Economics

By:SaraHeines

Chapters:

Chapter1:ThinkingLikean
Economist................................................3
Chapter2:
Scarcity.................................................................................4
Chapter3:Opportunity
Cost..................................................................5
Chapter4:ThreeBasicQuestionsEveryEconomyMust
Answer.....6
Chapter5:FourFactorsof
Production.................................................7
Chapter6:TypesofEconomic
Systems.............................................8
Chapter7:AdamSmithvs.Karl
Marx...................................................9
Chapter8:CharacteristicsofaMarket
Economy..............................10

 Chapter9:BusinessCostand
Production.........................................11
Chapter10:Supplyand
Demand.......................................................12
Chapter11:Market
Structure..............................................................13
Chapter12:BusinessCycleandEconomic
Indicators.....................14
Chapter13:GDP/
CPI.........................................................................15
Chapter14:Banking,Money,andtheFederalReserve
System.....16
Chapter15:TaxesandtheGovernmentsRoleinthe
Economy.....17
Chapter16:International
Trade..........................................................18
Chapter17:Investing
Principles.........................................................19

Chapter1:
3

ThinkingLikeanEconomist

Firstofallyoureprobablywondering,whatis
economics?Welleconomicsishowwe,asa
society,decidetodealwithscarcity.Scarcity
iswhenthereisntenoughofaproductbeing
producedtokeepupwiththedemandforthat
product.Economistsdealwithscarcityby
buyingassets.Thedifferencebetweenassets
andliabilities,orthingsyouownthatdont
generateaconstantincome,isthatassetsare
investmentsyoumakethataregoingto
generateanincomeforyou.Forexample,
someassetsyoucanbuyareownerships,
stocks,mutualfunds,realestate,andowningabusiness.Economistsbuytheseassets
sothatonedaytheywillbeabletoretirewithalotofmoney.Retiringiswhenyoulive
everydayafteryourcareerendswithenoughmoney.
Economistsalsoinvestin
thestockmarket.Theytrytofind
thenextbigcompanythatcould
possiblymakethemrich.Now
youreprobablythinking,dont
peoplelosemoneyinthestock
market?Youonlylosemoneyif
yousellyourstockwhenthe
marketisbad.Aslongasyou
keepyourstock,youcannever
losemoney.Thatiswhattrue
economistsdo.Themoreassets
aneconomisthas,thericherhell
bewhenheretires.

Chapter2:
4

Scarcity

Scarcityisamajorissueweareconstantlytryingtoworkaroundfromdaytoday.
Scarcityiswhenthereisntenoughofaproductbeingproducedtokeepupwiththe
demandforthatproduct.Forexample,inOctober,
1973,therewasanoilembargoputintoplacebythe
OrganizationofArabPetroleumExportingCountries
(OAPEC).Itmadethepriceofabarrelofoilgoupfrom
$3toabout$12.TheUSrespondedbyonlyletting
certainpeopleoncertaindaystogotothegasstations
tofillup.Sometimesfamilieswouldspendmostoftheir
dayoralloftheirdaywaitinginlinetogetgas.
Eventually,membersof
theOAPECdroppedtheirpricesandtheUSwasno
longerstrugglingwithashortage.

Anotherexampleofscarcityiswhenin2012,
avianfluwipedoutmillionsofchickensinMexico
creatinga
scarcityofeggs.
TheseeggswereapartofthestableMexican
diet.Thefluviruswipedoutalmost11million
chickens.Pricesforeggsdoubledfrom$1.50to
morethan$3akilogram.Insomeareasthe
pricestripled.TheMexicangovernmentlifted
tariffsoffofeggsandimportedthemfrom
differentcountries.TheUSaloneexported906
tonsofeggstoMexico.Mexicomightstillbe
tryingtodealwiththescarcityofeggs.

Chapter3:
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OpportunityCost

Everydaywehavetomakedecisions.Forexample,youmaywanttoattend
collegesomedaybutwhenyouareincollege,youarelosingthemoneyyouwouldhave
earnedfromajobifyouhadntgonetocollege.Opportunitycostisthemoneyorother
benefitslostwhenpursuingaparticularcourseofactioninsteadofamutuallyexclusive
alternative.Now,youwouldhavetodecide,iscollegereallyworthgoingto?Youwould
losefouryearsofsalaryattendingcollege.Ontheotherhandifyouwenttocollegeyou
wouldgetahigherpayingjobthanifyouhadnt.

Anotherexampleisafarmer.Ifafarmerdecidestogrowwheatonhis
land,hecantgrowcorn.Thefarmerhastodecideifitisreallyworthittogrow
wheatinsteadofcorn.Hehastoweighthebenefitsagainstthecostofgrowing
wheat.Ifitcostsmoretogrowwheatbutwheatpricesarehigh,thenheshould
growwheat.Butifitistooexpensivetogrowwheatandhewouldnotmakea
profit,heshouldthinkabout
growingcorn.Opportunitycostis
yetanotherfactorthatcaneither
helporhurttheeconomy.

Chapter4:
ThreeBasicQuestionsEveryEconomyMustAnswer

Everyeconomymustanswer3basicquestionsinordertomakeita
successfuleconomy.Thesequestionsare:
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Whoconsumesthegoodsandservices
producedinsociety?
Forwhom?Alleconomicsystems
mustdeterminewhichgoodsand
serviceswillbeavailableforpublic
useandwhichforprivateuse.

Whatgoods&servicesshouldbe
produced?
Whattoproduce?Alleconomic
systemsmustdeterminehowto
allocateproductiveresourcesinthe
formofland,laborandcapital.

Howshouldgoods&servicesbeproduced?
Howtoproduce?Alleconomicsystemsmustdeterminehowgoodsandservices
willbeproduced.

Ifaneconomycananswerthesethreesimpleyetcomplicatedquestions,itcould
becomeoralreadyisasuccessfuleconomy.Asuccessfuleconomyknowswhatto
produce,howtogoaboutproducingtheproduct,andhowmuchtoproducefor
consumers.

Chapter5:
FourFactorsofProduction
Therearethreemajorfactorsofproduction:land,labor,andcapitalgoods.There
isalsoafourth,althoughsomeeconomistsdontconsideritone.Entrepreneurshipis
7

thefourthfactor.Thesefactorsarecalledproducergoodsnottobeconfusedwith
consumergoods.Thesefactorsarewhatproducersinputsothattheycangetan
outputusuallyintheformofapaycheck.Producershavetopaytoobtainthesefactors
inordertorunasuccessfulbusiness.

LandLandisimportantbecausebusinessescouldntexistwithoutit.Producersneed
landtosettheirbusinessesupon.Theymightrentthelandorhaveboughttheyland.
Theymayevenhaveseveralpropertiestoproduceandsellon.Forexample,aNike
factorysitsonsomelandbutthenitshipsitsproducttoanotherpieceoflandthathasa
Nikestoreonit.

LaborEveryproducerneedsaworkforce.Theyneedagroupofmotivatedworkers
thatwillgetthejobdoneinthecheapestwaypossible.Withouttheworkers,therewould
benobusinessbecausetherewouldbenoproduction.Forexample,ifNikesworkers
justdisappeared,Nikewouldntexisteither.Butintodayssociety,machinesare
startingtotakeovertheworkersinfactoriessoNikemaynotjustdisappear.

CapitalGoodsCapitalgoodsaregoodsthatare
usedinproducingothergoods,ratherthanbeing
boughtbyconsumers.Anexampleofthisisaguy
whobuildsbirdhouses.Hiscustomersdontwant
hishammerorhissafetyglassesthatheuseswhile
makingthehouses.Theyjustwantthefinished
product.Butthemanwhomakesthebirdhouses
stillhastopurchasethesetools.

EntrepreneurshipEveryday
newproductsandbusinesses
aremadeduetonewentrepreneurs.Withoutthecourageous,
brave,andcreativepeopleouttherethatarewillingtoriskanything
todesignthenextbigthing,oursocietywouldntadvance.Like
withoutSteveJobsourtechnologywouldnothavebeenas
advancedasitisnow.

Chapter6:
TypesofEconomicSystems
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Therearemanytypesofeconomicsystems.Thesesystemsareputinto4main
categories:

MarketEconomyAmarketeconomyisan
economyinwhichdecisionsregarding
investment,production,andhowtheproductis
distributedarebasedonthesupplyanddemand,
andthepricesofthesegoodsandservicesare
determinedinafreepricesystem.Some
countriesthathaveamarketeconomyare
CanadaandtheUSA.

CommandEconomyAcommandeconomy
isaneconomicsysteminwhichdecisions
regardingproductionandinvestmentare
embodiedinaplanformulatedbyacentral
authority,whichisusuallyagovernmentagency.
Someexamplesofcountriesthathaveaneconomysimilartoacommandeconomy
areCuba,NorthKorea,China,RussiaandIran.Aperfectexampleofa

commandeconomyistheSovietUnion.Theyhaveacentralpowerthatcontrols
allproduction,investments,anddistribution.

TraditionalEconomyAtraditionaleconomyisanoriginaleconomicsystemin
whichtraditions,customs,andbeliefsshapethegoodsandtheproductsthe
societycreates.Countriesthathavethissystemareusuallyrural,farming
countries.Ifthereisasurplusitisusuallygiventotheleaderofthegroup.Their
economyisbasedontheirculture
andtraditionandonagriculture
andhunting.

MixedEconomyAmixed
economyisasystemwhereboth
marketandcommandeconomy
systemsareusedorfeatured.
SomepeoplesaytheUSmay
havethiseconomyalthoughmost
believewehaveaFreeMarket
Economy.

Chapter7:
AdamSmithvs.KarlMarx

AdamSmithandKarlMarxwerebornin
verydifferenttimes.AdamSmithsbirthday
isunknown,heisknowntobebaptizedon
June5th,1972.HewasaScottish
philosopherandwasthepioneerofmodern
dayeconomics.HelivedintheU.K.He
believedinafreemarket,whereproducers
arefreetoproduceasmuchastheywant
andchargeconsumersthepricesthey
want.Hethoughtthatthiswouldbethe
mostsuccessfulwaytorunaneconomy.
Heperformedlecturesonhisideasandmetseverallargefiguressuchas
BenjaminFranklin.

Ontheotherhand,therewasKarlMarx.KarlMarxwasbornMay5,1818.
HewasaGermanphilosopher.Marxknew
whoSmithwasandidoledhiswork.Even
thoughKarlMarxidoledSmith,hehadvery
differentideasabouthowtorunan
economy.Marxbelievedthatcommunism
andsocialismshouldbeeliminated.Marx
foughtforasocietygovernedbyafree
associationofproducers.Hebelievedthat
thecommunisticgovernmentswouldfail
andleadtosocialistdictators.Marxwanted
tocreateasocietythatwasclassless.He
believedinaneconomywheretherewas
noseparationbetweenclasses.

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Chapter8:
CharacteristicsofaMarketEconomy

Amarketeconomyisthemostidealeconomy.Itisthemostsuccessfuleconomy.
Amarketeconomyisan
economyinwhichdecisions
regardinginvestment,production,
anddistributionarebasedon
supplyanddemand,andprices
ofgoodsandservicesare
determinedinafreeprice
system.Themaincharacteristic
ofamarketeconomyisthat
investmentsaremadebasedon
howthemarketisdoing.For
example,letsuseNike.Letssay
Nikejustbeganandisnotvery
popularrightnow.Sincethe
marketforNikeislowrightnow,
investorswhothinkNikewill
succeedwillinvesttheirmoney
bybuyingsharesofNike.Ashare
isoneoftheequalpartsinto
whichacompany'scapitalisdivided,entitlingtheholdertoaproportionoftheprofits.
ThisinvestorwillthenprofitwhenNiketakesoffandstartstobecomemorepopular.
Afreemarketalsodoesnotlogicallytakeforgrantedtheexistenceofprivate
propertyinthemeansofproduction.Amarketeconomycanconsistofmanytypesof
cooperativesandcollectives,or
stateagencies,thatacquireand
exchangecapitalgoodswitheach
otherinthefreepricesystem.
Companiescanalsobeowned
privately,byanemployee,orthey
couldbeownedbythepublic.Either
waythiseconomyisthemostideal
economytohave.Thecitizensareallowedtosettheirownpricesandsellwhatthey
want.CurrentcountriesthathavethiseconomyareAustralia,Switzerland,New
Zealand,andCanada.
11

Chapter9:
BusinessCostandProduction

Everybusinesshasacost.Itcostsmoneyto
producegoods.Asapresidentofacompany,youhaveto
decidehowmuchsuppliestopurchase,howmany
employeestohire,howlargeofaspacetoown,andwhat
goodsaretobeproduced.Productioncostisacost
subjectedbyabusinesswhenmanufacturingagoodor
producingaservice.Ittakesintoconsiderationraw
materialcostsandthecostoflabor.Basedonthecostof
production,thecompanyhastodecidehowmanypeople
tohire.Theproductioncostgivescompaniesanideaof
howtopricetheirgood.
Businesscostisamonetaryvaluationoftheeffort
oftheemployees,thematerialsandresources,timeand
materialsthatareused,andtheeffortputintothe
productionofthegoodorservice.Forexample,letslook
atafarmer.Afarmerneedstopayfortheseedsforthecrops,thewaterforthecrops,
thetechnologythatwatersthecrops,thelandthecropssiton,themachinesthat
harvestthecrop,andthetransportationofthecrop.Thesearejustafewofmany
expensesafarmermustpay.Healsohastopayhisemployees.Therearemanycosts
tobeingafarmer.
Ourfarmeralsohastodecideifhiscostoutweighshisbenefit.Ifhecantmakea
significantprofitdoingwhathedoesthenheshouldswitchwhatheisdoing.For
example,letssaythatourfarmercouldget$10/hourworkingonhisfarmharvesting
crops.Heisfinewiththisbutisnearstrugglingtopaythebillseverymonth.Nowhe
couldgotoworkinthegrocerystorethatwouldgivehim$15/hour.Hewouldbemaking
moremoneyanddoinglessworktogetit.Thefarmerhastodecidewhatisinhisbest
interest.Hemaylovefarmingsomuchthathedbeokaywithonlygetting$10/hour.

12


Chapter10:
SupplyandDemand

Economicsisallaboutsupplyanddemand.Theyarewhatrunstheeconomy.
Demanddependsonsupplyandsupplydependsondemand.Supplyisastockofa
resourcefromwhichapersoncanbeprovidedwiththenecessaryamountofthat
resource.Companieshavetodecidehowmuchtheysupplyoftheirproductbasedoff
thedemandforit.Demandisaprinciplethatdescribesaconsumer'sdesireand
willingnesstopayapriceforaspecificgoodorservice.
AnexampleofthisisApple.LetssaythebrandnewIPhonejustcameout.Apple
needstolookatthedemandfortheirproducttoseehowmuchtheyshouldproduce.
Theywanttoproducejustenoughphones.Theydont
wanttosupplytoomanymorethanpeopleare
demanding,forthatwouldresultinasurplus.They
alsodontwanttosupplytoolittlebecausethatwould
endupinscarcity.Theywanttogetthemostprofit
thattheycan.
Allofthisisdecidedbasedoffofthesupply
anddemandcurve.Thecurveshowsatexactlywhat
pointthecompanyshouldproduceattogetthe
maximumprofit.Ifthecompanyproducesbelowthe
idealpoint,itwillresultinscarcity.Iftheyproduce
abovetheidealpoint,itwillresultinasurplus.

13


Chapter11:
MarketStructure

Marketstructureisthenumberoffirmsproducingidenticalproductswhichare
homogeneous.Thereareseveraldifferenttypesofmarketstructures:
Monopolistic:Amonopolisticmarketstructureisatypeofimperfectcompetition
suchthatmanyproducerssellproductsthataredifferentiatedfromoneanother,
therefore,arenotperfect
substitutes.
Oligopoly:An
oligopolyisastateoflimited
competition,inwhicha
marketissharedbyasmall
numberofproducersor
sellers.Industrieswhichare
examplesofoligopolies
include:thesteelindustry,aluminumindustry,filmindustry,televisionindustry,cell
phoneindustryandthegasindustry.
Monopsony:Amonopsonyisamarketinwhichthereisonlyonebuyer.An
exampleofthismarketisthesingleprayeruniversalhealthcaresystem.the
governmentistheonlybuyerinthismarket.
Oligopsony:Anoligopsonyisastateofthemarketinwhichonlyasmallnumber
ofbuyersexistsforaproduct.AnexampleofthisistheUSfoodindustryinwhichthere
areafewmajorcompanies,suchasMcdonalds,BurgerKing,andWendys,thatcontrol
themeatmarket.
Monopoly:Amonopolyisanexclusivecontrolof
themarketbyonebusinessbecausethereisnoother
businessthatissellingtheproductorofferingtheservice.
Atruemonopolyrarelyexistsbecauseifthereisno
competition,thebusinesswillincreasethepriceto
maximizeprofits.

PerfectCompetition:Aperfectcompetitionisthe
situationprevailinginamarketinwhichbuyersandsellers
aresonumerousandwellinformedthatallelementsof
14

monopolyareabsentandthemarketpriceofacommodityisbeyondthecontrolof
individualbuyersandsellers.Anexampleisthestockexchange.

Chapter12:
BusinessCycleandEconomicIndicators

Abusinesscyclereferstofluctuationsinproduction,tradeandactivityover
severalmonthsoryearsinamarketeconomy.Itexperiencestheupwardriseand
downwardfalloftheGDP.TheGDPstandsforGrossDomesticProduct.GDPisthe
monetaryvalueofallthefinishedgoodsandservicesproducedwithinacountry's
bordersinaspecific
timeperiod.Business
cyclesareusually
measuredby
consideringthegrowth
rateoftherealGDP.
Therehasbeenatotal
of11businesscycles
from1945to2009.
Theaveragelengthof
abusinesscycleis
approximately69
months,alittleless
thansixyears.The
averageexpansionisaround58.4months,whiletheaveragecontractionisaround11.1
months.ThelastexpansionbeganinJune,2009.Recessions,oraperiodoftemporary
economicdeclineduringwhichtradeandindustrialactivityarereduced,areusuallyalot
shorterthanexpansions,orthephaseofthebusinesscyclewhentheeconomymoves
fromatroughtoapeak.Troughsarethestagesofaneconomy'sbusinesscyclethat
markstheendofaperiodofdecliningbusinessactivityandthetransitiontoexpansion
andapeakisthehighestpoint
betweentheendofan
economicexpansionandthe
startofacontractionina
businesscycle.

15

Chapter13:
GDP/CPI

TheGrossDomesticProduct,orGDP,isthemarketvalueofallofficially
recognizedfinalgoodsandservicesproduced
withinacountryinayear.TheGDPcanbe
calculatedusingasimpleformula:C+G+I+
NX.Theformulaisverysimpleandeasyto
use.TheCisequaltoallprivate
consumption,orconsumerspending,ina
nation'seconomy,theGisthesumof
governmentspending,theIisthesumofall
thecountry'sbusinessesspendingoncapital,
andNXisthenation'stotalnetexports.NXis
foundbysubtractingthetotalimportsfromthe
totalexports.GDPisusedtogaugea
country'sstandardofliving.

CPI,orConsumerPriceIndex,isa
measurethatexaminestheweightedaverageofpricesofconsumergoodsand
services.Examplesofsomeofthese
goodsarefoodandclothing,andsome
servicesincludetransportation.The
U.S.BureauofLaborStatisticsisin
controlofmeasuringournationsCPI.
Theyhavetomeasuretwodifferent
typesoftheCPI:CPIforurbanwage
earnersandclericalworkers(CPIW),
andthechainedCPIforallurban
consumers(CCPIU).TheCCPIU
betterrepresentsthepopulationasa
whole,representing87%ofthe
population.TheCPIisusedtoidentify
periodsofinflationanddeflation.Ifthe
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CPIrisesgreatlyduringashortperiodoftime,ittypicallymeansaperiodofinflationis
onitswayandwhentheCPItakesamajordropinashortperiodoftimeitusually
marksaperiodofdeflation.

Chapter14:
Banking,Money,andtheFederalReserveSystem

Thebankingsystemisamajor
partofourprosperingeconomy.The
bankingsystemcanonlystandwiththe
supportofthecountryscitizens.
Citizensputtheirmoneyintoabank
andthebankhastochargeintereston
it.Forexample,ifyouput$5inabank
thatgivesyoua.05%interestrate,you
willget$0.03everyyearfromthebank
ifyoudontaddortakeawayyour
money.Thebankdoesntputyour
moneyinaspecialspotwithyour
nameonitthough.Theyuseyour
moneytoinvestinotherthings.Thats
howtheymakethemoneytopayyoubackininterest.Theyinvestinthingslike
personalconsumerloans,homemortgages,andfundingforsmall,medium,andlarge
corporations.

TheFederalReserveSystem,whichisreferredtoastheFED,isthehighest
powerinbanking.ItisthecentralbankoftheUnitedStates.Ithasfourmajor
responsibilities:

1.Conductingmonetarypolicy
2.Regulatingbankinginstitutionsandprotectingthecreditrightsofconsumers
3.Maintainingthestabilityofthefinancialsystem
4.ProvidingfinancialservicestotheU.S.government

TheFEDheadquartersareinWashingtonD.C.butthereare12regionalbanks
acrossthecountry.The12regionalFedsarebasedinBoston,NewYork,Philadelphia,
Cleveland,Richmond,Atlanta,Chicago,St.Louis,Minneapolis,KansasCity,Dallasand
SanFrancisco.TheFEDisalsorunbyaboardofgovernors.TheFEDisthemost
powerfulfinancialinstitutionintheworld.ItwasfoundedbytheU.S.Congressin1913
17

toprotectthenationfinancially.TheFEDisconsideredtobeindependentfromthe
centralgovernmentbecauseitsdecisionsdonothavetoberatifiedbythePresident.

Chapter15:
TaxesandtheGovernmentsRoleintheEconomy

Thefederalgovernmentisthemainforceinoureconomy.Itcontrolsournations
growthandprosperity.Itoperates
undertheFiscalpolicy.Through
fiscalpolicy,regulatorsattemptto
improveunemploymentrates,control
inflation,stabilizebusinesscyclesand
influenceinterestratesinaneffortto
controltheeconomy.Thefiscalpolicy
wastheideaofJohnMaynard
Keynes.Hebelievedgovernments
couldchangeeconomicperformance
byadjustingtaxratesand
governmentspending.Forexample,if
ourcountryisdealingwitha
recession,thegovernmentmight
lowertaxratestotrytofueleconomic
growth.Whenpeoplearentpaying
taxes,theyhavemoremoneyto
spendandinvestinthingswith.The
governmentusesthetaxeswepayto
funditsspending.Itusesthemoney
topayforthemilitarydefense,
interest,medicare,medicaid,socialsecurity,andmanyotherthings.Thegovernment
sometimeshastodecide,ifitshouldcutitsspending,wheretheyshouldcutit.They
havetodecidewhichwouldbethe
bestwaytomanagetheirspendingso
thattheycangetreelected.For
example,ifthecuttheirspendingfor
medicare,peoplemightthinkthe
governmentdoesntcareaboutour
health,therefore,notreelectingthat
representative.
18

Chapter16:
InternationalTrade

Internationaltradeistheexchangeofgoodsandservicesbetween
countries.Haveyoueverheardsomeonesay,Dontbuyforeign,buyAmerican!?This
persondoesntunderstand.BuyingforeigndoeshurtAmericanjobsbutwearegetting
goodsthatifweproducedourselveswouldbemuchmoreexpensive.Internationaltrade
helpstheUSeconomy.Italsoexpandsourboundariesbybringingusgoodsthatwe
otherwisecouldntgrowormanufactureintheUS.WithInternationaltrade,weas
consumershavemorechoicesinhowtospendourmoney.Internationaltradeismore
efficient.Forexample,usethetablebelow:

Dolls

ToyTrains

China

Japan

10

Japancanmake5dollsbutwhile
theyremakingthedollstheycant
makethe10toytrains.Sowehave
tolookatthislikeaneconomist.
Japansopportunitycostis1/2doll
foreverytrainand2trainsforevery
doll.Chinascostis1/3dollforevery
trainand3trainsforeverydoll.
Japanshouldfocusonmakingtrains
becausetheygiveuplesstomake
them.thentheycantradeChinafor
dolls.

19

Chapter17:
InvestingPrinciples
BenjaminGrahamwasaverysuccessfulinvestor.His
ideasinspiredmanypeople,forexample,WarrenBuffett.
Grahamisthoughttobethefatherofsecurityanalysisandvalue
investing.Grahamsmethodsforinvestingwerekeptinhistwo
books,SecurityAnalysisandTheIntelligentInvestor.There
werethreemainprinciplesthathethoughteveryoneshould
knowiftheywantedtobecomeasuccessfulinvestor.

1. Principle#1:AlwaysInvestwithaMarginofSafety
a. Amarginofsafetyistheprincipleofbuyinga
securityatasignificantdiscounttoitsintrinsic
value.Investingwithamarginofsafetyprovides
highreturnopportunitiesanddecreasestherisksof
investing.

2. Principle#2:ExpectVolatilityandProfitfromIt
a. Volatilityisastatisticalmeasureofthedispersionofreturnsforagiven
securityormarketindex.WhatGrahamistryingtocommunicatehereis
dontpanicwhenthemarketcrashesandpullyourmoneyfromit.Profit
fromit.Herecommendsbuyingsharesduringthistimesothatyoucan
turnagreaterprofitinthefuture.

3. Principle#3:KnowWhatKindofInvestorYouAre
a. Grahamfoundthattherearetwotypesofinvestors:ActiveandPassive.
i. Activeinvestorsareenterprisinginvestors.Theythinkaheadand
usemathtocalculatethebestareastoinvestinforthefuture.They
spendalotoftheirtimeplanningahead,constantlyresearching
andcalculating.
20

ii.

Passiveinvestors,ordefensiveinvestors,investinthestockmarket
andbonds.Insteadofusingmathconstantlytofigureoutwhereitis
besttoinvest,theyinvestintheentiremarket.Theybenefitfrom
theareasthatperformthebestwithouttrying
topredictthoseareasaheadoftime.Byjust
lettingtheirmoneysitinthemarket,theyturn
aprofitnomatterwhatandalmostneverlose
money.

21