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martes, 19 de enero de 2010

Economics and Physics

Lof ot people think the economy is a non-understandable matter of study. Well, here I'll try to make the things easier for you and for me.

My point today is that if we understand reality through the laws of physics we can also do the same through the laws of economics. When someone takes a course about physics the first thing he faces is Newton's ideas. In fact, if you think about it, almost the same laws can be applied in both fields of science.

Newton basicly says:

1) All bodies keep their state of motion if there is not a force operating over them
2) The underlying trend associated to space-time is speed
v = ds/dt
3) Speed is an increasing function of the acceleration
v = f(a)

What about the economy? Here is my contribution:

1) The asset values' don't change if the interest rate applied to those assets doesn't change

2) The underlying trend of prices in time is profitability
profitability = dp/dt

3)Profitability is an increasing function of volatility(risk)
profitability = f(risk)

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