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Economics for Securities Markets Code: 101

Economics for Securities Markets Code: 101. Lecture I Certification of Securities Market Programme National Institute of Securities Market. Information. Email id: poonam_mehra@nism.ac.in office phone: 2788 3050 Presentations and assignments will be available at

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Economics for Securities Markets Code: 101

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  1. Economics for Securities MarketsCode: 101 Lecture I Certification of Securities Market Programme National Institute of Securities Market

  2. Information • Email id: poonam_mehra@nism.ac.in • 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

  3. Reference • 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)

  4. Evaluation • Surprise Quiz (10%) • Case Study (10%) • Mid term (40%)- Micro • End term (40%)- Macro

  5. What is Economics? • How to make Money? • How to run Business? • Prediction of ups and downs of stock market?

  6. What is an Economy? • 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

  7. What does Scarcity mean? • Are we in an era of abundance or scarcity? • Everybody’s want add up to more than what there is • “wishes deferred and plans unmet…goals that remain just out of sight…dogged savings and some luxuries” • “ just as soon as people have enough money to live comfortably, they want to live extravagantly” • “even millionaires can have a hard time making ends meet if they try to live like billionaires”

  8. Alternative Uses • A medical team arrives at a war zone. • Soldiers with different forms of wounds and at different levels of emergency are awaiting the team • Faces a classic economic problem of allocating scarce resources to alternative resources

  9. Scope: Micro and Macro • Microeconomics is the branch of economics that examines the behavior of individual-decision making units (firms, households) • Macroeconomics is the branch of economics that examines the behavior of economic aggregates (income, output, employment etc. ) on a national scale

  10. Micro and Macro Concerns

  11. Economic Theory and Real World • Will I ever use this? • That’s OK its theory…what about real world?....what about practical solutions? • To achieve practical, profitable solutions, we require to understand • How real world functions? • But real world is complex, to understand one needs to make simplifying assumptions facilitated by “theory”

  12. Microeconomics : Some Examples • Eve and the Forbidden Fruit • Ant and the Grasshopper • Location Problem • Taxi Driver and Justice • King Solomon and the mother of the baby • Market for Lemons

  13. Managerial Economics • 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

  14. Measuring and Maximizing Economic Profit • 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

  15. Manager-Owner • If the manager is the same as the owner • What is good for the owner is good for the manager • If manager does not have equity ownership, then interests of manager and owner might vary • Owner wants to maximize value, manager wants to maximize market share of the firm • Principal Agent Problem: How to align the interest of the manager with that of the firm • Incentive design: stock option, retirement plans

  16. Price Takers vs. Price Setters • Price-taking firms • Cannot set price for its products and services • Price is determined strictly by market forces of demand and supply • Price-setting firms • Can set price of its product • Has a degree of market power, ability to raise price without losing all customers

  17. What is a Market? • A market is an arrangement through which buyers and sellers exchange goods or services • Market reduces transaction costs • Costs of making a transaction other than the price f the good or service

  18. Market Structure • 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

  19. Types of Market Structure

  20. Types of Market Structure

  21. Types of Market Structure

  22. Types of Market Structure

  23. Business Problems • Boeing vs. Airbus • Disneyland Revenue • Heinz’s decision on location of plants

  24. Economic Cost of Resources • Opportunity cost of using any resource is what firm owners must give up to use the resource

  25. Implicit Costs

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