Financial Analysis. Lesson 35. Economic Theory and Financial Decision-Making
Financial Analysis. Lesson 35. Economic Theory and Financial Decision-Making
Economic theory provides frameworks for understanding market behaviors and decisions.
Supply and demand explain price levels based on availability and need.
Elasticity measures sensitivity of demand or supply to price changes.
Opportunity cost is the value of the best alternative foregone.
Marginal utility assesses added satisfaction from consuming one more unit.
Law of diminishing returns states that additional input yields smaller increases.
Comparative advantage allows countries to specialize in goods efficiently produced.
Absolute advantage is when a producer is more efficient in all goods.
Market equilibrium occurs where quantity supplied equals quantity demanded.
Game theory analyzes strategic interactions and choices among decision-makers.
Nash equilibrium is where players’ strategies lead to no further benefits.
Behavioral economics studies effects of psychological factors on economic decisions.
Cost-benefit analysis compares benefits and costs to aid decision-making.
Externalities are third-party impacts from economic activities, positive or negative.
Market failure happens when resources are inefficiently allocated by the market.
Information asymmetry occurs when one party has more information than another.
Moral hazard arises when behavior changes due to lack of consequences.
Principal-agent problem conflicts arise when agents act against principal’s interests.
Rational choice theory assumes individuals make decisions to maximize benefit.
Risk aversion reflects preference for lower risk with secure returns.
Sunk cost fallacy bases decisions on irrecoverable past investments.
Monetary policy involves central bank actions to manage inflation and growth.
Fiscal policy uses government spending and taxes to influence the economy.
Interest rate parity links interest rates and currency exchange rates.
Purchasing power parity compares currency value based on price levels.
Liquidity preference theory explains interest rates based on money demand.
Quantitative easing increases money supply to stimulate economic activity.
Phillips curve shows trade-off between inflation and unemployment rates.
Multiplier effect indicates how spending affects income beyond initial amount.
Inflation targeting aims to keep inflation at an optimal level.
Technical Examples:
Cost-benefit analysis helps companies assess the financial impact of projects.
Game theory provides insights into strategic interactions in competitive markets.
Interest rate parity assists in understanding exchange rates and investments.