Transcript Economics for Securities Markets

Economics for Securities Markets
Code: 101
Lecture I
Certification of Securities Market Programme
National Institute of Securities Market
Information
Email id: [email protected]
 office phone: 2788 3050
 Presentations and assignments will be available at
http://works.bepress.com/poonam_mehra/
 For doubts and discussion, you can send an email or call
me up to decide a time
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Reference
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Managerial Economics, by Christopher R. Thomas and S.
Charles Maurice, 8th edition, McGraw-Hill, 2005 (Tand
M)
Macroeconomics, by G. Mankiw, 6th edition, Worth
Publishers, 2007 (Mankiw)
Evaluation
Surprise Quiz (10%)
 Case Study (10%)
 Mid term (40%)- Micro
 End term (40%)- Macro
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What is Economics?
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How to make Money?
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How to run Business?
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Prediction of ups and downs of stock market?
What is an Economy?
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Economy is often considered as a system of production and
distribution of goods and services in everyday life
Is that all?
Is Garden of Eden an Economy?
Garden of Eden was also a system of production and distribution of
goods and services, but it was not an economy.
Because everything was available in unlimited abundance
If there is no scarcity…there is no need to economize
Hence no need of economics
Economics is the study of the use of scarce resources
which have alternative uses
What does Scarcity mean?
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Are we in an era of abundance or scarcity?
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Everybody’s want add up to more than what there is
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“wishes deferred and plans unmet…goals that remain just
out of sight…dogged savings and some luxuries”
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“ just as soon as people have enough money to live
comfortably, they want to live extravagantly”
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“even millionaires can have a hard time making ends meet if
they try to live like billionaires”
Alternative Uses
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A medical team arrives at a war zone.
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Soldiers with different forms of wounds and at different
levels of emergency are awaiting the team
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Faces a classic economic problem of allocating scarce
resources to alternative resources
Scope: Micro and Macro
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Microeconomics is the branch of economics
that examines the behavior of individualdecision making units (firms, households)
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Macroeconomics is the branch of economics
that examines the behavior of economic
aggregates (income, output, employment etc. )
on a national scale
Micro and Macro Concerns
Concern
Production
Prices
Income
Employment
Microeconomic
Production/
output in
individual
industries and
businesses
Price of
individual
goods and
services
Distribution
of Income
and Wealth
Employment of
individual
businesses &
industries
Macroeconomic National
Aggregate National
production/ou Price Level Income Total
tput
Wages and
Salaries
Total
Corporate
Profits
Employment
and
Unemployment
in the Economy
Economic Theory and Real World
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Will I ever use this?
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That’s OK its theory…what about real world?....what about
practical solutions?
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To achieve practical, profitable solutions, we require to understand
◦ How real world functions?
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But real world is complex, to understand one needs to make
simplifying assumptions facilitated by “theory”
Microeconomics : Some Examples
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Eve and the Forbidden Fruit
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Ant and the Grasshopper
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Location Problem
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Taxi Driver and Justice
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King Solomon and the mother of the baby
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Market for Lemons
Managerial Economics
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Managerial Economics applies microeconomic theory to
solve business problems
How to use economic analysis to make decisions to
achieve firm’s goal of profit maximization
Economics of Stock Market
Investor in stock market: maximize returns and
minimize risk
Fund manager: maximize profit for AMC: maximizing
returns on the portfolio, design products, pricing
product
Broker: maximize commission
Measuring and Maximizing Economic Profit
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Economic Profit
= Total Revenue- Total Economic Costs
=Total Revenue – Explicit Costs – Implicit Costs
= (Total Revenue – Explicit Costs) – Implicit Costs
= Accounting Profits – Implicit Costs
 Objective of Manager should be maximization of
economic profit
Manager-Owner
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If the manager is the same as the owner
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What is good for the owner is good for the manager
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If manager does not have equity ownership, then interests of
manager and owner might vary
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Owner wants to maximize value, manager wants to
maximize market share of the firm
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Principal Agent Problem: How to align the interest of the
manager with that of the firm
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Incentive design: stock option, retirement plans
Price Takers vs. Price Setters
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Price-taking firms
◦ Cannot set price for its products and services
◦ Price is determined strictly by market forces of
demand and supply
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Price-setting firms
◦ Can set price of its product
◦ Has a degree of market power, ability to raise price
without losing all customers
What is a Market?
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A market is an arrangement through
which buyers and sellers exchange goods
or services
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Market reduces transaction costs
◦ Costs of making a transaction other than the
price f the good or service
Market Structure
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Market characteristics that determine the
economic environment in which a firm
operates
◦ Number and size of firms in the market
◦ Degree of product differentiation
◦ Likelihood of new firms entering market
Types of Market Structure
Perfect Competition
Large Number
of relatively
small firms
Undifferentiated No Barriers to
Products
Entry
Types of Market Structure
Monopoly
Single Firm
Product with
no Close
Substitutes
Protected by a
Barrier to
Entry
Types of Market Structure
Monopolistic Competition
Large Number
of Relatively
Small Firms
Differentiated
Products
No Barriers to
Entry
Types of Market Structure
Oligopoly
Few Firms produce
all or most of
Market Output
Profits are
interdependent
Business Problems
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Boeing vs. Airbus
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Disneyland Revenue
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Heinz’s decision on location of plants
Economic Cost of Resources
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Opportunity cost of using any resource is
what firm owners must give up to use the
resource
Explicit Cost
Market Supplied
Resources
Monetary payments
to resource owners
Implicit Cost
Owner Supplied
Resources
Return foregone by
not taking resources
to market
Economic Cost
Implicit Costs
Opportunity Cost of Cash provided
by owners (equity capital)
Opportunity cost of using land or
capital owned by the firm
Opportunity cost of owner’s tie spent
managing or working for the firm