Contents
Signals and Systems in Economic Analysis
by
Vineet Rathi
Sumit Kendurkar
Jiteshu Godara
Abstract:
There ain'tn o such thing as a free lunch economic knowledge in one sentenceAn economy is the institutional structure through which individuals in a society coordinate their diverse wants and desires. An ECONOMIC SYSTEM is the system by which the economy is organized. For example, if an economy is organized through markets, it is a market economic system. The study of economics involves the following three central problems:
1.What, and how much, to produce.
2.How to produce it.
3. For whom to produce it
There are various factors that become the input signals to the economic system and decide various matters in the economy regarding aggregates (total amount of goods & services produced by society), absolute levels of prices, level of growth of national output (GNP & GDP), interest rates, stock exchange rates, unemployment and inflation. As an example we’ll be considering the stock market and the ways in which it functions as a system which takes in diverse signals ( inputs ) with the prices as outcomes.
Introduction
THE ECONOMY: Desire refers to people's willingness to own a good. Demand is the amount of a good that consumers are willing and able to buy at a given price.The demand curve labeled DD in the figure below shows the amount of a good one or more consumers are willing and able to buy at different pricesMovements Along and Shifts in Demand Curves: A change in price never shifts the demand curve for that good. In the figure below an increase in price results in a movement up the demand curve. The fall in the quantity demanded from Q1 to Q2 is sometimes called a contraction in demand.
A demand curve shifts only if there is a change in income, in taste or in the demand for substitutes or complements. In the diagram below a decrease in demand has shifted the demand curve to the left. The new demand curve is D1 D1.
Supply: The supply curve labeled SS in the figure below shows the amount of a good one or more producers are prepared to sell at different prices.
Market Price: At prices above the equilibrium (P*) there is excess supply while at prices below the equilibrium (P*) there is excess demand. The effect of excess
supply is to force the price down, while excess demand creates shortages and forces the price up. The price where the amount consumers want to buy equals the amount producers are prepared to sell is the equilibrium market price. All these situations are shown in the diagram below: Now, we are ready to look at the stock market and how these concepts apply there.
Stock Market: Stock is a share in the ownership of a company. We are interested in looking at how the shares trade. In fact, this is the system we will be looking at.
Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Before we go on, we should distinguish between the "primary" market and the "secondary" market. The primary market is where securities are created while, in the secondary market, investors trade previouslyissued securities without the involvement of the issuingcompanies. The secondary market is what people are referring to when they talk about "the stock market. Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. The principal theory is that the price movement of a stock indicates what investors feel a company is worth. Price times the number of shares outstanding (market capitalization) is the value of a company. But the price of a stock doesn't only reflect a company'sc urrent valueit also reflects the growth that investors expect in the future. We will explore these ideas further in the next section.
