Mathematical Economics and Finance

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文件名称：Mathematical Economics and Finance
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更新时间：2012-06-09 16:22:52
Mathematical Economics Finance 1. Basic microeconomics is about the allocation of wealth or expenditure among different physical goods. This gives us relative prices. 2. Basic finance is about the allocation of expenditure across two or more time periods. This gives us the term structure of interest rates. 3. The next step is the allocation of expenditure across (a finite number or a continuum of) states of nature. This gives us rates of return on risky assets, which are random variables. Then we can try to combine 2 and 3. Finally we can try to combine 1 and 2 and 3. Thus finance is just a subset of micoreconomics. What do consumers do? They maximise ‘utility’ given a budget constraint, based on prices and income. What do firms do? They maximise profits, given technological constraints (and input and output prices). Microeconomics is ultimately the theory of the determination of prices by the interaction of all these decisions: all agents simultaneously maximise their objective functions subject to market clearing conditions.