1.1 Finance in the World

Finance begins with economics, which is the study of scarcity. In this world, we have a finite amount of resources: oil, time, labor, etc. Economics studies how individuals and groups utilize these scarce resources. Finance is the application of economics, allowing for the tradeoff of various resources in the face of uncertainty, particularly over time. An economist’s primary tradeoff is supply vs. demand, while a financier’s is risk vs. return. 

There are three main branches of finance: personal finance, public finance, and managerial (or corporate) finance. Personal finance The decisions made by individuals about their own money. includes the decisions typically made by individuals over the course of their lives, affecting primarily themselves and their households. Retirement planning, insurance, and mortgages are all examples of personal finance decisions. Public financeThe study of the income and expenditures of the government. focuses on the income and expenditures of governments, and their role in the economy. Managerial finance The financial decisions made by managers of companies for the purpose of operating a business. , which is the focus of this text, involves all financial decisions made by managers of companies for the purposes of operating a business. Facilitating all three branches of finance is a vast network of financial institutions and markets, which specialize in providing financial products and services.

There are common methods and techniques that will be relevant to the different branches of finance. Also, certain situations will lie at the intersection of multiple areas. For example, a business and a homeowner might both need to evaluate the mortgage for a real estate transaction, and both businesses and governments issue bonds, which might be bought by an individual for their retirement portfolio.