First Exam review points
Chapter 1
Economics: Is the study of how a society decides three things: what gets produced, how it
gets produced, and who gets what.
The main points with Economics is: How scarce resources (labor, Capital, and natural
resources) are allocated in the production process among competing uses. How income
generated in the production and sale of goods and services is distributed among members
of society. How people allocate their income through spending, saving, borrowing and
lending decisions.
Microeconomics: The causes and consequences of individual decision-making units in a
particular market.
Macroeconomics: the causes and effects resulting from the sum of decisions made by all
firms of households in many markets.
Finance: is the study of the financial or monetary aspects of production, spending,
borrowing and lending decisions.
Finance: deals with the raising and using of money by individuals, firms, governments,
and foreign investors. How individuals manage money, how the financial system
coordinates and channels the flow of funds from lenders to borrowers. How new funds
may be created by financial intermediaries during the borrowing process.
The financial system: is a mechanism of transferring funds from those who have excess
funds to those who deficiencies through financial markets and institutions. The financial
system continually changes and evolves. Changes in government regulations and advances
in computer technologies, innovations in the ways people spend, save, and borrow funds.
Saving: Income that is not spent on consumption.
Income: Is the flow of revenue an individual receives over time.
If Income > consumption, the individual is a net lender or surplus spending unit.
If Income < consumption, the individual is a net borrower or deficit spending unit.
The financial system provides: a mechanism whereby a net lender may conveniently make
funds available to net borrowers. Greater investment than would be possible otherwise.
Improved resource allocation, resulting in greater productivity.
A robust financial system: Lowers search costs associated with lending and borrowing.
Leads to higher economic growth than otherwise possible. Makes funds available to
credit-worthy borrowers.
The financial system is composed of financial markets and financial institutions.
Financial markets are where net lenders can lend their funds directly to net borrowers this
is called direct finance. Money market (one year or less) – Bond Market (capital market) –
Stock Market ( capital market) – Mortgage market ( securities relating to realty) –
Derivatives market ( forwards/ futures/ options) – Foreign Exchange market ( foreign
currencies).
Financial Institutions are firms that provide financial services to net lenders (ssus) and net
borrowers (dsus) – Banks –Savings and Loan associations – credit unions these financial
