Trade-offs

Examples of Trade-offs in the following topics:

• Trade-Off Consideration

  • Trade-off considerations are important because they take into account the cost and benefits of raising capital through debt or equity.
  • Therefore, a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing.
  • Another trade-off consideration to take into account is that the while interest payments can be written off, dividends on equity that the firm issues usually cannot.
  • Therefore, trade off considerations change from firm to firm as they impact capital structure.
  • Describe the balancing act between debt and equity for a company as described by the "trade-off" theory

• The Short-Run Phillips Curve

  • The short-run Phillips curve depicts the inverse trade-off between inflation and unemployment.
  • The long-run Phillips curve is a vertical line that illustrates that there is no permanent trade-off between inflation and unemployment in the long run.
  • Nowadays, modern economists reject the idea of a stable Phillips curve, but they agree that there is a trade-off between inflation and unemployment in the short-run.
  • The idea of a stable trade-off between inflation and unemployment in the long run has been disproved by economic history.

• Introducing the Budget Constraint

  • In this circumstance the decision is easy, and the trade off will be sacrificing convenience and high quality food for the ability to have enough food on the table over the course of the whole month.
  • To expand upon this definition further, the business concept of opportunity cost via trade-offs is a central building block in understanding budget constraints.
  • Understanding these trade-offs underlines the true function of budget constraints in economics, which is identifying which consumer behaviors will maximize utility.
  • This demonstrates the trade-off ratio between the two available products or services.
  • Keep in mind that moving from one point on the in to another is trading off '$x$' amount of one good for '$y$' amount of another.

• Secondary Market Organizations

  • The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies.
  • Most bonds and structured products trade "over the counter," or by phoning the bond desk of one's broker-dealer.
  • Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities, or derivatives directly between two parties.
  • It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.
  • OTC stocks are not usually listed nor traded on any stock exchanges, although exchange listed stocks can be traded OTC on the third market.

• Trade Leads to Gains

  • Producers and consumers trade because the exchange makes both parties better off.
  • Producers and consumers trade because the exchange makes both parties better off.
  • The sum of consumer and producer surplus is called economic, or social, surplus, and reflects the total amount of benefit received by society when consumers and producers trade.
  • An allocation of resources is Pareto efficient when it is impossible to make any one individual better off without making at least one individual worse off.
  • Similarly, an action that makes at least one party better off without making any individual worse off is called a Pareto improvement.

• Mediterranean Trade and European Expansion

  • Most were Italians, as trade between Europe and the Middle East was controlled mainly by the Maritime Republics.
  • From the 8th century until the 15th century, they held the monopoly of European trade with the Middle East.
  • The silk and spice trade, involving spices, incense, herbs, drugs, and opium, made these Mediterranean city-states phenomenally rich.
  • Europeans turned to the North African trade of wheat and olive oil (valued also as an energy source), and a search for silver and gold.
  • Europeans had a constant deficit in silver and gold, as coin went only one way—out, having been spent on eastern trade that was now cut off.

• Types of Market Organizations

  • These can be broken down into different types based on what is being traded.
  • Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities, or derivatives directly between two parties.
  • It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.
  • OTC stocks are not usually listed nor traded on any stock exchanges, although exchange listed stocks can be traded OTC on the third market.
  • Municipal bonds are often traded in this way.

• The Rise of the African Slave Trade

  • Driven by the desire for raw materials, new trading outlets, and cheap labor, Europeans initiated an extensive slave trade out of West Africa.
  • The major European slave trade began with Portugal’s exploration of the west coast of Africa in search of a trade route to the East.
  • By 1444, slaves were being brought from Africa to work on the sugar plantations of the Madeira Islands, off the coast of modern day Morocco.
  • In the 15th century, the Spanish invaded and colonized the Canary Islands off the coast of Africa under the direction of the Kingdom of Castille.
  • Examine how economic desires gave birth to and perpetuated the Atlantic slave trade

• Trade and Economy

  • States were responsible for their own trade policies under the Articles of Confederation.
  • The government protected its London-based merchants—and kept others out—by trade barriers, regulations, and subsidies to domestic industries in order to maximize exports from and minimize imports to the realm.
  • The goal of mercantilism was to run trade surpluses so that gold and silver would pour into London.
  • Under the Articles of Confederation, Congress was denied the power to regulate either foreign trade or interstate commerce, and as a result, all of the states maintained control over their own trade policies.
  • Some States paid off their war debts and others did not.

• Trade vs. Consumer Promotions

  • Trade promotions are targeted toward retailers while consumer promotions are targeted toward consumers.
  • Trade promotions are targeted toward retailers while consumer promotions are targeted toward consumers .
  • Trade promotions are marketing activities executed between manufacturers and retailers.
  • Price deals are temporary reductions in price, such as 50% off an item.
  • Differentiate between trade and consumer promotions relative to a product's marketing mix