Financial Literacy Foundations: Cash Course Compilation

Lemonade, sir! Lemonade, ice cold, only a dollar! Hey, nice stand you have there. If you grow your business, you could really help out your local economy. Economy? But I'm just trying to sell lemonade. Well, when you produce and sell a product, you're participating in something called an economy, which is an interconnected web between producers, you, and consumers, your customers. An economy can be local, national, and even global. For example, the United States has had the largest economy in the world for at least the last 60 years. Its wealth and resources are used to create and accomplish things all around the world. So my stand isn't just about lemonade? Nope, it's much more than that. So how does an economy work? Well, an economy is the activity between consumers and producers. When you buy lemons, sugar, and ice for your lemonade, you are participating in the economy as a consumer. On the other hand, when you make and sell your lemonade, you're participating in the economy as a producer. And who do you sell it to? Consumers! This cycle of economic activity is happening everywhere around you, including at your favorite restaurant, at your local barber shop, and all over the internet. As buying and selling increases, economies grow and expand, creating financially good times. But sometimes, due to various reasons like political instability, extraordinary events, and inflation, activity will slow down and the economy will contract or get smaller. This typically leads to people losing their jobs and having less money to spend. This leads to less economic activity, where consumers spend less and businesses cut how much they produce. This pattern of expansion and contraction of the economy is called the So what happens if the economy contracts too much? Well, when it contracts for at least six months straight, the economy is said to be in a recession. I know it may sound scary, but the U.S. has had 13 recessions since the end of World War II, with most of them lasting less than a year. You may have even lived through a couple of them. Economies can be as big as a nation or as small as a community. No two economies are alike, either, since they are shaped by a region's geography, resources, culture, laws, history, and the choices and actions of the people living within it. One type of economy is a market-based economy, or free market economy. In this type of economy, producers and consumers, not the government, decide what is sold and produced based on supply and demand. Producers sell what consumers want and set prices based on what consumers are willing to pay. Like my lemonade stand! Yes! Let's say that your lemonade is so good and in such high demand, you can barely keep up. To meet the demand, you have to hire more employees, buy more materials, and increase the supply of lemonade. This is great for your local economy and for you! As drinks continue to fly off the stand, you start upping your prices. Eventually, you notice sales are slowing down and customers are drinking a cheaper alternative. So in order to stay competitive, you drop your prices and try to bring back that demand. That sounds exciting! Another type of economy is called a command-based economy. In this kind of economy, the government owns and controls production, distribution, and prices. Here, private ownership and competition is controlled or doesn't happen at all. In other words, in this type of economy, your lemonade empire would cease to exist. Less exciting. In reality, no economy is purely market-based or command-based. Today, the majority of the world's nations are mixed economies. They usually lean more towards market-based or command-based economies, but have sprinkles of other types mixed in. For example, the United States is mostly a market-based economy, but the government can have sizable influence on the economy by changing interest rates or with subsidies for various products, artificially creating demand that otherwise might not exist. Vietnam is another example of a mixed economy. Up until the late 1980s, Vietnam was a pure command-based economy, but then it began to encourage private enterprise. Now that you know more about an economy, let's take a look at how you can participate and help your community and country thrive. One, be productive. Economies thrive when citizens are educated and working. The decisions and efforts of an economy's citizens are what makes it great or not. Two, be an entrepreneur. Business owners create jobs, which in turn creates growth, which in turn can help the local economy. There are opportunities all around you. Three, observe. When you're walking around, consider what kind of economic activity is happening. Consider the stores, the products, the workers, and the customers. This may influence both where you shop and where to set up shop someday. We're all entangled in the complex web of the economy. As producers and consumers, we depend on one another for goods and services. So be sure to do your part, contribute, and make your community a better place. Thank you. Enjoy. Thank you for your business. Dude, I am so hyped for this new Prager Station console. I know, but look at this line. It goes right around the building. Yeah, that's because it's so great. Everybody wants one, even though it's very expensive. It's like real life supply and demand right here. Supply and... wait, what are you saying? Supply, like how much they have, and demand, how much people want it. Sorry, we're all sold out. Sold out? I demand an explanation for this. Looks like another episode of... Supply refers to the quantity of a product or service that producers can provide to the market at different prices. Like the supply of Prager Stations, am I right? Yes, that is a product. It could also be hot dogs, strawberries, plumbing services, etc. The list is almost endless. On the other hand, the producers of these products or services are not. These include individuals, businesses, and even entire industries. To determine how much or what to produce, they have to factor in various things like production costs, availability of resources, technology, and competition. Then we have demand. Demand is the quantity of a product or service that consumers are willing or able to buy at different prices. Like the demand of Prager Stations. Think about it. Exactly. It's all about what people want and how much they are willing to pay for it. Demand depends on price, personal preferences, income levels, trends, and fads. However, it's the relationship between supply and demand where things get interesting. When the supply of a product is high at a specific price and the demand is low at that price, we have what we call a surplus. In other words, more of the product is available than people are willing to buy. When that happens, producers may need to lower prices to encourage consumers to purchase more to balance the supply and demand. Imagine a farmer with an excess of strawberries. To clear the inventory before it expires, he may need to lower his prices. On the other hand, when the supply of a product is low at a specific price and the demand is high at that price, we have a shortage. This means there's more demand for the product than there is supply. In such cases, prices tend to go up because people are willing to pay more to get what they want. But why can't the producers just increase the supply if the demand is so high? It's called scarcity. I don't like that. I want my Prager Station. Just keep listening. Fine. Well, he's right. There's always a limit, or scarcity, of supply. And there will only be so much product on hand on a given day or a certain time. Producers might very well miss an opportunity if there isn't enough supply to meet demand. But if there is too much supply and demand is not there, the business will lose money on the cost to create the supply. Producers must consider carefully how much supply to create. In a free market, this invisible hand between producers and consumers constantly shapes the market, influencing prices and rebalancing the supply and demand equilibrium. For example, if the grocery store sells out of strawberries today, more supply may be brought in tomorrow. Then you've got factors like changes in technology, natural disasters, and even global events that can all affect supply and demand, causing ups and downs in prices. On the other hand, while sometimes necessary to stabilize markets, protect consumers, and prevent abuses, artificial production and price controls mandated by government regulation can cause a surplus for which there is little or no demand. These policies also tend to create scarcity and higher prices for things consumers do want. Now that you know a bit about supply and demand, let's take action. Observe how prices change over time regarding various services and products. Track something as simple as a popular product or an everyday commodity like gasoline. Notice how national or global events affect those changes. Be smart when shopping. It can be easy to buy the latest product and end up paying a price you'll later regret. Exercise a little patience, and you may be pleasantly surprised at how quickly prices drop when demand goes down. Your budget will thank you. Consider what opportunities exist around you to meet current or future demand for a certain product or service. More than a few successful businesses and entrepreneurs have been started Understanding and appreciating the basic economic principles between supply and demand is essential for any business and consumer. You'll gain insights into how the world of business works and learn to make smarter choices when you shop. And someday, you might just create an amazing product or service that the world didn't even know it wanted. Or maybe not. Did you know it's been said that salt was used as money once upon a time? In fact, the Latin word for salt is where we get the word salary. What's more certain than salt is money is the use of cowrie shells as a form of money throughout Asia, Africa, and Oceania, even into the 20th century. Whether it's salt, shells, or cents, currency is the system of money used by a society to buy and sell goods and services. It has taken many different forms over the centuries and across the globe, but the concept is always the same. When people live in a community, they specialize in the work they do. One man becomes a butcher, another a baker, and somebody becomes the candlestick maker. This division of labor produces superior products because each person becomes an expert in what they make. Once they have enough for themselves, they sell the extras to get the other things they need. But how does the butcher buy bread from the baker? Probably through simple exchange at first. Three loaves of bread for two pounds of meat sounds fair, right? This is called bartering, the direct exchange of goods or labor. What if he doesn't want my bread? Then you can't get beat. Unless you have something else to trade that the butcher wants, like the candles you received from the candlestick maker. But this bartering gets troublesome, each person trying to guess the thing that the other person wants to get what they need. And the baker can't keep a collection of bread sitting around the house waiting to trade. It'll get old and stale. There needs to be an in-between, something that everyone agrees to use for exchange. Any ideas? How about my famous kaiser rolls? They're smaller. Didn't I just say... Good guess, but try again. Oh, didn't you say something about shells before? Yes, exactly! Shells are something that don't spoil. They can be used in large or small amounts and can be easily carried and traded. This is the beginning of a currency, a medium of exchange. Beads, livestock, tobacco, and even beaver pelts have been used as currency at times. Most sophisticated economies have decided over time that metal makes the best kind of currency, particularly gold and silver. But what makes gold or shells truly valuable? You can't eat them, right? Their value is based on what they can be traded for. And for that to work, people have to trust that the system is honest and reliable. In order to establish and maintain trust, the government designates only certain people to create currency. They work at a place called a mint. This means you can't just make your own currency, or as we call it now, money. If you do, that's called fake or counterfeit currency, and they reduce the value of the real money, a result known as dilution, and it can lead to some serious problems. Most of our money is paper now. How did that happen? Well, back when banks were created to protect large amounts of coins, they gave paper bank notes as receipts, which then functioned as paper currency. Whoever had the receipt could go to the bank and claim the coins. Governments eventually offered paper money backed by gold and silver, but now all countries use fiat money, which is money that is only backed by trust in the government, not precious metals. There are some benefits to fiat money, such as being easy to exchange. Because it is based solely on the trustworthiness of the government, there is still some risk. So how do I get some currency? Well, most people get currency from working at a job and receiving a salary in exchange for their labor. Children usually get money as an allowance from their parents or as a birthday gift from friends or family. You're also most likely to encounter different kinds of currency if you travel abroad. Governments typically produce official money, and it's usually only valid in that country. If you go to another country, you often need to exchange one kind of money for another. For example, if you go to Japan, you'll have to trade U.S. dollars for the yen, or if you're going to Mexico, the peso. First, you need to know the exchange rate. Let's say that when you're traveling to Japan, one U.S. dollar is equal to 130 yen, and you want to convert 250 dollars to yen. Multiply the 250 dollars by the exchange rate of 130, and you get 32,500 yen. But to actually make the exchange, you'll need to go to a bank or money exchange kiosk. And there's almost always a fee involved, so you wind up with a little less than the full amount. Most of us need to make exchanges to live, because it's hard to produce everything you need by yourself. And currency makes it easier to exchange those goods or services. Historically, there have been three kinds of currency. Commodities like salt and grain, representative currency like gold coins and shells, and fiat currency like other metal coins and paper money. Remember that, in the end, the money or currency is not itself valuable, but rather its value is in exchanging it for goods and services. Wow, looks like you've had some real success with selling lemonade. Congrats! Thank you. So, have you formally created a company for your business? What? You know, like a sole proprietorship, an LLC, or maybe even a corporation? Huh? You do know there are advantages to formally creating a company to run your business, right? Totally! I definitely know that. No, actually, I don't. Well, it's great that you found success in your business. Let's talk about how to protect all that hard work and continue to grow it on this episode of... Why can't I just run the business as myself? Well, technically, you're not a business. To be a business, you'll need to form a business entity. An entity is anything that has a clear and separate existence. Oh! In the business world, it's an organization that's formed to engage in activities to make money. Being a business entity provides many benefits, such as possible tax advantages. You are paying taxes, right? Of course! Good. Now, let's take a look at some of the most common business entities, starting with the simplest one, sole proprietorships. This is a business structure that's owned by a single individual who is liable for the business's debts and pays personal income tax on the money made by the business. A sole proprietorship's advantages include being simple to set up, easy tax reporting, and lower operational costs. Great! Sign me up! However, it comes with the disadvantage of unlimited personal liability. Which means? Meaning, if your lemonade operation runs into financial or legal trouble, you'll be personally responsible. Say your lemonade makes someone sick and you get sued, you could lose your house. My house? Yes. But thankfully, there's another type of business that can give you some liability protection. A limited liability company, also known as an LLC. This business structure protects owners from being personally held responsible for any debts accrued by the business and allows for more than one owner. Similar to a sole proprietorship, profits earned in an LLC can be taxed as personal income and the company isn't completely separated from its owners. Forming an LLC is generally more costly and more difficult than a sole proprietorship, but it offers the protection that a sole proprietorship does not. And since it's not always legally separate from the owner, the LLC may need to dissolve if an owner goes bankrupt or passes away. So once it's set up, it'll be THE ULTIMATE LEMONADE CORPORATION! Actually, incorporation is a separate kind of business entity. This is the legal process of forming a company as its own entity rather than being attached to its owners. Once incorporation is completed, a corporation is formed and the business assets and income are now considered separate from all owners and investors. It's often designated by the abbreviations for incorporated or limited after its name. This process tends to be the most difficult and costly to set up. Incorporations could be subject to being double-taxed once at the business level and once at the personal level. So it separates me from my business. It's expensive and it's difficult? Why would anyone want to incorporate? Well, say you wanted to raise money from people outside your immediate family and friends to grow your operations. Incorporating makes that easier because investors and financial institutions generally have more confidence in a corporation's ability to pay back debt. Sweet! Being a corporation also gives the ability to issue shares of stock in order to raise money. Most major stocks such as Google, Apple, and Amazon, which trade on public stock exchanges, are corporations. Both incorporation and LLCs provide a corporate veil This veil means creditors cannot recover their losses by going after the owners personally. So if I have a corporate veil and I'm accused of breaking the law, I'll be fine, right? Well, not quite. If the business is involved in illegal activity, the law can pierce the corporate veil and hold the owners personally responsible. Now that you know something about forming a business, let's pretend you're looking to start your own. First, talk to someone who's formed a business. Ask them what type of business they own and why they chose the business entity they did. Second, do some research. Look up and explore the details of sole proprietorships, LLCs, and corporations. There are lots of unique vocabulary and processes when it comes to forming a business. Third, write out which business entity you would choose and why. Show it to someone with business experience and get some feedback. Finding success is a great feeling, but it's important to protect your hard work and to find potentially even more success. Establishing a formal business entity could be the first step to doing just that, giving you benefits and protections through the highs and lows of being an entrepreneur. Wait, did I put salt or sugar in this? What is this taste? Watch more at PragerUKids.com. And parents, don't forget to subscribe.