Lecture%201%20-%20Intro%20-%20Post-1

Lecture%201%20-%20Intro%20-%20Post-1 - Fin 501 Financial...

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Fin 501 Financial Economics Introduction and Overview Professor Nolan Miller 1
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Why Should an Finance Student Study  Economics? 1. Economics is the intellectual foundation for finance. 1. Economics provides a framework for decision making applicable to  problems in business and finance (and life!). 1. It is required for the MSF/E degree! We’re not going to focus on #3. I’m going to work to convince you that economics will help you  understand the world in a way that helps you do better at your job and  in life. I think this stuff is cool.  I’m going to try to convince you that you should  think it is cool, too. 2
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The Economic (and Finance) Approach  to Problems The economic approach to problems has four parts: 1. Actors have preferences over allocations of the world’s resources. 1. The environment places constraints on what actors can choose. 1. Given the constraints, actors try to do as well as possible. 1. Changes in behavior arise from changes in constraints. Or … economics is about constrained optimization. Thinking carefully about objectives and constraints, and linking changes in  behavior to changes in constraints helps us think systematically about  problems. 3
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Example You go to the grocery store with $100. You have tastes (preferences) Some things you like, others you don’t. But, assume that, no matter what you currently have, there is something you’d like to  have more of. These tastes are stable over the time period in question. There are limits on what you can have You only have $100. Not everything is on the shelf. Given your tastes, and the constraints on what you can have, you fill up your  grocery cart to make yourself as happy as possible. 4
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Example Question: Do you spend all your money? Yes!  Since there’s something you’d like more of, if you don’t spend all your money you  should buy more of it. Why might you NOT spend all of your money? Question: If you go back tomorrow with $100, will you buy the same stuff? It depends. But, if you do something different, economists attribute the change to changes in  constraints and/or observable characteristics. Something got more expensive. Something is there today that wasn’t there yesterday or vice versa. Something was there yesterday that wasn’t there today. It isn’t because tastes have changed in a way that can’t be observed.
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This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

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Lecture%201%20-%20Intro%20-%20Post-1 - Fin 501 Financial...

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