Fin concept

Hello Friends! We will now begin with discussion of the relationship between financial markets and economic efficiency. Financial markets facilitate mutually beneficial intertemporal exchanges by organizing trading in financial securities. These securities, and the information contained in their prices, enable individuals to reach higher levels of lifetime utility than would be possible in the absence of financial markets. We begin this chapter with a brief treatment of financial securities, followed by a discussion of the more important tasks that financial markets must perform to be economically efficient. We include brief treatments of two kinds of market failures. We conclude with a general discussion of informational efficiency and the efficient markets hypothesis. 2.1 Financial Securities A financial security is a saleable right to receive a sequence of future payments. The size of each future payment can be either guaranteed or determined by the outcome of some...

1 The Economics of Financial Markets 1.1 The Economic Function of a Financial Market The economic function of a financial market is to increase the efficiency with which individuals can engage in mutually beneficial intertemporal exchanges with other individuals. 1 This book is an introductory exposition of the  economics  of financial markets. We address three questions. First, we explain how financial markets enable individuals to make intertemporal exchanges. Second, we explain how economists assess how well a system of financial markets performs this function. Third, we develop the implications for public policy of our answers to the first two questions. 1.2 The Intended Readers for This Book We address this book to students who have completed at least one course in economics. We assume that the reader has a rudimentary understanding of opportunity cost, marginal analysis, and how supply and demand produce equilibrium prices and qu...