Financial Crisis 2007-2008 Case Study

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The financial collapse of 2007/2008 was due to the significance of sub-prime mortgages and mortgage-backed securities. A sub-prime mortgage is a mortgage given to individuals who are refused prime mortgages. Whilst mortgage-backed securities is when banks securitise mortgages by pooling them together and then selling them to investors. Investors then receive monthly interest and principal payments, whilst banks receive a fee for the sale. In 2007/2008 those who had sub-prime mortgages were failing to keep up with principal payments, which was exacerbated by rising interest rates. Meanwhile, subprime mortgage-backed securities decreased in value forcing banks to sell them at low prices and incur a financial loss on those remaining. Consequently, these factors made institutions suffer with reduced demands for mortgages, declines in stock prices, falling liquidity in the market and having to write off millions of bad debt. As a result, this started the financial crisis of 2007/2008.
Opportunity cost is a more comprehensive and important concept than accounting cost …show more content…

Businesses can use this knowledge to check if their products demand is price elastic or inelastic. Income elasticity of demand measures the sensitivity of quantity demanded when there is a change to income; allowing businesses to use this knowledge to calculate if a products demand is income elastic or inelastic. For example, a laptop company is suffering with low sales for the past year. After investigation they come to the conclusion sales reduced due to two factors; one of which was because of increasing laptop prices. The company also realises a significant amount of their community have recently lost their jobs, which further affects sales. This shows the demand for their laptop is sensitive to changes in price and income; therefore they drastically reduce their prices which results in sales

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