Economics and Finance-Basic Principles

Course
Introduction to Finance
(8011753 – INTRODUCTION TO FINANCE)
(A.Y. 2021/22)
Economics Vs Finance
Basic principles
© 2022 1
Agenda
1) Economics
2) Finance
3) Economics and Finance
4) Financial Needs
2
Economics
Economics
Etymology
The etymology of the term reminds two Greeks words:
- οἶκος (oikos)  House
- νόμος (nomos)  Law, rules
A proxy translationof the term “Economics” should

be “the rules about the house (management)” but,
in a modern meaning, it could be
“the management of available resourses”.
3
Economics
Economics
Contents
Economics concerns the different options

of allocation, management and
distribution of available resources.
Being related to the possible use of the available

resources and the decision making processes of
economic agents that own these resourses, Economics
can be classified within the social sciences.
4
Economics
Economics
Classification
Regarding the use of individuals or society as reference
points, it is possible to distinguish Microeconomcs
from Macroecnomics.
Microeconomics Macroeconomics
Microeconomics concerns the Macroeconomics concerns the

study of individual behaviors and study of the allocation of resources
decisions (consumers, firms, etc.) between groups and different
about the use of their resources. agents (families, firms,
Governments, etc.) that interact
with the aim to reach their goals. 5
Economics
Economics and the Economic System
The economic system is the set of production,

exchange, allocation and consumption of
goods and services.
It follows that Economics can be referred as the

discipline that studies the functioning of the
economic system.
6
Economics
Economics
The fundamental hypothesis of the classical economics
The classical studies about Economics are
based on some assumptions as…
1 Scarcity of resources
There is a limited amount of resources to satisfy needs
and achieve goals.
Implications of such hypothesis concern the need to assess the

effects of different allocations of resources in order to choose the
optimal one that maximizes the utility functions of the economic
agents. … If resources are limited it could be not possible to
satisfy all the needs of an individual or a group (society).
7
Economics
Economics
The fundamental hypothesis of the classical economics
The classical studies about Economics are
based on some assumptions as…
2 Rationality of economic agents
Economic agents are fully rationals and take decisions
that maximize the expected results of their choices.
The rationality of the economic agents implies the use of

decision making processes based on complete and detailed
analysis where all the available information are considered.
Such decisions should lead to the best results possible. 8
Economics
Economics
The economic agents
Within an economy different agents exist and differ each
others for their goals and their role in the economic system.
1 Families 2 Firms 3 Governments 4 NPO

(political parties, trade unions,
religious organizations, charity
organizations, etc.)
Families are usually considered as consumers of good and

services (the demand side of the market).
The role of families in the economy is even related to the supply side of the
labour market and with the production of savings.
9
Economics
Economics
The economic agents

Firms are involved in the production of goods and services in a profit

oriented business.
A relevant distinction is about financial firms (e.g. banks, insurance companies, etc.) and
non-financial firms (e.g. agricultural, industrial and service industries)
In an economic perspective firms are feautred by the release of new

investments. 10
Economics
Economics
The economic agents

The Government (either the central Government and the local

authorities) provides public goods (e.g. law and order,
army, education, infrastructures, etc.) with the aim to
achieve social well-being (e.g. economic development, full
employment, etc.) 11
Economics
Economics
The economic agents

The main sources of funding for Governments are taxation

and indebtedness (e.g. Issues of Government bonds) that
are used to achieve political goals.
With its policies the Government can be pivotal in the reallocation of wealth between
different economic agents. 12
Economics
Economics
The economic agents

Firms are involved in the production of goods and services in a profit

oriented business.
A relevant distinction is about financial firms (e.g. banks, insurance companies, etc.) and
non-financial firms (e.g. agricultural, industrial and service industries)
In an economic perspective firms are feautred by the release of new

investments. 13
Finance
Finance
Finance is the discipline that studies

the money related issues.
(production, exchange, distribution, etc.)
A definition of money that is not limited to cash

(banknotes and coins) and that involves any item or
good that can be used as a payment facility (e.g.
cheques, securities, etc.) leads to a definition of
Finance as the discipline that studies the
management of financial resources.
14
Economic and Finance
In a modern society usually any economic transaction
has a financial consequence.
Individual need Economic need Financial need
15
Example #1
Hunger To buy food To pay for food
16
Example #2
To rent and
Housing To pay rent
apartment
17
Example #3
Plan for goals To deposit money

To Save
in a bank account
18
In a good perspective Finance should support
the Economy by providing the rights tools to
achieve economic goals.
While economic issues concern the production, trade

and consumption of goods and services, financial
issues concern the transfer of financial reasources
between agents with the aim to support them in
achieving their economic goals.
19
Real Financial
Economy Economy
Part of an economic system Part of the economic system
that concerns the production, that concerns the production,
exchange and consumption exchange and use
(use) of goods and services. (consumption) of financial
products and services.
Food, clothes, furnitures, motor Loans, securities, payment

vehicles, electronics, etc. facilities, insurance, etc.
20
Economic System Financial System
A set of individuals and A set of financial

organizations that work to products, intermediaries
satisfy the population and markets.
needs by the use of It represents the infrastructure
available resources. needed to produce and distribute
financial products and services.
21
ATTENTION
AThe
set ofpresence
individuals and
of an efficient
A set offinancial
financial
system is essential
satisfy the population
for supporting the
and markets.
economic
needs by the development
use of of a Country or
It represents the infrastructure
an economic
available resources. area.
needed to produce and distribute
financial products and services
22
When the Financial System does NOT
work properly…A set of financial
A set of individuals and
Firms can not
satisfy the population find money and to run
markets.
needstheir
by thebusiness
use of or make it grow.
It represents the infrastructure
available resources. financial products and services
Results could be a downturn of the economy, a slowdown

of development and a decrease of job opportunity.
23
People are not
satisfy the population able to save
and for the
markets.
needs by the use of future.It represents the infrastructure
When people do not trust banks anymore and use cash to
save money they will have no returns, will have the risk of
theft, etc.
24
People are
satisfy the populationnot able to borrow.
and markets.
needs by the use of It represents the infrastructure
When banks are not able to recognize a good borrower
from a bad one the good borrower will not have the chance
to borrrow to buy an house, start a business, send children
to college, etc.
25
Real economy and Financial economy

The real economy concerns the exchange of goods
and service, while the financial economy concerns
the exchange of financial resources.
The two parts of the economy are connected each

other because the management of economic
resourses (e.g. land, real estate properties, natural
resources, etc.) requires the use of financial
resources (e.g. money, loans, credits, etc.).
26

Example
Families and Firms can interact in
different manners.
Products
Families can buy products

from firms. Firms Families
Firms will transfer their products Money

(goods) to families (buyers) that will
transfer an amount of money to firms.
27

Example
Families and Firms can interact in
different manners.
Work
Firms can buy workforce from
family members.
Firms Families
Families will transfer

Money
workforce to firms (service)
that will pay for it (salary).
28

Example
From the Economic perspective Families and Firms close an economic
loop where families receive products and give workforce.
Real loop Financial loop
Work Money (Salary)
Firms Families Firms Families
Products Money (Prices)
In the meanwhile a financial loop is closed because Families pay the

price of the good they bought and receive the salary for their work.
29
Financial Needs
The most common classification

of financial needs is…
1 Payments (trade)
2 Investment
…€
3 Capital raising
4 Risk Management
30
Course
Introduction to Finance
(8011753 – INTRODUCTION TO FINANCE)
(A.Y. 2021/22)
Basic principles
© 2022 31

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Course

3) Economics and Finance

A proxy translationof the term “Economics” should

Economics concerns the different options

Being related to the possible use of the available

Microeconomics concerns the Macroeconomics concerns the

Economics and the Economic System

The economic system is the set of production,

It follows that Economics can be referred as the

Implications of such hypothesis concern the need to assess the

The rationality of the economic agents implies the use of

1 Families 2 Firms 3 Governments 4 NPO

Families are usually considered as consumers of good and

1 Families 2 Firms 3 Governments 4 NPO

Firms are involved in the production of goods and services in a profit

In an economic perspective firms are feautred by the release of new

1 Families 2 Firms 3 Governments 4 NPO

The Government (either the central Government and the local

1 Families 2 Firms 3 Governments 4 NPO

The main sources of funding for Governments are taxation

1 Families 2 Firms 3 Governments 4 NPO

Firms are involved in the production of goods and services in a profit

In an economic perspective firms are feautred by the release of new

Finance is the discipline that studies

A definition of money that is not limited to cash

Individual need Economic need Financial need

Individual need Economic need Financial need

Hunger To buy food To pay for food

Individual need Economic need Financial need

Individual need Economic need Financial need

Plan for goals To deposit money

While economic issues concern the production, trade

Food, clothes, furnitures, motor Loans, securities, payment

A set of individuals and A set of financial

Results could be a downturn of the economy, a slowdown

Real economy and Financial economy

The two parts of the economy are connected each

Real economy and Financial economy

Families can buy products

Firms will transfer their products Money

Real economy and Financial economy

Families will transfer

Real economy and Financial economy

Firms Families Firms Families

Products Money (Prices)

In the meanwhile a financial loop is closed because Families pay the

The most common classification

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