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Economics for Securities Markets
Code: 101
Lecture I
Certification of Securities Market Programme
National Institute of Securities Market
Email id: [email protected]
 office phone: 2788 3050
 Presentations and assignments will be available at
 For doubts and discussion, you can send an email or call
me up to decide a time
Managerial Economics, by Christopher R. Thomas and S.
Charles Maurice, 8th edition, McGraw-Hill, 2005 (Tand
Macroeconomics, by G. Mankiw, 6th edition, Worth
Publishers, 2007 (Mankiw)
Surprise Quiz (10%)
 Case Study (10%)
 Mid term (40%)- Micro
 End term (40%)- Macro
What is Economics?
How to make Money?
How to run Business?
Prediction of ups and downs of stock market?
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
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”
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
Scope: Micro and Macro
Microeconomics is the branch of economics
that examines the behavior of individualdecision 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
Micro and Macro Concerns
output in
industries and
Price of
goods and
of Income
and Wealth
Employment of
businesses &
Macroeconomic National
Aggregate National
production/ou Price Level Income Total
Wages and
in the Economy
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”
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
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
Broker: maximize commission
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
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
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
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
Market Structure
Market characteristics that determine the
economic environment in which a firm
◦ 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
Types of Market Structure
Single Firm
Product with
no Close
Protected by a
Barrier to
Types of Market Structure
Monopolistic Competition
Large Number
of Relatively
Small Firms
No Barriers to
Types of Market Structure
Few Firms produce
all or most of
Market Output
Profits are
Business Problems
Boeing vs. Airbus
Disneyland Revenue
Heinz’s decision on location of plants
Economic Cost of Resources
Opportunity cost of using any resource is
what firm owners must give up to use the
Explicit Cost
Market Supplied
Monetary payments
to resource owners
Implicit Cost
Owner Supplied
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