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

2. Information Email id: poonam_mehra@nism.ac.inpoonam_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 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 ConcernProductionPricesIncomeEmployment MicroeconomicProduction/ output in individual industries and businesses Price of individual goods and services Distribution of Income and Wealth Employment of individual businesses & industries MacroeconomicNational production/ou tput Aggregate Price Level National Income Total Wages and Salaries Total Corporate Profits Employment and Unemployment in the Economy

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 CostsTotal Economic Costs =Total Revenue – Explicit Costs – Implicit CostsImplicit 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 Perfect Competition Large Number of relatively small firms Undifferentiated Products No Barriers to Entry

20. Types of Market Structure Monopoly Single Firm Product with no Close Substitutes Protected by a Barrier to Entry

21. Types of Market Structure Monopolistic Competition Large Number of Relatively Small Firms Differentiated Products No Barriers to Entry

22. Types of Market Structure Oligopoly Few Firms produce all or most of Market Output Profits are interdependent

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 Economic CostExplicit Cost Market Supplied Resources Monetary payments to resource owners Implicit Cost Owner Supplied Resources Return foregone by not taking resources to market

25. 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