5 Government Policies to Reduce Income Inequality
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
16 Information, Risk, and Insurance
Introduction to Information, Risk, and Insurance
16.1 The Problem of Imperfect Information and Asymmetric Information
16.2 Insurance and Imperfect Information
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
17 Financial Markets
Introduction to Financial Markets
17.1 How Businesses Raise Financial Capital
17.2 How Households Supply Financial Capital
17.3 How to Accumulate Personal Wealth
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
18 Public Economy
Introduction to Public Economy
18.1 Voter Participation and Costs of Elections
18.2 Special Interest Politics
18.3 Flaws in the Democratic System of Government
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
19 International Trade
Introduction to International Trade
19.1 Absolute and Comparative Advantage
19.2 What Happens When a Country Has an Absolute Advantage in All Goods
19.3 Intra-industry Trade between Similar Economies
19.4 The Benefits of Reducing Ba
iers to International Trade
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
20 Globalization and Protectionism
Introduction to Globalization and Protectionism
20.1 Protectionism: An Indirect Subsidy from Consumers to Producers
20.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions
20.3 Arguments in Support of Restricting Imports
20.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally
20.5 The Tradeoffs of Trade Policy
Key Terms
Key Concepts and Summary
Self-Check Questions
Review Questions
Critical Thinking Questions
Problems
A | The Use of Mathematics in Principles of Economics
B | Indifference Curves
C | Present Discounted Value
Answer Key
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
References
Index
By the end of this section, you will be able to:
Describe financial capital and how it relates to profits
Discuss the purpose and process of bo
owing, bonds, and corporate stock
Explain how firms choose between sources of financial capital
XXXXXXXXXXFirms often make decisions that involve spending money in the present and expecting to earn profits in the future. Examples include when a firm buys a machine that will last 10 years, or builds a new plant that will last for 30 years, or starts a research and development project. Firms can raise the financial capital they need to pay for such projects in four main ways: (1) from early-stage investors; (2) by reinvesting profits; (3) by bo
owing through banks or bonds; and (4) by selling stock. When business owners choose financial capital sources, they also choose how to pay for them.
Early-Stage Financial Capital
Firms that are just beginning often have an idea or a prototype for a product or service to sell, but few customers, or even no customers at all, and thus are not earning profits. Such firms face a difficult problem when it comes to raising financial capital: How can a firm that has not yet demonstrated any ability to earn profits pay a rate of return to financial investors?
XXXXXXXXXXFor many small businesses, the original source of money is the business owner. Someone who decides to start a restaurant or a gas station, for instance, might cover the startup costs by dipping into his or her own bank account, or by bo
owing money (perhaps using a home as collateral). Alternatively, many cities have a network of well-to-do individuals, known as “angel investors,” who will put their own money into small new companies at an early development stage, in exchange for owning some portion of the firm.
Venture capital firms make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. These firms gather money from a variety of individual or institutional investors, including banks, institutions like college endowments, insurance companies that hold financial reserves, and corporate pension funds. Venture capital firms do more than just supply money to small startups. They also provide advice on potential products, customers, and key employees. Typically, a venture capital fund invests in a number of firms, and then investors in that fund receive returns according to how the fund as a whole performs.
The amount of money invested in venture capital fluctuates substantially from year to year: as one example, venture capital firms invested more than $48.3 billion in 2014, according to the National Venture Capital Association. All early-stage investors realize that the majority of small startup businesses will never hit it big; many of them will go out of business within a few months or years. They also know that getting in on the ground floor of a few huge successes like a Netflix or an Amazon.com can make up for multiple failures. Therefore, early-stage investors are willing to take large risks in order to position themselves to gain substantial returns on their investment.
XXXXXXXXXXProfits as a Source of Financial Capital
XXXXXXXXXXIf firms are earning profits (their revenues are greater than costs), they can choose to reinvest some of these profits in equipment, structures, and research and development. For many established companies, reinvesting their own profits is one primary source of financial capital. Companies and firms just getting started may have numerous attractive investment opportunities, but few cu
ent profits to invest. Even large firms can experience a year or two of earning low profits or even suffering losses, but unless the firm can find a steady and reliable financial capital source so that it can continue making real investments in tough times, the firm may not survive until better times a
ive. Firms often need to find financial capital sources other than profits.
XXXXXXXXXXBo
owing: Banks and Bonds
XXXXXXXXXXWhen a firm has a record of at least earning significant revenues,