Finance Differentiated from Economics
Economics is concerned with analyzing the distribution of resources in a society. It studies transactions among people involving goods and services with or without the exchange of money. It is interested in supply and demand. Costs and profits and production and consumption. The broad and highly developed field of economics is closely related to other social sciences. Such as sociology. Political science, and psychology. Economics may be conveniently divided into two major categories :
Micro-economics which is basically a body of theory that studies the way business make decisions about pricing and production is different kinds of markets and under differing assumptions. Also called price theory of theory of the firm. Micro-economics tries to explain how rational persons make business decisions.
Macro-economics, which is the study of the overall economic situation of a nation or group of nations; It attempts to relate such factors as production and consumption into a meaningful view of national economies. It uses definations such as gross national product (GNP) to measure the level of economic activity and has developed fairly sophisticated means for forecasting the future.
The field of finance rests heavily on the work of economists and makes use of many economic tools. It begins with the theories and assumptions developed in micro-economics and attempts to apply them to explain the workings of a modern business firm. It borrows forecasting and other models from macro-economics and tests them against current situation to predict the result from varying courses of action being considered by the firm. Finance is less concerned with theory than is economics. Finance analyst forecasts for the individual firm; economics forecasts for the industry and the overall level of economics activity.