Demand and Supply in Financial Markets

Introduction to Demand and Supply

• Definition and relevance of demand and supply in economics.
• Focus on financial products and services rather than general goods.
• Initial lectures will cover basic microeconomic concepts.

Price and Quantity

• Price on the y-axis; quantity on the x-axis of the demand-supply curve.
• Importance of understanding buyers and sellers in the market.
  • Buyers: Individuals or entities looking to purchase goods/services.
  • Sellers: Individuals or entities looking to sell goods/services.
• Market regulates price based on demand and supply.

Concept of Optimum Price and Quantity

• Determining optimum price and quantity for buying and selling products.
• Consideration of different financial instruments (e.g., stocks, options).
• Importance of optimizing investment returns.
  • Different investors have different goals (maximize profits vs. minimize losses).

Risk and Return

• Relationship between risk and return in financial markets.
• Different methods to quantify risk: standard deviation, beta, etc.
• Importance of analyzing risk-return profile when investing.

Marginal Revenue

• Definition: change in revenue associated with a unit change in output.
• Marginal revenue is crucial for solving optimization problems.
• Primal and dual problems in optimization.
  • Primal: Original optimization problem.
  • Dual: Mirror image of the primal problem, revealing deeper insights into optimization.

Utility Theory

• Utility theory helps in understanding decision-making in finance.
• Different investors have different demands based on risk appetite.
• Decision-making involves choosing the optimal choice from a set of alternatives.

Expected Value in Decision-Making

• Expected value calculated through probabilities and outcomes.
• Example: Comparing two financial decisions based on expected value.
• Ranking decisions based on expected utility.

Utility Functions and Risk Preferences

• Different types of utility functions (linear vs. quadratic).
• Impact of utility function selection on decision-making.
• Classification of investors based on risk preference:
  • Risk-averse: Prefers to avoid risk.
  • Risk-neutral: Indifferent between risk and certain outcomes.
  • Risk-seeking: Willing to take risks for potential higher returns.

Conclusion

• Importance of understanding demand and supply in financial contexts.
• Relationship between price, quantity, risk, return, and utility in investment decision-making.
• Future discussions will delve deeper into specific financial instruments and their analysis.