Finance is often used as a synonym for economics. However, these two subjects are quite different and the study of the latter covers far more territory than the study of the former. Economics is actually the study of how people and institutions make decisions about how to allocate scarce resources. The field of economics is very broad and covers such areas as business cycles, public finance, macroeconomics, microeconomics, decision science, decision theory, financial markets, interest rates, international trade, international finance, government finance, and private finances. Finance, on the other hand, is merely an application of those topics that have broader applications.
For instance, while economics discusses the ways in which individuals and institutions make decisions concerning the allocation of scarce resources, finance uses a different lens to analyze how they make those decisions. Finance can be thought of, in a broad sense, as the discipline of financial planning. It is concerned with managing the long-term financial interests of investors and institutions.
There are a number of different theories that have been developed in order to describe, classify, analyze, predict, or explain the behavior of financial markets. One of the most influential of these theories is Behavioral Economics. The field of behavioral finance is made up of a number of related fields, including anthropology, statistics, information science, and neuropsychology. Behavioral economic theory makes use of a wide range of statistical techniques and statistical reasoning in order to produce predictions about individual behavior and the behavior of markets.
One of the best-known areas of research in the area of behavioral economics is economics of demand and supply. This field seeks to explain why certain activities tend to be more common among people than others, why some markets are stable and others unstable, and why monetary policy may not have much effect on economic activity at the national level. Another prominent area of research in behavioral finance is financial theory. This field studies the interactions of monetary incentives and other financial forces that drive certain economic behaviors. A popular avenue through which this type of analysis is done is market analysis.
Finance, however, is not solely the domain of economists. Businesses also make significant financial decisions on an everyday basis. Some choose to invest in a company’s shares, assets, or in the firm itself. Others decide on mergers and acquisitions. And some companies issue dividends to stockholders. All of these endeavors result in financial statements that are prepared by accountants and other professionals who understand how to interpret the numbers they display.
Accounting is just one of the modern financial theories that attempts to describe how markets affect the behavior of individuals. Other theories focus on the role of creditors and debtors. One of the most popular of these modern financial theories is probably credit theory. This theory suggests that individuals are influenced by financial incentives to borrow money that they might not otherwise need. For example, if an individual wants to purchase a new car, he will probably borrow from a bank until he has enough saved up to purchase the vehicle. If the individual were unable to pay back his loan, however, he may not be able to obtain another automobile.
Another popular modern financial concepts is called micro-economics, which explains the effects of changes in supply and demand to particular industries or firms on individual consumers. Economics graduates often specialize in micro-economics, as it is one of the most important branches of business studies. Graduate students pursuing a career in economics will learn about business cycles, inflation, unemployment, financial markets, macro-prices and micro-prices, government spending and economic policies.
Finance teachers also should teach students about the major concepts used in accounting such as capital budgeting, consumption expenditure, asset pricing, and portfolio balance. They should discuss government policies that influence financing methods, including taxes, social programs, and foreign currency exchange rates. These factors all have an effect on the financing decisions of businesses and households. Finance students can develop a solid background in the study of finance and use this knowledge in the field of business administration, economics, or management.