Summary

Business firms can raise money from internal (inside) and external (outside) sources. Most internal funds come from profits. The principal sources of external funds are loans and sales of stocks.

Large corporations often raise funds through the sale of stocks and bonds. Bondholders lend money to the corporation and are, therefore, its creditors. Since stock represents part ownership of a corporation, stockholders are owners.

Bondholders receive interest payments during the period of the loan, plus the face value of the bond at maturity. Stockholders receive a share of the profits in the form of dividends when and if the board of directors declares them. When stockholders sell their shares, they receive the shares’ market value at the time of sale.

Publicly held stocks and bonds are traded in stock exchanges or over-the-counter markets. Those who invest in corporate securities hope to make money from dividends, interest, or long-term growth in the value of their investment. Speculators buy and sell securities as values change.

The government agency responsible for overseeing the operations of the securities markets if the Securities and Exchange Commission (SEC). The SEC subscribes to the principle of caveat emptor, “let the buyer beware.”

Investors and other interested in the financial condition of a firm can learn much from its income statement and balance sheet. The balance sheet describes a firm’s assets (the things it owns) and liabilities (the amount it owes). The difference between assets and liabilities is the net worth. The income statement lists income and expenses. It provides information about the business’s profitability.

Looking Ahead

The quantity and quality of goods and services a business produces is determined by many factors – the skill of its employees, the efficiency of it machines and equipment, and the ability of its managers to continually improve productivity. Production involves creating goods and services, while productivity is a measure of the efficiency of production. As you read Chapter 7, you will learn more about each of these concepts and the effect they have on our standards of living.

The History of Economic Thought Jean Baptiste Say (1767-1832) Say's Law of Markets

For hundreds of years, the science of astronomy was frozen by the theories of the second-century Greek astronomer, Ptolemy. According to Ptolemy, the Earth was the center of the universe. It was not until the 16th century that Galileo and Copernicus persuaded Europeans that the Earth, and all the other planets, rotated around the sun. In much the same way, the doctrine known as Say's Law slowed progress in economics for well over 100 years.

John Baptiste Say admired Adam Smith's work, and through his Treatise on Political Economy (1803), he helped to introduce Smith's The Wealth of Nations to his native France. In explaining Smith's theories and the role of markets in satisfy­ing human wants, the author developed what came to be known as Say's Law. According to Say's Law, "production creates its own demand." In other words, people produce and sell goods and services to buy the things they want. If buyers no longer want certain products, sellers will stop producing them and shift to something that is in demand.

Say's Law further explains that if only those goods and services actually in demand are produced — and managers and workers use the income they receive from the sale of those products to buy the things they want and need — then supply creates its own demand. In other words, there can be no such thing as overproduction or long-term unemploy­ment. Temporary overproduction and unemploy­ment can exist, but never long-term.

The Great Depression of the 1930s, with its wide­spread unemployment and overproduction, finally put Say's Law to rest. Although some economists continue to agree with Say that in the long run the market will bring supply, demand, and employ­ment into balance, most agree with the British economist J.M. Keynes. Keynes argued that press­ing problems require immediate attention; we can't wait for long-term solutions.