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A land-development loan is a loan made to a real estate developer for the purposes of acquiring, subdividing, and making improvements to raw, undeveloped land to make it suitable for building housing, industrial facilities, and the like. The finished lots, complete with utilities, access roads or streets, and other on- and off-site improvements, are then sold to builders who, with the aid of construction loans, construct the buildings on the lot. The buildings are then eventually sold to the users, who finance their purchase via permanent loans.

As improvements are completed and in place, disbursements are made. However, although the amount and timing of construction loan repayment are assured by the terms of the takeout commitment, land-development loan repayment occurs as lots are sold. As a result, land-development loans tend to be the riskiest of all real estate loans because of the uncertainties associated with the development and sale of the finished lots.

In the American economy, millions of consumers make millions of decisions every day. You decide to buy a movie ticket instead of a paperback novel. Your roommate decides to buy two pounds of imported cheese rather than one or three. How are these decisions made?

Economists have constructed a simple theory of consumer choice based on the hypothesis that each consumer spends his or her income in the way that yields the greatest amount of satisfaction, or utility. This seems a reasonable starting point, since it says little more than that people do what they prefer. But, to make the theory operational, we need a way to measure utility.

A century ago, economists thought that utility could be measured directly in some kind of psychological units (sometimes called “utilise”), after somehow reading the consumer’s mind. But gradually it came to be realized that this was an unnecessary and, perhaps, impossible task. How many utilise did you get from the last movie you saw? You probably cannot answer that question because you have no idea what a ’til is.

But you may be able to answer a different question like, How many hamburgers would you give up to get that movie ticket? If you answer “three,” we still do not know how many utilise you get from a film. But we do know that you get more than you get from a hamburger. Hamburgers, rather than utilise, become the unit of measurement, and we can say that the utility of a movie (to you) is three hamburgers.

Early in the twentieth century, economists concluded that this more indirect way of measuring utility was all they needed to build a theory of consumer choice. We can measure the utility of a movie ticket by asking how much of some other commodity (like hamburgers) you are willing to give up for it. Any commodity will do for this purpose. But the simplest choice, and the one we will use in this book, is money.’

Thus we are led to define the total utility of some bundle of goods to some consumer as the largest sum of money she will voluntarily give up in exchange for it. For example, suppose Jennifer is considering purchasing six pounds of Central American bananas. She has determined that she will not buy them if they cost more than $2.22, but she will buy them if they cost $2.22 or less. Then the total utility of six pounds of bananas to her is $2.22 -the maximum amount she is willing to spend to have them.

Total utility measures the benefit Jennifer derives from her purchases. It is total utility that really matters. But to understand which decisions most effectively promote total utility we must consider the related concept of marginal utiliy. This term refers to the additional utility that an individual derives by consuming one more unit of any good.

Titling assets is an important aspect in coordinated estate planning, but it is only the first step. The real key is to determine the clients’ objectives. Do they have goals for passing assets to the next generation, or is a charitable beneficiary of primary importance? Because defining these goals is not easy, many clients fail to act. The result is that they die without setting down any formal instructions, that is, they die intestate. The ultimate aversion in planning is dying without stipulating how assets are to be disposed. Because these individuals fail to write down what they want to happen, the state-or states-decides.

A classic example is Howard Hughes. In his case, numerous individuals attempted to obtain a piece of the action. The states of California and Texas litigated to gain jurisdictional control of the estate for purposes of collecting inheritance taxes. With proper estate planning, much of the delay and expense, as well as publicity, could have been avoided.

The Hughes case also illustrates the importance of the state of domicile or jurisdictional control. (Domicile is typically defined as a person’s permanent home, not necessarily one’s current physical residence). The state of domicile will determine who inherits and the rate of tax on the individual’s personal property, regardless of its physical location. This alone is an extremely pertinent question, because states levy taxes at different rates. Some states have significantly higher inheritance or estate taxes than others.

Real property-meaning real estate-is subject to the laws of the state in which it is located. For other property, this is not so clear-cut, and with overlapping state laws come increasing complications and costs. Usually, personal property is subject to the jurisdiction deemed to be the domicile of the deceased.

More important in this context, it is unwise for clients to rely on any state to distribute their assets. State-recognized beneficiaries may not be those the client would have chosen. Without planning, the deceased’s assets could be divided as follows: one third to the surviving spouse and two thirds to the surviving children. This could unintentionally place the assets in the hands of someone unable to manage them. And, if no relatives can be found, the assets will escheat, or pass to the state. Few clients would knowingly give their assets to the state. But without a will and heirs, that is just what can happen.

Again we need to distinguish between the short run and the long run, but the distinction is different here. The short run for the industry is defined as a period of time too brief for new firms to enter the industry or for old firms to leave, so the number of firms is fixed. By contrast, the long run for the industry is a period of time long enough for any firm that so desires to enter (or leave). In addition, in the long run each firm in the industry can adjust its output to its own long-run costs.’ We begin our analysis of industry equilibrium in the short run.

With the number of firms fixed, it is a simple matter to derive the supply curve of the competitive industry from those of the individual firms. At any given price, we simply add up the quantities supplied by each of the firms to arrive at the industrywide quantity supplied. For example, if each of 1000 identical firms in the corn industry supplies 45,000 bushels when the price is $6 per bushel, then the quantity ] supplied by the industry at a $6 price will be 45,000 bushels per firm x 1000 firms = I 45 million bushels. I

This process of deriving the market supply curve from the individual supply curves of firms is perfectly analogous to the way we derived the market demand curve from the individual demand curves of consumers. Graphically, what we are doing is summing the individual supply curves horizontally, as illustrated in Figure 25-5. At a price of $6, each of the 1,000 firms in the industry sup- , plies 45,000 bushels (point c in part [a]), so the industry supplies 45 million bushels E (point C in part [b]). At a price of $8, each firm supplies 50,000 bushels (point e’ in part [a]), and so the industry supplies 50 million bushels (point E in part [b]). Similar calculations can be carried out for any other price. This adding-up process indicates, incidentally, that the supply curve of the industry will shift to the right whenever a new firm enters the industry

The supply curve of the competitive industry in the short run is derived by summing [lie short-run supply curves of all the firms in the industry horizontally.

Notice that if the short-run supply curves of individual firms are upward sloping, then the short-run supply curve of the competitive industry will be upward sloping, too. We have seen that the firm’s supply curve is its marginal cost curve (above the level of minimum average variable cost), so it follows that rising marginal costs lead to an upward sloping short-run industry supply curve.

Surprisingly little research on the long-run effects of union management cooperation has been reported. However, a recent study of several different types of union-management cooperation initiatives now begins to offer some evidence of the effects.

Large differences are apparent in the philosophies underlying cooperation projects. Scanlon and quality circle programs have the greatest participation, while Rucker and Impro-Share programs are mostly associated with economic incentives. The plans cannot substitute for good management, but where that does not exist, labor-management committees can be a springboard for progress. In the absence of management’s commitment to participation, Scanlon and other types of high-participation programs will fail. Critical factors for the ongoing success of the programs are the training and commitment of supervisors and the construction and understanding of the bonus formulas.

Companies and unions generally begin the programs to improve labor relations, to increase the amount of compensation available, and so on. Whatever the parties’ motives might be, they will influence the type of cooperation plan chosen. Gainsharing influences productivity more than labor-management committees or QWL programs. And no matter which method is chosen, it will not be necessary if traditional collective bargaining methods are successful. Companies and unions both appear to bargain rather than use cooperative alternatives unless difficulties arise in accomplishing their goals.

A study of cooperation in 23 sites found productivity improvements in 12 and no change in 10 others. In 16 of the sites, the subsequent experience enabled union members to earn bonuses supplementing what they would have earned solely as a result of collective bargaining. Evidence suggests bonus levels are directly influenced by the rate of suggestions generated by the employees. Employment levels are relatively unaffected by cooperative programs, and labor relations are seen as improved.

Finally, evidence suggests the productivity improvements are associated primarily with a one-shot increase rather than a long, steady improvement. And, the workplace intervention most likely to produce the productivity improvement appears to be the Scanlon plan.

To discover what happens in a market in which perfect competition prevails, we must deal separately with the behaviour of the individual firms and the behaviour of the industry that is constituted by those firms. One basic difference between the firm and the industry under competition relates to pricing. We say that:

Under perfect competition, the firm is a price taker. It has no choice but to accept the price that has been determined in the market.

The fact that a firm in a perfectly competitive market has no control over the price it charges follows from the definition of perfect competition. The presence of a vast number of competitors, each offering identical products, forces each firm to meet but not exceed the price charged by the others. Like a stockholder with 100 shares of General Electric, the firm simply finds out the prevailing price on the market and either accepts that price or refuses to sell. But while the individual firm has no influence over price under perfect competition, the industry does. This influenc. is not conscious or planned-it happens spontaneously through the impersonal forces of supply and demand, as we observed in Chapter 4.

With two important exceptions, the analysis of the behavior of the firm under perfect competition is exactly the same as that pertaining to any other firm. The two exceptions are the special shape of the competitive firm’s demand curve and the effects of freedom of entry and exit on the firm’s profits. We will consider them in turn, beginning with the demand curve.

Assumed that the firm’s demand curve sloped downward; if a firm wished to sell more (without increasing its advertising or changing its product specifications), it had to-reduce the price of its product. The competitive firm is an exception to this general principle.

A perfectly competitive firm has a horizontal demand curve. This means it can double or triple its sales without any reduction in the price of its product.

How is this possible? The answer is that the competitive firm is so insignificant relative to the market as a whole that it has absolutely no influence over price. The farmer who sells his corn through an exchange in Chicago must accept the current quotation his broker reports to him. Because there are thousands of farmers, the Chicago price per bushel will not budge because Farmer Jones decides he doesn’t like the price and holds back a truckload for storage.

Basic supply-demand analysis can be used to explain both how externalities lead to environmental problems and how these problems can be cured. As an illustration, consider the damage that massive generation of garbage does to our environment. be comparably high . For the community depicted in the graph, the price of garbage removal will be P dollars per ton, and 10 million tons will be generated (point A).

But what if the community’s government decides to remove garbage “free”? Of course, the consumer still really pays through taxes, but not in a way that makes each person pay for the quantity of garbage that he or she produces. The result is that the supply curve is no longer SS. Rather it becomes the blue line TT, which lies along the horizontal axis, because any household can increase the garbage it throws away at no cost to itself. Now the intersection of the supply and demand curve is no longer point A. Rather it is point E, at which the price is zero, and the quantity of garbage generated is 25 million tons-a substantially greater amount.

Similar problems occur if the community offers the oxygen in its waterways and the purity of its atmosphere without charge. The amount that will be wasted and otherwise used up is likely to be enormously greater than it would be if users had to pay for the cost of their actions to society. That is a key reason for the severity of our environmental problems.

The magnitude of our pollution problem is attributable in large part to the fact that the market lets individuals, firms, and government agencies deplete such resources as oxygen in the water and pure air without financial charge.

It follows that one way of dealing with pollution problems is to charge those who emit pollution, and who despoil the environment in other ways, a price commensurate with the costs they impose on society.

Money is so much a part of our day-to-day existence that we are likely to take it for granted, failing to appreciate all that it accomplishes. But it is important to realize that money is very much a social contrivance. Like the wheel, it had to be invented. The most obvious way to trade commodities is not by using money, but by a system in which people exchange one good directly for another. And the best way to appreciate what monetary exchange accomplishes is to imagine a world without it.

Under a system of direct barter, if Farmer Jones grows corn and has a craving for peanuts, he has to find a peanut farmer, say, Farmer Smith, with a taste for corn. If he finds such a person (this was called the double coincidence of wants by the classical economists), they make the trade. If this sounds easy, try to imagine how busy Farmer Jones would be if he had to repeat the sequence for every commodity he consumed in a week. For the most part, the desired double coincidences of wants are more likely to turn out to be double wants of coincidence, where Jones gets no peanuts and Smith gets no corn. Worse yet, with so much time spent looking for trading partners, Jones would have far less time to grow corn. Thus:

Money greases the wheels of exchange, and thus makes the whole economy more productive.

Under a monetary system, Farmer Jones gives up his corn for money. He does so not because he wants the money per se, but because of what that money can buy. Money makes his shopping tasks much easier, for it allows him simply to locate ‘a peanut farmer who wants money. And what peanut farmer does not? For these reasons, monetary exchange replaced barter at a very early stage of human civilization, and only extreme circumstances, like massive wars and runaway inflation’s, have been able to bring barter (temporarily) back.

Bankers have a reputation, probably deserved, for conservatism in politics, dress, and business affairs. From what has been said so far, the economic rationale for this conservatism should be clear. Checking deposits are pure fiat money. Years ago, these deposits were “backed” by nothing more than the bank’s promise to convert them into currency on demand. If people lost trust in a bank, the bank was doomed.

Thus, it has always been imperative for bankers to acquire a reputation for prudence. This they did in two principal ways. First, they had to maintain a sufficiently generous level of reserves to minimize their vulnerability to runs. Second, they had to be somewhat cautious in making loans and investments, since any large losses on their loans would undermine the confidence of depositors.

It is important to realize that banking under a system of fractional reserves is an inherently risky business that is rendered relatively safe only by cautious and prudent management. America’s continuing history of bank failures bears sober testimony to the fact that many bankers have been neither cautious nor prudent. Why? Because this is not a recipe for high profits. Bank profits are maximized by keeping reserves as low as possible, by making at least some risky investments, and by giving loans to borrowers of questionable credit standing (because these borrowers will pay the highest interest rates).

The art of bank management is to strike the appropriate balance between the lure of profits and the need for safety. When a banker errs by being too stodgy, his bank will earn inadequate profits. When he errs by taking unwarranted risks, his bank may not survive at all. Many banks have perished in the latter way in recent years, especially in the savings and loan industry.

A second forecasting method, pioneered at the National Bureau of Economic Research, exploits observed historical timing relationships through the use of certain that have in the past given advance warning of economic events.

For example, the stock market is a leading indicator because stock market downturns normally begin several months before downturns in industrial production. Why does this happen? Does the decline in the stock market cause economic downturns by reducing consumer spending? Or are both the stock market and industrial production just reacting to some other influence, with the stock market’s reaction coming sooner? Certainly these are fascinating questions. But the answers may not be crucial to a forecaster if the stock market continues to be as good a leading indicator of industrial production in the future as it has been in the past. In that event, we will be able to make use of the observed relationship between stock prices and industrial production for forecasting even if we do not entirely understand its origins.

As it turns out, however, excessive reliance on any single leading indicator produces an unimpressive forecasting record. An obvious solution is to look at many indicators. But once we start to do this, we will often receive conflicting signals. If one indicator is rising rapidly while another is falling, what are we to do?

One way to resolve this conflict is to form an average of several leading indicators. For example, every month the news media report the latest reading on the Commerce Department’s composite index, which is a weighted average of 11 of their leading indicators. The agreement is usually quite good. The leading indicators occasionally call for a recession that never comes (as in 1966), and occasionally they give clear early warning signals of a downturn (as in 1973 and 1979). But often movements of the leading indicators are followed so closely by movements in real gross national product that the advance warning they provide comes too late to be of much use to policymakers.

Key questions include: What segments of need exist in the market? What gaps exist in the competitive need fulfillment? What are the dynamics of the need segments? What bothers customers? What benefits are desired? What are the strengths/weaknesses?

Several research techniques can be used. In a focus group, a skilled moderator leads small groups of consumers/customers from the target market in a discussion of problems, needs, product concepts, competitive brands, and new ideas.

For market structure analysis/gap analysis, quantitative research is designed to cluster product attributes/benefit perceptions into basic dimensions, determine distance between basic groups, and identify groups where needs are not being satisfied. It is multidimensional research that structures a market on the basis of products, needs, and usage occasions with the objective of defining and understanding the dynamics of a market beyond traditional secondary data sources. It answers questions such as: What are the products in the market and how do consumers react to them? How are the products used, by whom, when? Which products compete/substitute for each other? What product attributes lead consumers to use the products in the way they do?

Problem detection studies are quantitative surveys to define problems in a category and rank them based on intensity (how bothersome are they?), frequency (how often do they occur-and for how long?), preemptibility (the extent to which products/services already on the market can handle the problem).

Task analysis is a technique involving actual observation or recall to identify steps involved in a project (baking bread, selecting and opening a bank account, mowing the yard, painting the house) and problems encountered. A consumer might be asked to list all tasks involved in a project (with an incentive to get a quantity of tasks), whether it was a pleasant or unpleasant task, why they feel that way, and whether they would like to see it simplified or changed.