How Markets Work
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How Markets Work

Supply, Demand and the ‘Real World’

Robert E. Prasch

An accessible and enjoyable look at the way the market REALLY works! How Markets Work presents a new and refreshing introduction to elementary economics. The venerable theory of supply and demand is reconstituted upon plausible and defensible assumptions concerning human nature, the law, and the facts of everyday life – in short – the ‘Real World’. The message is that markets differ in ways that matter. Starting with a brief survey of property and contract law, the lectures develop several ‘ideal types’ of markets – such as credit, assets, and labor – while illuminating the similarities and differences among them. Care has been taken to ensure that the reformulations presented are accessible to students and compatible with a variety of non-mainstream traditions in economic thought.
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Chapter: Lecture IV: Asset markets: market dynamics when expectations are a consideration

Robert E. Prasch


LECTURE IV Asset markets: market dynamics when expectations are a consideration Financial assets are intangible claims on a future stream of earnings. Examples include stocks, bonds, foreign exchange holdings, etc. Assets are distinct from commodities in that we cannot directly use or consume them. Tangible, as opposed to financial, assets include such delightful objects such as fine wine or rare paintings, are useful in consumption or display, but the market for such items is rather different from that for financial assets. The point is that financial assets have no direct application in consumption as they cannot satisfy a need or a want. Rather, they represent claims on wealth, that is to say they are claims on future purchasing power (of course, the anticipation of future wealth has an impact on current consumption, but that is not the subject of this lecture). To sum up, an asset is a claim on a future stream of revenue (that might or might not take the form of a single lump-sum payment) in the event that a previously agreed upon set of conditions and qualifications are met. The reason we purchase an asset is because we believe, in light of our expectations at the time of purchase, that it represents the superior flow of revenue based on our collective estimation of the influence of such variables as liquidity, the rate of return and riskiness of other assets, the riskiness of the asset, and how this asset changes the risk profile...

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